Bitcoin has been called a Ponzi scheme. Especially now that unwitting speculators are buying the cryptocurrency. They are attracted by the spectacularly rising price of Bitcoin and other cryptocurrencies in 2017.
In The Problem with Calling Bitcoin a “Ponzi Scheme”, Preston Byrne argues that this is not correct.
A Ponzi scheme is a scam with specific characteristics. A central counterparty promises huge investment returns to investors. The money of new participants is used to pay out earlier ‘investors’.
But Bitcoin is decentralized. Byrne proposes to call Bitcoin a Nakamoto Scheme, after the pseudonymous inventor of Bitcoin, Satoshi Nakamoto:
“The Nakamoto Scheme is an automated hybrid of a Ponzi scheme and a pyramid scheme which has, from the perspective of operating a criminal enterprise, the strengths of both and (currently) the weaknesses of neither.”
Read Preston Byrne’s blog for the full argument.
I mention the Ponzi scheme ran by Bernie Madoff in the introduction of Bankers are people, too: How finance works. The pricing of assets like Bitcoin is covered in the chapter Alternative assets (p.81). I suspect that the section Where does the money go in a crash? (p. 75) will be relevant pretty soon.