- cross-posted to:
- tech@kbin.social
- cross-posted to:
- tech@kbin.social
Over 2 percent of the US’s electricity generation now goes to bitcoin::US government tracking the energy implications of booming bitcoin mining in US.
Over 2 percent of the US’s electricity generation now goes to bitcoin::US government tracking the energy implications of booming bitcoin mining in US.
Well, so a lot of people call it a Ponzi scheme, and it certainly has been used as one before, but the thing that separates it from a true Ponzi scheme is there is a product, and it’s not you.
Places accept Bitcoin as a currency, there’s Bitcoin ATMs, all that. This makes it valuable as a method to make online purchases, specifically, as a third-party payment processor. First you convert your money to Bitcoin through a service of your choice that’s not related to the person you’re paying, then you transact, and eventually that person cashes out Bitcoin for money. This generates 3 transactions, which a Bitcoin miner can authenticate and be paid in Bitcoin for their efforts.
This seems convoluted but it’s about the same process as using a debit card, with MasterCard or Visa promising to balance everything in a bit and acting as an institution to verify trust.
This process is not the only positive thing about Bitcoin, but it’s a major one and ensures two things. The first is that those exchange services give everyone in this “Ponzi scheme” an out. While they’re running, you can’t be pumped and dumped in the usual way. This creates some confidence, which helps keep people in, which raises the value. A normal Ponzi scheme promises an out, but has none.
The second, because there’s people who trust in Bitcoin on actual merits, is that Bitcoin becomes a legitimate investment. It becomes equivalent to currency exchanges, where people exchange their money anticipating the value of USD or the euro to raise or fall. Again, very much like a Ponzi scheme, but since these people have an out, this is a risk, not a scam.
As far as I know (I’m not an expert) these two kinds of transactions are the bulk of the transactions in Bitcoin, but between the two, Bitcoin will remain alive with frequent usage and that enables bitcoin mining. None of this is stable, but it’s also not a scam.
During the big push to get some vendors to accept Bitcoin this system hadn’t formed, there were plenty of people willing to sell and mine Bitcoin, but few that were willing to buy it, and calling it a Ponzi scheme was appropriate. It’s just the end goal wasn’t to sucker someone into giving you money, it was to sucker them into supporting an economy that didn’t exist. They succeeded, so now it’s not a scam, just risky.
No. There is no out.
Charles Ponzi pretended that he had a way of getting extremely high yields on investments, so people gave him their money. In reality, he simply paid out early “investors” with money he got from new “investors”. That means he needed more and more money/more and more investors. That couldn’t work very long.
This is like bitcoin, in that any profit must come from new people. If someone bought bitcoin for $1000 and sold it for $1 million, that means that 1000 people must have paid them $1000 each. Even more people than that must have paid in, because the electricity bill and the hardware also need to be paid. To pay these people the same profit, you need over one 1 million people to pitch in $1000 and so on.
The cash flow structure is a lot like a Ponzi scheme. It’s not so much risky as unsustainable. That’s the point of calling it a Ponzi scheme. It’s all out in the open, so maybe it’s not a scam, as such.
Mind that the crypto space is full of unregulated and unaudited exchanges (=banks), beyond the reach of regulators or police.
I’ll grant that it does provide a service by facilitating money laundering. We couldn’t have ransomware without crypto.
I mean it supposed to be a currency, so the point is supposed you spend it on actually good and services like at overstock.com or whatever
Um… we very much had ransomware and viruses before crypto. Bank wires have been irreversible… forever. Before crypto, ransomware also demanded gift cards and prepaid debit cards. 99% of the crime on earth is paid for using fiat currency, not Bitcoin.
Yeah the out is that you can buy goods and services with it. I could’ve paid for my VPN (Private Internet Access) with Bitcoin, Overstock takes Bitcoin, those ATMs exist.
If everyone suddenly wanted to cash out, it would crash and very few people would get money for it, but that’s also what separates it from a Ponzi scheme, the fact that I don’t need to transform it to USD to spend it. There was a hard push by Bitcoin enthusiasts to get some places to accept it directly for exactly that reason.
Yes, just like in a Ponzi, you can cash out as long as new money comes in.
Whether one exits the scheme by taking goods or money is a distinction without a difference. Involving goods may make MLMs legal but they are still pyramid schemes.
ETA: The difference to a literal Ponzi scheme is that profits are not guaranteed. When Ponzi could not pay, his scheme was revealed as a fraud. When new money stops pouring into bitcoin, then the line simply no longer goes up. The point about the Ponzi comparison is that you are throwing away your money. It cannot work. There is nothing behind it.
Under the spoiler is a more thorough explanation on why (non-fraudy) stocks are an actual investment and crypto is not.
spoiler
Let’s look at how stocks get their value.
A company sells shares to get funding. Say, you want to make microwave dinners. You need to hire people, an industrial kitchen, packaging and packaging machines, ingredients, and probably a whole lot more. The company takes in revenue from selling the dinners, which pay for the running costs. Anything above that may be reinvested or turns into profit. The profit is paid to the stock-owners to pay them for their investment.
Now the question is: What is the value of a stock?
Imagine you take out a loan. That gives you money right now, in the present. You pay back the loan with the money that you get from your stocks; your share in the profit. Now imagine that the company goes out of business (and the value of the stock becomes $0) right as you are done paying back the loan + interest. Then that loan was the present value of the stock.
In theory, the value of a share is the present value of the future money that you get paid. Of course, one cannot know how much that is, so this is useless for actual investing. Still, the market price of a share should be the best guess of people with money. If the stock is trading higher than someone’s guess, they sell. If it’s lower, they buy. So the market cap should reflect the future profits.
But what’s the value of a crypto-coin like bitcoin?
Let’s start by thinking only about a coin being used to transfer money. And to make it easier, let’s say that coins are only exchanged for money once a day.
Say people want to transfer 10 million USD each day. The senders buy coins for 10 million USD. They don’t care how many coins that gets them, only that the coins represent 10 million USD. If there are 2 million coins being sold on the market, then each coin must transport 5 USD and that will be the market value.
New coins are constantly being “mined” to pay for the upkeep of the system. Let’s say that’s 100,000 coins per day.
The intended receivers of the 10 million USD sell their coins to get the money. The miners also sell their coins to pay their bills. So the next day you have 2 million + 100,000 coins on the market. The senders again want to transport 10 million USD, so they buy the 2,100,000 coins on the market. The market value of a coin is now ~4.76 USD. Adding more coins lowered the value of the coins. That is inflation. The “missing” money goes to the miners to keep the system running. That’s not a problem for senders and receivers. Transferring money costs money, however you do it. (That crypto is an extremely expensive way to do this, is one underlying reason why it has no adoption as a payment system in the normal economy.)
So far, you wouldn’t expect anyone to store or “hodl” coins. The value is just going down. But obviously, this is only true as long as the amount of USD to be transferred stays constant. If the system is more widely adopted and more money is transferred (outpacing the inflationary effect of the newly mined coins), then each coin has to transport more USD and the “value” goes up.
Now, if you believe that adoption continues to grow, it becomes a reasonable strategy to stash some coins to sell them later at a higher “value”. Maybe the problem is already obvious, but let’s continue to take it slow.
So, let’s say, it’s a bit later. There are 15 million coins and they are to transfer 100 million USD. The market price of a coin is now $6.67. (Let’s also say that there are no more coins being mined and the upkeep is paid some other way.) Now we bring in some venture capitalists. One day, they buy coins for an additional $50 million. Now the coins trade at $10 per coin. 15 million coins bought for $100 million + $50 million, right?
The VCs now have 5 million coins. But note where the money went. It went to the transfer receivers when they sold the 15 million coins for $10 each. They got a windfall profit. That’s how it goes in crypto. All the money that people “invested” by buying coins is gone. It was either used to pay miners/for the system upkeep, or early adopters took it and ran. It’s all gone. That’s the big difference to shares.
If the VCs sell their coins again, they lose. Because when there is only 100 million USD in the market for 15 million coins, they would only get 6.67 USD per coin. The money that they spent is gone. If they want to make a profit, new money has to come from somewhere. There are only 2 ways to achieve this.
One is continuing adoption. If more money were to be transferred, with the same number of coins, the price goes up. They can siphon off some of that money by selling into that market. But that lowers the price again, so that only yields a profit if adoption increases enough.
The other is that someone else also removes coins from the market. If there are fewer coins for the same (or a decreasing!) amount of money being transferred, then the market price will also go up. (In this scenario, too, they would be siphoning off money that other people are trying to transfer. The cost of transferring money would be increased for no very good reason; not a great feature in a payment system.) But note that this, too, lowers the price again. That only yields a profit, if “hodlers” sequester the coins sold by the VCs for a higher price than the VCs paid.
I’m not saying this is a Ponzi scheme because everyone has heard that already.
So that’s it. If you want to know the effect of 50k bitcoin on price, you need to look at the trading volume (minus wash trades): How many bitcoin are actually “in use”? You also need to know how many of these coins will be promptly removed from the market by “hodlers”.
If everybody suddenly sold all their USD, EUR, or other currency, that currency’s value relative to other currencies would also crash. That’s not unique to Bitcoin.
People cash out their currency to buy goods and services, that’s the whole point. You accept currency knowing you can spend it later. It’s useless in and of itself. In order for them to spend it later, somebody has to be their “exit liquidity” and trade a good or service they have for that currency. You can call that a ponzi scheme if you want, or you can just call it currency, because that’s how currency works.