” The arrest of principals of Bitclub Network, accused of operating a Ponzi scheme, underlines again the wild west nature of the digital space. Here’s an article from our e-book – Blockchain, Bitcoin and what the difference means to you – which neatly points out the differences between a Ponzi scheme and genuine blockchain based cryptocurrencies.”| Temple Melville CEO of The Scotcoin Project
One of the biggest myths regarding Bitcoin is that many consider it as a fraudulent, Ponzi scheme. But very few actually understand what a Ponzi scheme is.
It is not wise for people to draw conclusions without a proper understanding of any topic whatsoever. And that is what people are doing when it comes to Bitcoins. They just term Bitcoins and other cryptos as scams.
Therefore, being a reputed blog in this space, we at CoinSutra think it is very important for us to clarify this point and spread more awareness, which is also our motivation to write today. I will explain in detail why Bitcoin is not a Ponzi scheme, but before that let’s understood and examine what a Ponzi scheme actually means.
What Is A Ponzi Scheme?
A Ponzi scheme is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading.
Operators of Ponzi schemes can be either individuals or corporations and grab the attention of new investors by offering short-term returns that are either abnormally high or unusually consistent.
Companies/schemes that engage in Ponzi schemes focus all of their energy into attracting new clients to make investments. Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors. When this flow runs out, the scheme falls apart. [Source Wiki]
Ponzi schemes are sometimes also referred as pyramid schemes and the characteristics of both the schemes are higher returns than the average market by recruiting new members under the scheme and taking money from them in some form or other.
Characteristics of Ponzi or Pyramid Schemes:-
- They promise high and unusual returns.
- They promise regular or monthly returns usually.
- They require you to add new investors/members into the scheme to increase your return rate.
- Founders usually run away with a big chunk of money.
These are the main characteristics of a typical fraudulent scheme whether it is in the crypto space or otherwise.
Now that you know these characteristics you can easily do away with such schemes by doing a quick litmus test.
What You Can Do To Not Fall For Such Schemes: Litmus Test
You can quickly do a litmus test to avoid such schemes or projects by following two simple bits of advice given by Andreas M. Antonopoulos, a renowned Bitcoin speaker, and proponent.
it promise regular returns that exceed average market returns?
It’s a Ponzi
Does it focus more on recruiting new people than any product?
It’s a pyramid scheme#litmustests
This litmus test is so powerful and apt that you can apply it within the crypto space. You can also use it to judge other schemes outside of this market.
Bitcoin Is Not A Ponzi Scheme
In the light of the above explanations, I can say that people who say Bitcoin is a Ponzi scheme don’t really understand what a Ponzi scheme is.
- Bitcoin never asked anyone to put money
Bitcoin whitepaper, if you have read it, doesn’t speak a thing about buying/selling bitcoins and neither lure investors to put their money. It is an 8-page document explaining a solution for making a censorship-resistant digital money.
- Bitcoin founder never ran away with a big chunk of money
Bitcoin founder, Satoshi Nakamoto never ran away with a chunk of Bitcoins. One might now argue that he held millions of bitcoins but that he never stole from anybody or just created out of thin air despite being Bitcoin’s founder.
Instead, he also had to run a full node and mine Bitcoin blocks to receive the block rewards to get new bitcoins, which is a legal way that anyone can follow even today.
Also, note that the Bitcoins he mined at that time and kept to himself were worthless then. It was his sheer will to believe in the potential of the project that motivated him to keep those funds with him.
- Bitcoin never asked you to recruit new people/investors under it
Neither Satoshi or his whitepaper or even early Bitcoin holders went to recruit new people/investors for Bitcoin.
In initial days, mostly geeks used to mine and play with Bitcoin and most of them used to spend it on gambling or pizzas or just used to giveaway in meetups. I have not seen such Ponzi scheme yet that give away their products in such a manner.
- Bitcoin doesn’t promise or gives monthly/regular returns
Bitcoin whitepaper or it’s working model till date doesn’t promise any returns or regular returns either. Yeah, of course, that’s another thing that people have made money due to insane rise in the price of Bitcoin over the years but that’s simply the law of demand and supply acting in a free market.
On the flip side, Bitcoin prices also fall rapidly and many people get burned due to their such speculative investment!
- Bitcoin has no head/person controlling it
Bitcoin is based on the decentralized and censorship-resistant tech of blockchain and proof of work which makes sure that no one, in particular, is ‘in-charge’.
Clearly, with no one at the helm of Bitcoin, no one can run away or take over other people’s money or Bitcoin.
Everything said and done, I understand that there are a lot of cryptocurrency Ponzi schemes and pyramid schemes going on but that doesn’t mean Bitcoin or the other currencies are fraudulent.
On the flip side, cryptocurrency market has been, is, and will be prone to such schemes because it is based on the decentralized technology of blockchain. Something which is based on decentralized tech and is hard to stop or regulate will give birth to Ponzi schemes but that doesn’t mean that Bitcoin is a Ponzi scheme.
Instead, use the parameters that I have discussed at the start of this article to educate and examine yourself whenever you encounter such Ponzi schemes and simply opt out of it.
Lastly, I would say, I am yet to see a Ponzi scheme like Bitcoin which does this:
Show me a ponzi scheme where the early investors donated $86 Million to charity and I’ll give you all my #bitcoins. https://www.reddit.com/r/Bitcoin/comments/7jj0oa/im_donating_5057_btc_to_charitable_causes/?utm_content=title&utm_medium=hot&utm_source=reddit&utm_name=Bitcoin …
Authored By SUDHIR KHATWANI
Hey there! I am Sudhir Khatwani, an IT bank professional turned into a cryptocurrency and blockchain proponent from Pune, India. Cryptocurrencies and blockchain will change human life in inconceivable ways and I am here to empower people to understand this new ecosystem so that they can use it for their benefit. You will find me reading about cryptonomics and eating if I am not doing anything else.