Nonsensical Idea of the Day: "Bitcoin is a Ponzi Scheme"

It is absurd to label bitcoin a Ponzi scheme. Yet that is what Jim Rickards says. Ironically, Bitcoin is an anti-Ponzi setup, regardless of what it is used for, regardless of whether or not it's in a bubble.

In a video interview with Hedgeye CEO Keith McCullough, not only did Rickards state that he agreed with Jamie Dimon, he made this claim "I call it a Ponzi with no one in charge. There's no Madoff, but it's working that way.”

Rickards points out that primary uses of Bitcoin are money laundering, capital flight, etc. But what does that have to do with being a Ponzi scheme?

“Bitcoin has not been combat tested in a business cycle. We have not had a recession or a financial crisis since 2009. I’ve seen all these other asset classes go through many business cycles. I know how they’ll behave. Bitcoin has not been tested in that arena,” says Rickards.

I agree. But what does that have to do with being a ponzi scheme?

Ponzi Definition

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.

There is no revenue to speak of. When someone buys a bitcoin someone else gets a bitcoin. The number of coins slowly increases in time but the algorithm itself helps prevent fraud. It does not stop theft or someone losing their keys and thus their coins, but again that does not fit the definition.

Nor does the fact that criminals demand ransom in bitcoin. There are fraudulent activities in dollars, euros, silver, gold, and yes Bitcoin. If fraudulent activity makes a currency a Ponzi scheme, then gold is a Ponzi scheme as well.

There is no magic bullet that will stop fraudulent activity, but the key is the currency in and of itself is neither a fraud nor a Ponzi scheme.

Those looking for Ponzi schemes might wish to consider public union pension plans or preposterous amounts of interest on public and private debt that require ever-increasing amounts of debt to keep the system running.

Neither Bitcoin nor gold have anything in common with debt pyramids Ponzi schemes.

Rickards' Game

Rickards has increasingly makes nonsensical statements of which I believe he has to know better.

Hype sells.

If Rickards is seeking publicity, well, he got it. Congratulations. I prefer other ways.

Mike "Mish" Shedlock

It's not a pyramid, it's an S-curve.

The price of Bitcoin may be a “Bubble” and not a “Ponzi:”

Many assets are also potentially bubbles, so it is difficult for me to single out Bitcoin as being a worse investment than say, Netflix common stock. Unlike Netflix, Bitcoin does not burn shareholder cash every month to continue operating! My major concerns with Bitcoins are a large number of Bitcoins are held by a small group of people and Bitcoin depends on tech supplied by others to be operable (electricity, software, hardware, miners, etc). There is no obligation for anyone to continue providing said tech if it is no longer profitable to do so. I think Bitcoin’s main utility may be for transfer of capital between countries and as a lifeline during hyperinflation (Venezuela, Zimbabwe). Obviously it has also been useful for speculation lately...


A Ponzi is characterized by price support for current holders of the "asset" coming from new buyers only because there is no inherent value in a Ponzi and all of them are understood to be bankrupt as soon as everyone tries to get their money out at once. A bubble is different. In a bubble there is true value in the asset. Gold coins held in your hand may be a bubble at any point when priced in dollars but they will never become worthless and thus are not a Ponzi. Stocks are just another fiat currency. Most have no inherent value because they are not really ownership rights to anything. They can go to nearly zero even though the underlying company is still in business. Look at SIRI for an example of this. Even if you hold your share certificates in hand you can never demand anything in exchange for them. They will only exchange if some greater fool is available to trade you something of real value for them. The notion that company shares have value and are a place for your life savings is fairly new in history. The notion that gold has value is ancient. When conquistadores went to the Americas they were looking for gold. Why? Because somehow gold was universally deemed to be valuable in all of Eurasia at the time. Importantly, when they got to the Americas they found that the locals, who never had any exposure to Eurasian values, also hoarded gold (and silver) as stores of value. That is truly impressive - the entire world seems to have independently come to the belief that precious metals were precious even though there was no real good use for them. Gold is too soft to make good weapons or tools from. Yet still it happened. JP Morgan once said that gold is money and everything else is not. Another version of this is that gold is money and everything else is credit (i.e. a claim on gold once you unwind all of the complexity and derivatives). Who knows when it will happen but someday we will find out that JP Morgan was right.

Hypothetically, if the three largest holders of a virtual placeholder called “Bitcoin” paint the tape to push the published price up after they establish their original positions for almost nothing, is that a Ponzi or a Bubble? If outsiders sometimes pay shockingly high amounts to speculate on future price appreciation are they victims of fraud? What if every outsider who purchases Bitcoin first checks a box that states: “The price of Bitcoin is controlled by a cartel. You may lose 100% of your investment.” Since the SEC does not directly regulate Bitcoin, is painting the tape for Bitcoin illegal? Can something that does not promise anything of physical value to anyone be a Ponzi?

While it may not have started as such, I suspect Bitcoin has become a racket that is a hybrid of painting the tape and check kiting, but because cryptocurrencies are new the activity is not yet explicitly illegal. It may be the financial equivalent of a “designer drug.” Perhaps we will add a new type of scam to the lexicon. It might be known as a “crypto-kiting.”

"Where's the revenue? There is no revenue and no dividends. There is no interest paid. A stream of new investors is not required. " It would seem to me that the stream of new investors is those buying crypto.....why else is the price rising? The revenue would be those selling their inflated crypto. Buy for $1500, sell for $5000.....good dividend while still holding the bulk of your original investment.

madashellowell, there does not need to be revenue or dividends but there does need to be some underlying value. Where is the revenue or dividend for gold? There is none. So is it a Ponzi? At the end of the day value derives from scarcity. When the conquistodores brought back incan gold to Spain, the qty of gold in the region skyrocketed relative to the production. The result was a big drop in the buying power of gold. Of course, that stabilized over a few years, like a golden stone being thrown into a lake of molten gold. We are learning that gold is only made in supernovas or in the collapse of binary neutron stars. So it is rare indeed. The crypto known as Bitcoin has a limited number of units architected into its design but now there are many hundreds of cryptos, all of them having all the same benefits as the one known as Bitcoin. The only advantage of Bitcoin brand crypto is name recognition and thus liquidity. But there is no "gold-like" precious metal and all of the easy to find gold has been scooped up already. The simply aren't making any more of it. Cryptos can be made over and over again with little effort, just like any other worthless fiat currency. Bitcon (sic) will eventually become known as a mania, a flash in the pan. Gold and silver not so much. They have already stood the test of time.

I think it actually has a pyramid scheme architecture. The cost of mining escalates with time forcing the value up until it is no longer producible. Likely the concept was to create artificial depletion. In reality the iterations required to complete the last block change could be infinite.

Everything is a "BUBBLE". Consider it. Technologies emerge, grow(inflate), and eventually get replaced (shrink). So, Everything is a bubble. Bubbles aren't bad by merely existing. Those who imply so are trying to manipulate their hearers. Beware the liars...

Think non denominational piece of paper (blank) someone buys it for what they think it's worth.