Is Cryptocurrency a Real Investment or a Fancy Ponzi Scheme

Chukwudi Awaibe Written by Chukwudi Awaibe · 4 min read >
Ponzi & Cryptocurrency

There are two sides to every story. Likewise, a coin, it has two sides. For this coin, Cryptocurrency, there are two sides to it. Some have called cryptocurrencies, Ponzi schemes, but crypto experts say that apart from bad players, cryptocurrencies are legitimate entities.

What is a Ponzi Scheme?

A Ponzi scheme is a fraudulent investing scam that promises high rates of return with little risk to investors. The term owes its origin to a swindler named Charles Ponzi, who made his name in 1920.
A Ponzi scheme is an investment fraud in which clients are promised a large profit at little to no risk. Companies that engage in a Ponzi scheme focus all their energy into attracting new clients to make investments. These are generally multi-level marketing schemes, in which money from new investors is used to pay ‘profits’ to earlier investors. This continues till new investors keep joining. 

A typical example of a Ponzi is the largest and probably the longest running Ponzi scheme in history, Bernie Madoff. Popularly referred to as Madoff’s scheme.

What is a Cryptocurrency

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It is a class of digital assets created using cryptographic techniques that enable people to buy, sell or trade them securely. Unlike traditional fiat currencies controlled by national governments, cryptocurrencies can circulate without a monetary authority such as a central bank.

How does it work

Bitcoin and most other cryptocurrencies are supported by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what. The use of blockchains addressed a problem faced by previous efforts to create purely digital currencies, preventing people from making copies of their holdings and attempting to spend it twice.

Individual units of cryptocurrencies can be referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value, and some can be used to participate in specific software programs such as games and financial products.

How are cryptocurrencies created?

One common way cryptocurrencies are created is through a process known as mining, which is used by Bitcoin. Bitcoin mining can be an energy-intensive process in which computers solve complex puzzles to verify the authenticity of transactions on the network. As a reward, the owners of those computers can receive newly created cryptocurrency. Other cryptocurrencies use different methods to create and distribute tokens, and many have a significantly lighter environmental impact.

Bitcoin is one of top 10 Cryptocurrencies available in the world today. The list includes Bitcoin (BTC), Ethereum (ETH), Tether (USDT), USD Coin (USDC), BNB (BNB), Binance USD (BUSD),
Cardano (ADA), Solana (SOL), Dogecoin (DOGE), XRP (XRP).

What the experts say

While addressing the Indian Banks’ Association on Monday, February 14, 2022, Reserve Bank of India (RBI) deputy governor T. Rabi Sankar said that cryptocurrencies are akin to Ponzi schemes or even worse and banning them is the most sensible option for India.

“We have also seen that cryptocurrencies are not amenable to definition as a currency, asset or commodity; they have no underlying cash flows; they have no intrinsic value; that they are akin to Ponzi schemes, and may be even worse,” he said in a speech.

Some experts agree that there are cryptocurrencies that work like Ponzi schemes. “When it comes to crypto products, there are many products with projects that are trying to work like Ponzi schemes. It’s spread across the world but is much more popular in countries such as Malaysia and Indonesia. Crypto is used as a way of payment because it’s easier and, by using crypto, they can open the entire Ponzi scheme to the whole world instead of being restricted to a specific country or region,” says Sathvik Vishwanath, co-founder and CEO, Unocoin, a crypto exchange.

Cryptocurrencies are, in fact, worse than Ponzi schemes, says Gaurav Mehta, founder of Catax, an online crypto tax and auditing platform. “It is a more complicated asset than a Ponzi scheme, and it is worse since it not only encourages evangelism but also undermines nation states by interfering in the currency system. When the tulip mania passed, people were at least left with tulips to smell; when Bitcoin passes, they (investors) would be left with nothing,” he said.

However, Others don’t agree. A Ponzi scheme promises high returns with minimal risk, whereas crypto trading is quite volatile due to market conditions, regulator challenges, and other factors, which gives investors an opportunity to earn high returns but while they face high risk.  

“Clubbing crypto assets with Ponzi schemes is grossly unfair. Multi-level marketing schemes and chit fund schemes that promise steep returns would qualify as Ponzi schemes,” says Sharat Chandra, vice-president, research, and strategy, EarthID, a global decentralized self-sovereign identity management platform.

Some experts tout it as the best-performing asset of the last N years, where N can be just about any number from one to ten. They also increasingly judge it as a credible investment.

This view contradicts the longstanding sceptical view by many economists and others that what bitcoin really is, in effect, is a Ponzi scheme. Brazilian computer scientist Jorge Stolfi is one voice who has contended this. His view is based on the following observations:

  1. Investors buy in the expectation of profits.
  2. That expectation is sustained by the profits of those that cash out.
  3. But there is no external source for those profits; they come entirely from new investments.
  4. And the operators take away a large portion of the money.

The debate on cryptocurrency will continue for a long time to come. Some things to ponder are, who owns it? Who controls it? The computers or blockchain behind it if it crashes, gets infected or bugged, what happens? What are the physical and economic policies behind? Who formulates the laws behind it and who are the regulators? Is it a loose cannon that have not exploded? These and many more are the various hurdles Cryptocurrencies will have to cross to prove its legitimacy and global acceptance. A major concern is that it’s not controlled by national governments and can circulate without a monetary authority such as a central bank. It undermines nation states by interfering in the currency system.

In a crash, the holders of bitcoin will collectively have lost what they have paid the miners for their bitcoin. This sum may be not far from the sum originally invested with Madoff, after accounting for inflation. But bitcoin holders will have no one to pursue to recover this sum: it will simply have gone up in smoke, a social loss. The holders of bitcoin would then only wish it had been a Ponzi scheme.

As cryptocurrencies fight for legitimacy, bad players make the task more difficult, especially as the commentary around cryptocurrencies has moved beyond payments (legal tender) use cases to aspects such as asset tokenisation, metaverse, gaming and web3.0.



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