If you have been in the crypto space long enough I am sure you have heard from at least one person claiming that Bitcoin is a Ponzi scheme, Pyramid scheme, or a bubble. Perhaps you have heard all three. A lot of these people don't know what they are talking about and just quoting someone else they've heard. Here are the meanings of the three and why Bitcoin does or doesn't fit the criteria:
Ponzi scheme
What is it?
A Ponzi scheme involves a person or entity that recruits investors without any underlying product/service. The only way those investors are paid out is when new people invest. Nothing of value is added and the creator(s) of the scheme run off with all the money in the end. In a Ponzi scheme, people are promised high return with little to no risk. There is no financial reward to recruit new people other than the fact that they add to the money pool (collective reward). Early buyers may get rewarded and the Ponzi may spread by word of mouth. It is not a pyramid scheme because there is no individual reward for recruiting new members. Also there is a central authority.
Is Bitcoin a Ponzi?
No... no it is not. Bitcoin is decentralized so it cannot be a Ponzi. Bitcoin had a lot of work put into it by Satoshi and many other developers. They had no malicious intent like how a Ponzi does. Also, if Satoshi wanted to come and take all your bitcoins away, he couldn't do it. So no, bitcoin is not a Ponzi.
Example of a Ponzi
Bitconnect
Pyramid Scheme
What is it?
A Pyramid scheme involves a person or entity that acquires new members whose sole purpose is to recruit more members. Members are rewarded based on the number of people they bring into the pyramid. This is similar to multi-level marketing. The difference is multi-level marketing has a product where as pyramid schemes do not. If they do have a product, it is a garbage product and a majority of the money being generated is from getting new members. If people are having to pay up front to "get in the business" then it is probably a pyramid scheme. In a pyramid scheme there is no central authority who controls all the money like in a Ponzi.
Is Bitcoin a Pyramid?
No it is not. It is wrong when people mistake bitcoin for a Ponzi, but it is even worse when people mistake it for a pyramid. When you get more people to invest in bitcoin, you are not personally rewarded. All investors are collectively rewarded because the price goes up, but there is no real strong financial incentive for you to get family members and friends to buy bitcoin.
Example of a Pyramid
People that want to sell you a "starter kit" for selling "starter kits" for any overly priced bullshit product (such as knives, moisturizer creams, DVDs, etc.).
Bubble
What is it?
A bubble is when there is so much hype over a certain thing that investors start evaluating that thing at overly high prices. The increasing price causes people to experience something called "fear of missing out". As a result, people buy and prices are fueled to soaring heights. Eventually reality hits home and a lot of people end up losing money once prices come crashing down.
Is Bitcoin a Bubble?
Maybe. We have yet to see whether bitcoin becomes a huge success or a massive failure. If it fails then it was a bubble. If it succeeds then it wasn't. So far I'm feeling pretty optimistic. There definitely is a lot of hype in the Bitcoin space, but the future will be the ultimate answer for whether that hype is warranted.
Example of a Bubble
The Dotcom Bubble
I don't mind bitcoin skeptics describing bitcoin as a bubble. Sometimes, they can come up with decent arguments for it. What is annoying though, is when people say bitcoin is a Ponzi or pyramid scheme, because that just doesn't make sense. Using pyramid, Ponzi, and bubble interchangeably is not correct. Our words are important in how we use them.
