Why Bitcoin is not a Pyramid Scheme

Bitcoin has caused quite a stir around the world in recent years. The cryptocurrency has fascinated many people and has become a part of the global financial system. However, despite its growing popularity, there are still many misconceptions and prejudices about Bitcoin.

One common criticism is that bitcoin is a Ponzi scheme and therefore bound to fail.

But is this really the case? This article examines why bitcoin is not a Ponzi scheme and how it differs from such schemes.

What is a Pyramid Scheme?

A pyramid system, or Ponzi scheme, promises large profits with very little risk. Pyramid schemes achieve these returns for their earlier investors by paying them off with the money they collect from later people.

Why is it also known as a Ponzi Scheme?

The Ponzi scheme was named after the fraudster Charles Ponzi. Ponzi did not invent this type of scam, but he became famous for this scam in 1920.

Who was Charles Ponzi?

Charles Ponzi, whose original name was Carlo Ponzi, was an Italian fraudster who stole millions of US dollars through a Ponzi scheme in the US in 1919 and 1920.

He enticed his clients to give him money by promising them a supposedly lucrative arbitrage deal.

However, this was a deception, as Ponzi did not use his clients' deposits for the promised business, but instead used them to pay interest to previous investors in order to make it appear that the business was working.

The Goal of Pyramid Schemes

The goal of Ponzi schemes is to try to get as many new people as possible to pay off the previous people. These systems collapse when there are no more new investors to bring in the money.

Pyramid Schemes are a Business Model

As a business model, such a system needs a constantly growing number of participants to function. In classic pyramid schemes, non-existent or overpriced products are sold to people.

In a Ponzi scheme, there is always a company. The company recruits individuals to solicit new participants. The compensation of the salary is basically tied to the recruitment and not to the sale of the actual product.

In a pyramid scheme, the salespeople bear the risk and not the company itself. The whole thing fails because there is no longer sufficient demand for the product.

Why Bitcoin is not a Pyramid Scheme

There is no group of people behind bitcoin trying to bring new people into the system to pay off previous investors.

There is no product being sold in abundance where compensation is directly tied to attracting new people. In short, Bitcoin is not a business model.

Bitcoin is an Asset

Bitcoin does not meet the definition of a Ponzi scheme any more than gold and other assets such as stocks, bonds, certain wines or paintings.

These assets not only have the monetary properties of a store of value, but also have some utility or are popular as collectibles due to their scarcity.

Bitcoin provides a global decentralized monetary network that solves the double-spending problem and does so without a central institution, third parties, middlemen, or trust.

In addition, bitcoin is absolutely scarce, which is a good characteristic for a long-term store of value. This can be compared to rare resources or goods such as gold, diamonds, certain paintings, whiskeys or vintage cars.

Bitcoin is Money

Bitcoin is also money, like the U.S. dollar, euro, or Swiss franc. Unlike government fiat currencies, bitcoin has physical scarcity and is not credit or debt based.

Bitcoin's value increases as a function of adoption, and adoption increases because bitcoin's monetary characteristics are superior to currency competition.

Bitcoin has a fixed supply. Inflation is mathematically predictable and cannot be arbitrarily manipulated. «Monetary policy» is governed and enforced only by a common consensus of network participants.

> Learn more about Money and what different Types there are.

Conclusion

The claim that bitcoin is a Ponzi scheme is false and inaccurate.

A Ponzi scheme is based on the idea that new people join a company or concept and use their deposits to pay the deposits of previous people. This causes the system to grow until there are no more new people and the system collapses.

In contrast, bitcoin is based on decentralized technology that provides a secure and transparent record of all transactions. There is no central authority that controls how bitcoin is spent, and there is no way for previous individuals to use their deposits to pay the deposits of newer individuals.

Instead, bitcoin are created through a process called «mining». Comparable to mining for physical commodities or metals, such as gold, silver, or copper.

Overall, it can be said that bitcoin is a decentralized technology based on a solid concept and should not be called a pyramid scheme.