When faced with something new or unfamiliar, especially when dealing with money, people often tend to automatically put it into a box. Unfortunately, Bitcoin is no exception. Since its rise in value since its initial launch in 2009, many have been skeptical of how and why it could do so. In this informative article, we explore the common misconception that Bitcoin is a Ponzi Scheme.
What Is A Ponzi Scheme?
First, let's take a look at what a Ponzi Scheme actually is. Ponzi Schemes are fraudulent investment scams which promise high rates of return with minimal risk. This is orchestrated by a "portfolio manager" taking an investment (payment) from a new recruit and using those funds to pay off earlier investors, taking a portion of the funds for themselves.
The new recruit will only be paid once they have recruited more new people, whose funds will be used to pay off their investment. As long as new people are entering the system, the earlier investors are seemingly making profits. This all falls apart when the pool of potential investors becomes saturated and no new investors are entering the system.
The business concept was first mentioned in literature in the 1800s but was officially coined in the 1920s after a person by the name of Charles Ponzi. Ponzi schemes pose as financial services and are illegal in the UK and most other countries and are punishable in the same light as anti-money laundering.
Why Bitcoin Is Not A Ponzi Scheme
As Bitcoin is an entirely decentralised asset and operates using the transparency of blockchain technology, Bitcoin cannot be a Ponzi Scheme. Due to the nature of blockchain, anyone at any time can verify all transactions made on the Bitcoin network, dissimilar to a Ponzi Scheme where "investments" are shrouded in secrecy.
Ponzi Schemes need to obfuscate transactions from both investors and regulators in order for the scam to work, which is the exact opposite of how blockchain functions. These issues alone prove that Bitcoin cannot be a Ponzi Scheme.
Instead, Bitcoin is open to anyone and following one purchase the investor can own and hold the original cryptocurrency. As a digital currency, Bitcoin is stored in digital wallets which are accessible to anyone, without the need for lengthy paperwork. Most exchanges offer users access to a Bitcoin wallet, which can easily be accessed directly on the platform.
Bitcoin Volatility Confirms It Is Not A Ponzi Scheme
Not often seen in a positive light, Bitcoin's market volatility puts the final nail in the coffin when considering whether Bitcoin is a Ponzi Scheme. See, in Ponzi Schemes investors receive suspiciously consistent returns, which is just not plausible when it comes to trading Bitcoin.
Day traders have been known to witness high price swings over short periods of time, sometimes losing or accumulating a large amount in mere hours. This is entirely unrealistic when it comes to the functioning of a Ponzi Scheme.
Instead, Bitcoin's price history has shown that substantial growth is generally witnessed in four year periods. This is in line with the Bitcoin halving event, an automated change to the miner's rewards which manages the number of new coins entering circulation. After every 210,000 blocks are added to the network's blockchain, the halving event is initiated, and the rewards are automatically halved. History has shown that roughly 12 - 18 months later Bitcoin has seen substantial gains. The next halving to take place will be in 2024.
How To Avoid Ponzi Schemes In The Crypto Realm
While Bitcoin and other cryptocurrencies are not Ponzi Schemes themselves, that doesn't mean that Ponzi Schemes cannot use Bitcoin to lure in potential investors. Beware of any investment "firms" looking to invest in crypto for you, particularly if they're claiming to provide inflated rates of returns.
Stay clear of Ponzi Schemes and other investment scams, and utilise the financially-inclusive world of crypto investments yourself.