Why Bitcoin is worse than a Ponzi scheme in the Madoff style

This is a guest contribution by Robert McCauley, non -resident senior fellow at the Global Development Policy Center at Boston University and associated member of the Faculty of History of the University of Oxford. In this article, McCauley argues that the comparison of Bitcoin with a ponzi scheme compared to Ponzi schemes is unfair.

Bitcoin has exceeded its all -time high of USD 69,000 of November 9, 2021. On the first weekend in December, Bitcoin suffered a violent flash crash of $ 12,000, when accounts were closed over levered positions. And yet, even at the current price of $ 49,000, it is still advertised by the guests of the financial news as the most powerful asset of the past NEAR years, where n can be any number of one to ten. They are also increasingly assessing it as an independent credible investment.

This contradicts the long-term skeptical view of many economists and others that Bitcoin is actually a ponzi scheme. The Brazilian computer scientist Jorge Stolfi is a voice that claims this. His view is based on the following observations:

1. Buy investors in anticipation of profits.

2. This expectation is maintained by the profits of those who pay out.

3. But there is no external source for these profits; They come exclusively from new investments.

4. and the operators take a large part of the money.

All of this sounds true. But if you call Bitcoin as a ponzi scheme, critics are probably too friendly in two ways. First, Bitcoin does not have the same final as a Ponzi scheme. Secondly, from a broad social perspective, it represents a deeply negative sum game.

At first glance, it is worth assessing how it does it compared to the original scheme of Charles Ponzi. In 1920 Ponzi promised 50 percent for a 45-day investment and managed to pay them out to a number of investors. He suffered and managed to survive investor runs until the plan finally collapsed after less than a year.

In the largest and probably the longest-running Ponzi program in history, Bernie Madoff paid around one percent month. He offered to pay the participants of his system both the originally "invested" sum and the "return" from it. As a result, the system could suffer a run and did it too; The large financial crisis of 2008 led to a cascade of repayments by the participants and the collapse of the system.

But the dissolution of Madoff's plan has expanded beyond its collapse due to the remarkable and ongoing legal proceedings. These survived Madoff himself, who died in early 2021

Many do not know that an insolvency administrator, Irving H. Picard, persistently and successfully persecuted those who have taken more money out of the system than put in US law to the US Supreme Court. From the $ 20 billion in recognized original investments in the system (of which the victims were communicated that they had achieved a value of more than three times this sum) Billions of dollars, that is impressive 70 percent, reintroduced and distributed. Demands of up to $ 1.6 million are repaid in full.

In contrast to investments at Madoff, Bitcoin is not bought as a strong asset, but as an eternal null cupon. In other words, it promises nothing but running return and never matures with a required terminal payment. It follows that it cannot suffer any run. The only option of how a Bitcoin owner can be paid out is the sale to another person.

The collapse of Bitcoin would look very different from that of Ponzi or Madoff. A possible trigger could be the collapse of a large so -called stablecoin , d. h. Replacement US dollars that have arisen to provide a cash leg for cryptocurrency transactions. These “unregulated money market funds” were sold as a dollar deputy with safe assets that correspond to their outstanding liabilities. In view of the lack of regulation and disclosure, it is not difficult to imagine that a large stable coin "breaks the money", as was the case in 2008 in a regulated money market fund that gave a clay papers. This could mess up the entire ecology of crypto so that it does not make any bids for Bitcoin. The market could close indefinitely.

In this case, there would be no lengthy legal efforts to pursue those who redeemed their Bitcoins at an early stage to redistribute their profits to those who still have bitcoins. Bitcoin owners would not be entitled to those who bought and sold early.

In his cash flow, Bitcoin is more like a Penny-Stock pump-and-dump scheme than a ponzi scheme. In a pump-and-dump scheme, retailers basically acquire worthless stocks, speak up and possibly act to rising prices with each other before passing them on to those who are attracted to the chatter and the program. Like the pump-and-dump scheme, Bitcoin opens up the pure desire for capital gains. Buyers cannot bear the sight of friends who get rich overnight: they suffer from acute fear of missing something (Fomo). In any case, Bitcoin does not make any promises and cannot end when a Ponzi scheme ends.

In second place, there is another big difference between Bitcoin and a Ponzi scheme in the fact that the former is a game with negative sums from a aggregated or social perspective. To the extent that real resources are used to get Bitcoin up and running, it is as expensive as Madoff's two- or three-man operation was not. What Madoff took out of his plan from a social point of view and finally consumed is a redistribution in a zero -sum game (the trustee sold his penthouse). The fourth observation of Stolfi that "the operators take a large part of the money" summarizes Madoff's income and the income of the Bitcoin miner, but these are very different from an economic point of view.

With Bitcoin and other cryptocurrencies, it is about naming the country, the electricity consumption of which corresponds to the all the guessin (miner), carry out the transactions and receive Bitcoin as a reward. Even if the electricity price includes its contribution to global warming (its "umweltxternality") - which is probably usually not the case - this represents a real cost factor.

How high are the costs? At the beginning of 2021, Stolfi estimated the cumulative payments to Bitcoin miner at $ 15 billion since 2009. At the time of the Bitcoin Prize at the time, he estimated the increase in this sum to about $ 30 million a day, which mainly pays electricity.

The hole grows faster with the higher Bitcoin prices today. Around 900 new bitcoins per day require the majority of $ 45 million per day. Thus, the negative sum in the Bitcoin game is several $ 10 billion and increases to over one billion dollars per month. If the Bitcoin price collapses to zero, the profits of those who have sold would remain behind the losses of the owners. Comparing Bitcoin with a ponzi scheme or a pump-and-dump scheme, both of which are essentially redistribating, means flattering the cryptocurrency system.

Finally, an economic analysis by Bitcoin must recognize its uniqueness in the history of the mania. As a speculation object, Bitcoin is unprecedented to which there is nothing there. This postmodern mania offers high prices for entries in nobody. An eternal zero voucher was not created as a joke, but as a trillion dollar system. In contrast to a Ponzi scheme, Bitcoin cannot end in a run.

At a crash, the owners of Bitcoin collective lost what they paid the miners for their Bitcoins. After taking inflation into account, this amount cannot be far from the amount originally created for Madoff. But Bitcoin owners will not have anyone to reclaim this sum: they will simply have rose in smoke, a social loss. The owners of Bitcoin would then only wish to have been a ponzi scheme.