Has Bitcoin Turned Into A Ponzi Scheme?

Apple just recently made the unexpected and more or less unannounced decision to pull the Bitcoin wallet app 'Blockchain' from its App Store. This was the last Bitcoin wallet available for iOS devices, and as such the move has inspired a lot of backlash from the Bitcoin community. In one extreme case, a member of Reddit's Bitcoin community promised a new Google Nexus 5 to the first five people to upload a video of themselves smashing their iPhone 5 or 5S, stating that it was due to Apple's lack of support for Bitcoin.

All of this raises questions about the real value of Bitcoin and other cryptocurrencies. Such a quick and aggressive response from online communities certainly indicates a popular support for these new digital exchange mediums, but we have to wonder what good that does something trying to be a new form of money. Just because there is a lot of popular support for a new type of medium doesn't mean it is going to be successful or even very useful.

In fact, the snowballing popularity of Bitcoin and other cryptocurrencies may work against investors like the iPhone-smashing activists of Reddit. They may slowly push themselves into a self-created economic bubble. If and when it pops, Bitcoin may just go down in history as the biggest virtual market bust since the internet bubble - if not bigger.

More than that, though, cryptocurrency continues to take on more and more Ponzi-like characteristics that may mark it out as the largest, and maybe most unintended Ponzi scheme of all time. What does that even mean? To answer that question we're going to look very briefly at what cryptocurrency like Bitcoin really is, how it works, and then why it might be one of the most elaborate cons of all time (even if unintentionally). We've chosen to stick to the Bitcoin example because, well, it's the one we all know and is clearly the most significant.

The ABCs of Cryptocurrency

Cryptocurrency of any kind from the first and highly popular Bitcoin to the less popular but infinitely more entertaining 'Coinye West' is essentially just a digital medium of exchange in the same way your paper money is a physical one. In other words, multiple goods and services can be given a value in a given cryptocurrency, making their trade and exchange more efficient. But of course it has a few unique features.

First of all, unlike fiat money (regular cash), Bitcoin is not created by a single monitoring body like the Federal Reserve. Instead, millions of computer users devote themselves to creating the Bitcoins themselves through complex mathematical computations. The 'miners' as they’re known, both control how much money is produced, and also ensure the legitimacy and value of the Bitcoin through the production process. Big bonus of this system: it makes forgery almost counter-productive, because it just takes too much time to make a legitimate copy.

The second fairly unique feature is that all cryptocurrency contains digital signatures in its code. These signatures essentially record every 'hand' the coin passes through and keeps a record of its use. This makes believable fraud and simple theft even more difficult.

How Do You Get It?

Getting Bitcoin follows pretty naturally from what it is: you can buy it with fiat money; earn it in services online; trade with a Bitcoin wallet like Blockchain; or you can 'mine', a process whereby a computer of high processing capacity solves cryptographic problems of increasing difficulty to make new Bitcoin (so as to ensure not too much is created) from which the miner takes a small percentage.

That simple mechanism ensures that people do not abuse the system because it takes way too long to make mine Bitcoins for anyone with other things to do.

Growth, Maturity, and "Pop"

Economic bubbles are very common and have three general stages: growth, maturity, and the pop. It's a pretty straight forward process. A new hot commodity begins to get bought up at great prices. The popularity forces the prices up, eventually reaching a peak or 'maturity'. Then, through a lack of new investors, a loss of interest, some external hit to the economy as a whole, or any number of other factors, the bubble pops and the prices plummet.

In December 2013, the first hints that Bitcoin might be popping came up in China. The value for a single Bitcoin went from about $1,200 in November 2013 to less than half that. Bitcoin began 2014 stronger, but just recently an almost 20% pull back occurred. What does all this mean? It points to the fact that although mining sets both a cap and a limit to how fast Bitcoin can be produced, it is a very volatile commodity, the key word here being “commodity.”

Why the Bubble Will Burst

Firstly, there are the investors. After showing more than once that it is capable of some massive increases in value in very short periods of time, Bitcoin has proven itself to be irresistible for aggressive investors. But the thing is, these people aren't buying Bitcoin because they want to use it as a medium of exchange. Instead, to them, cryptocurrency is just another investment. So we have here the element of people getting excited and buying Bitcoin at higher and higher prices in the hopes it will continue to rise in value.

Second, even if we pretend people are buying up Bitcoin to usher in a new age of e-economics, the fact remains that it is not real currency for at least two very big reasons. Reason one: Bitcoin is extremely volatile and so useless as a reliable medium; real money is reliable and relatively stable. Reason two: money is stable because it is regulated and backed up by legitimate economies.

The lack of a central regulating body is a good thing for people who want to produce their own Bitcoins or be sure that the value of their goods won't get messed around by a few greedy individuals at the top, but it also means there is no one guiding or legitimating the growth of the currency. To date, very few outlets exist to use Bitcoin as currency.

This is important. The thing most Bitcoin enthusiasts miss is that central banks don't just print money and regulate exchange; they give the money they produce tangible value by backing it up with an economy. The value of Bitcoin isn't backed by some utopian, post-government 'Economy of the Internet' like the US dollar is backed by the very real 'Economy of America'. Instead, Bitcoin gains its value by how much USD, CAD, AUS, etc. it is worth. It may be nice to think of cryptocurrency as a new form of money, but it's really just another commodity.

The Biggest, Most Transparent, Unintended Ponzi Scheme Ever?

These two facts – aggressive, hopeful investment, and not actually being money – make a great setup for good old fashioned Ponzi scheme, the main premise of which is to promise investors a return, get other people to invest, pay the first people off with the new money after a small skim off the top, and repeat.

Some may argue that because Bitcoin doesn't promise a return on an investment but just an opt in to a new currency (like buying USD with Euros), it isn't hiding any potentially fraudulent dealings and so it isn't a Ponzi scheme. Of course, it isn't quite functioning as a currency, and is offering an investment with a return. It doesn't matter that it's people who are making that what it is, that's what it is.

Not only that, but the way these 'investors' are anticipating the value of Bitcoin to keep rising is very indicative of suckered investors in a Ponzi setup. What fuels these schemes is the hopes of the investors that the value will rise more and more. Bitcoin depends on miners and people buying into it, and those people depend on Bitcoin being worth something. Eventually, the Bitcoin or the people buying into it will run out and... pop.

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