Is Bitcoin Just a Ponzi Scheme?

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Bitcoin has been making waves in the financial world for years now and I remember posting about it back in 2013 on this blog when it was priced at a measly $120 per bitcoin. I think we can all agree that since then, the price of bitcoin has gone wild. I’m not saying it’s a bubble and I’m not saying the price won’t go higher yet, but it’s certainly one of the financial stories of our time and the gains have been truly phenomenal. But with financial professionals warning about it being a nothing more than a Ponzi scheme, should you be worried about investing in bitcoin?

Here are a few points that are worth consideration in my eyes. I’m not going to make a call on whether bitcoin is a Ponzi scheme or not and to be upfront, I’m not currently invested in cryptocurrencies either, but I do think it’s worth discussing whether bitcoin could potentially be just that.

Why Bitcoin Might Well Be a Ponzi Scheme

So, why are people saying that bitcoin might be nothing more than a Ponzi scheme? The main reason that seems to pop up is that experts say that bitcoin has no intrinsic value and that the rise in price is simply being fuelled by financial speculation. As bitcoin is not backed by anything physical, like gold for example, the value of bitcoin is pretty much governed by how much a person is willing to pay for it and also how many people are wanting to buy it.

Let’s be honest now, what are your reasons for wanting to invest in bitcoin? Is it because you 100% believe in the concept and you want to use it as a currency going forward, or is it because you see the price going up and up and up? While I’m sure there are many diehard bitcoin advocates out there who want to use it as an alternative currency, I’d say the majority want to invest because of the potential to make money quickly. This means that financial speculation plays a big part in the price of bitcoin.

So, if we’re saying that bitcoin’s price is only based on what people are willing to pay for it and nothing more, then that could well place it into the category of being a Ponzi scheme, in that people will only buy in while the price keeps on going up but once that stops, the price could come crashing down again like it has in the past and a lot of people could lose a lot of money very quickly.

Why Bitcoin Might Not Be a Ponzi Scheme

Of course, we could also argue that the US dollar no longer has any intrinsic value, as it is no longer backed by the price of gold either. This point is high on the list of what attracts so many people to bitcoin. While the US or many other governments around the world can print money with the press of a button and effectively devalue a currency at any time, with bitcoin this cannot currently happen, as the supply of bitcoin cannot exceed 21 million as things stand. Your investment will only be affected by the demand for bitcoin, as the supply is fixed.

This may be a good time to compare bitcoin with gold. The price of gold has fluctuated massively over the years, mainly due to financial speculation and the fact that it is viewed as a safe haven in times of trouble. Like bitcoin, though, gold is only really worth what people are willing to pay for it. If people lose faith in gold for some reason, then the price could crash in the same way that people could lose faith in bitcoin. The same is true of currencies like the dollar, euro or sterling, as we saw after the Brexit vote and the euro crisis. Bitcoin is described by many as being digital gold. So, as long as people have faith in bitcoin you can expect the price to rise, even more so as the supply is limited. Who knows whether bitcoin may overtake gold over time as a perceived safe haven and store of value. If this happens, could it even be the case that bitcoin itself acts as a catalyst for a loss of faith and trust in gold?

So Is Bitcoin a Ponzi Scheme?

After all we’ve said here, is bitcoin a Ponzi scheme or not? I said at the start of this post that I’m not going to make a call on this but here are a few points to sum up.

Given that the majority of people who are buying into bitcoin are likely to be speculators looking to make a quick buck, referring to bitcoin as a Ponzi scheme might not be far off. On the other hand, if bitcoin could actually take over from or at least rival gold as a store of value and perhaps even a flight to safety in times of crisis, then is it really all that different to gold itself? I know people actually use gold for other things and in that way it does have more ‘intrinsic value’ than bitcoin, but gold is definitely subject to financial speculation in the same way that bitcoin is, so is it really that different?

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