Topic: Why people think Bitcoin is a ponzi scheme? (Read 5112 times)

Since you seem awfully sure of yourself in this thread, explain [in detail] the arguments behind your latest statement. This should help to show us your thinking processes when developing an argument...and also shouldn't be a problem if you know what you're talking about

You are right that a similar method was proposed. But AFAIK, it was never implemented because it was such an obvious failure.
Here is the best analysis I can find: "'Proof-of-Work' Proves Not to Work"

http://www.google.com.sg/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CDEQFjAA&url=http%3A%2F%2Foinvite.googlecode.com%2Ffiles%2FProofofWorkNoWork.pdf&ei=bJetUIOuDcymrAeb-YAw&usg=AFQjCNE4hSD2PG6bUyBxyPrEkIthG0_a4w&sig2=D1LrCspXcoK3Nv3ACwueRQ


Analagous criticisms apply to bitcoin. Any system generating enough fees to deter attackers would also deter legitimate users, i.e. the only way to adequately protect bitcoin is to destroy it.

Isn't a similar method used to filter spam in emails?  I may be incorrect on this, so please correct me if I am.
But if this is the case, then wouldn't PoW have been just as much of a "marketing scheme" in the "campaign" which brought email to the masses?

See thread topic.


And yet the question postulated was why some people may equate bitcoin with some type of sketchy investment scheme. For the sake of this discussion, you can take one of three valid positions:

a) You agree that bitcoin is a ponzi scheme or something along those lines and you can tell us why you think so.

b) You disagree that bitcoin is a ponzi scheme and can explain why you believe it is not.

c) You have an insight as to why some people may elect to believe bitcoin is a ponzi scheme.

How is that relevant? No one in the thread said that Bitcoin is a Ponzi scheme or even that they think Bitcoin may be a Ponzi scheme.

You are simple-minded and cannot grok ambiguity.

Ah, I see why your "ignore" button is so darkly colored now. Instead of making insightful posts to show why I am mistaken, you've resorted to "durr, you don't understand me".

You've been presented with factual statements and definitions as to why Bitcoin cannot be a Ponzi Scheme, yet you're still arguing. Why? Obviously I must be missing something in this thread...

No, the whole PoW thing is not a marketing scheme. No, not at all. 

Ponzi Scheme = promising an interest rate to investors and paying it with new investors money.

Pyramid Scheme = paying someone higher up for the right to join a scheme and inviting people below you to pay up to you.

Bitcoin Scheme = converting electricity into a digital currency.

Like mining in the real world, the value of a commodity, comes from the effort/cost to obtain it and the demand for it.

People who say bitcoin is a ponzi scheme have never tried to make one and so don't understand it's value.

I'm a miner.  I wish I were paid to understand your statements.  I'm glad I'm not paid to agree with them.

to further confuse things it MUST be said that the global fiat reserve currency credit bubble is a ponzi scheme! and not all ponzi schemes end up with the creator escaping and living happily ever after, I would guess that never happened once? everything is "energy to do work" at the end of the day, be it USD or BTC!

Hmm... Korb Investments... Member of the mining cabal I see ↑. I understand why my statements may not have "made much sense." As a miner, you are paid to not understand them.

Sorry Cunicula...having just read this entire thread, I must say I agree with BTC-Joe. His statements are right on point when describing a "Ponzi Scheme" and how most members react to the phrase. After that, your posts haven't made much sense and have instead resulted in insults instead of thought out and flowing statements.

I wonder if the main reason is because they have heard about ponzi schemes but don't know what that is. Because it sounds cool to say, they are looking for a place to use the term.

Nah bro, I'm not the one missing anything here. Let's examine:

The OP said he doesn't think of bitcoin as a ponzi scheme - nothing suggests that he has a clear understanding of what a ponzi scheme is or is not (that is your assumption)...and since this is a public forum and not a 1 to 1 discussion between myself and the OP, other readers may not be clear on what constitutes a ponzi scheme.

You're really hung up on me explaining what a ponzi scheme is rather than addressing the real issue - that is the actual faults of bitcoin and similar 'e currencies'. You don't need to tell me that you have nothing more to say because that was quite evident from your first response. Try to stay on topic, compadre.

I don't think you've understood what I intended to say - or I'm not reading you right...

I was talking of a classic pyramid or MLM model where there is a direct benefit to be gained from people who are sold to or 'recruited' by those who recruited them and by those who recruited them etc.

The difference in my eyes between a marketing scheme that is doomed to fail and one that I'd count as constructive commerce is whether the which the vast majority of participants (including and especially the 'bottom layer') have derived value from the initial transaction irrespective of any further profits.

Where this is the case, say if I bought a plastic sandwich box and was happy that the combination of quality/price meant I got good value then it makes no odds whether it was bought from a shop or from an MLM scheme.  The only difference is how the profits are split - and that's only of interest if the buyer, in additional to being content with initial purchase value, is interested in further participation by marketing him/herself.

I'm afraid I don't understand what you're saying about what I said that is like 'every company that is running today'.  I'd be happy to elaborate or does my further explanation clear it up for you?

Note I've not yet brought Bitcoin into the equation.  I wanted to try and separate out detrimental and positive aspects of schemes generally classified as 'ponzi' first.  Mushing up concepts like greed and fraud and bound-to-fail and profiteering and small numbers making massive money etc. in one emotive word then jumping in on the 'Oh yes it is, Oh no it isn't' pantomime virtually guarantees the discussion can not move forward.

I don't understand this sorry.  Are you talking about a normal business, a marketing scheme of some sort or something to do with Bitcoin?  I don't know of the 'hostess and the executive' example you gave nor what it is meant to illustrate.

Let's review, since you missed it the last time

The question is: 'why do people make a mental association between A and B (even though A and B are not the same)'

You responded by saying that A and B are not the same. This indicates that you have trouble differentiating between logical reasoning and reasoning via analogies and symbols.

On reviewing your writing, I believe you suffer from cognitive limitations. (e.g. Asperger's)

I don't have anything more to say to you, other than a suggestion that you seek help for your condition.

You've yet to make any points.


Oh, am I trying to reassure people about bitcoin by explaining what a ponzi scheme is? This isn't about bitcoin so much as it is a failure to properly utilize the English language. We're not going to redefine words to suit your opinions.

The proper response, which has eluded you, is that bitcoins do have fundamental flaws that will prevent them from gaining mainstream adoption as they are now...but in no way are they comparable to a ponzi scheme. Do I personally "believe" in bitcoins as a currency (or a replacement for any national currency)? No, but I do see opportunity here in the context of bitcoins being more of an virtual item than a currency.


And people who lack the intellectual capacity to support their arguments with logic will quickly resort to misdirection and eventually trolling in an attempt to mask their shortcomings.

You are using the "collapse" word again.   I'm kind of perplexed as to why.

Miners either hold what they mine, sell it at an exchange, or to some degree, spend their mining proceeds within the bitcoin economy.  But that happens once.  After the miner spends those funds the funds are then spent.  Those coins are ultimately either bought by someone investing/speculating or they continue to circulate in the bitcoin economy.

Starting later this month, the currency issuance rate drops to a 12.5% level (at an annual rate).

So in the year that follows miners will either save, cash out or spend those 1.3 million coins that they earn.

 - If 100% of those funds are saved ("hoarded") by the miners then, of course, that will not cause "collapse".
 - If 100% of those funds are spent in the bitcoin economy, that will be fantastic, and will not cause a "collapse".
 - If 100% of those funds are cashed out immediately upon being earned by miners, that might keep the exchange rate subdued, but I can't think that is anywhere enough to cause "collapse".
 - And thus, if there is any combination of the above, there is nothing there that would cause a "collapse".

So where do you see low profits (or losses) to miners as being something that will cause Bitcoin's collapse?

So does every company that is running today, so how do you differentiate a valid business vs a ponzi. What does one use as proof? If particular one like our's with no tangible product or place of business. Every company eventually collapses.

Which brings me back to my original idea, when the select few profit too much, that will increase the chance of collapse. Just take a look at hostess they gave the executives 300% raises and lowered the workers pay.

The fact is if mining rewards stopped tomorrow, one of two things would happen. (a) Bitcoin would just about die except for extremists who will mine without a profit, or (b) miners would only accept transactions with high transaction fees. There goes transferring money for almost free across the world. Whether miner income is from transaction fees or inflation the end outcome is no different, just a different way of marketing it (similar to buy 3 get 1 free vs 25% off only reversed) Miners have already decided on what they are willing to work for regardless of technology.

What I'm looking for is a way to reach out to people who think bitcoin is a scam. Not try to convince myself it is not. A large amount of the tech community thinks bitcoin is still a scam/ponzi and I think they are possible the best place to reach out and start increasing our user base.

The cult-like attitude of bitcoin proponents also plays an important role here. Thanks. Case in point. ↑

The proper response when bitcoin and Ponzi are mention in the same sentence is: Provide reassurance that bitcoin is not a ponzi scheme.

Members of the cult are expected to produce certain pat responses. Even when these responses are unrelated to the question asked.

Observing such cult-like behavior, outsiders are distrustful and suspect a ponzi. As they should.

Let's not.


If you know what a ponzi scheme is then you can quite easily determine what is not a ponzi scheme. If the OP understood what a ponzi scheme actually is then he probably would not have started this thread in the first place.

Do I need to hold your hand and walk you through anything else?

I think the simple reason people think of Bitcoin as a ponzi scheme is it is that for people who are either against Bitcoin or, who out of concern for we brainwashed want to warn us against Bitcoin, 'ponzi' is a great FUD term and repeating it, using it in headlines etc. perpetuates its association with Bitcoin.

I never participated in pyramid/ponzi/mlm schemes but have been attracted to them and not believing the legal/illegal differentiation is what counts, wanted to get to the bottom of the difference between such a scheme that is beneficial and one that is detrimental to its participants.

My reasoning went like this:  If the benefit to participants is solely profits from those further down the chain it will sooner or later collapse - and when it does, by necessity the vast vast majority of participants will lose.

If there is a product or service being sold along with the promise of profits from those further down the chain and the product or service is one that is not (without the potential profits) worth the money paid then it will sooner or later collapse - and when it does, by necessity the vast majority of participants will lose - although they will at least have something to show for it!

However, if there is a product or service being sold (with or without a promise) and it is a product or service that would be of value at the asking price regardless of potential profits from marketing then every buyer as well as every seller, regardless of where in the chain, have gained.  So why would it collapse?

Granted there are many who hate the idea of those towards the top of MLM schemes making so much more money from doing basically the same thing as what the last-in-chain seller is doing.  Many people also still believe if someone has made a heap of money by necessity there is someone else who has suffered as a consequence.  This can't be helped.  But I think it is helpful to tease apart the elements making up the varied interpretation of what makes a ponzi because it then gives us the conceptual tools to see which aspects may be relevant to Bitcoin and which aren't.

Nice restatement of the myth.

There is no 'needed capacity'. One CPU worth is completely adequate. Or do you believe that double-spending is otherwise impossible to prevent in a decentralized system? [Hint: it isn't at all impossible or even very hard.] If not, then what do you mean by 'needed capacity'? What is the capacity 'needed' for exactly?

Lets look at the first part of the OP's post.

Why would you think that explaining what a ponzi scheme is answers the OP's question?

The better answer to the OP's question is to explain what a ponzi scheme is. A ponzi scheme is essentially an investment scam that promises high returns in short time frames. It accomplishes this by using money from new investors to pay current investors, but the money is never actually invested in anything and so the fund has no way to gain value.

Ponzi schemes fail once they reach critical mass - the point where there are more current investors than there are new investors - making the "investment" scheme insolvent. This is when the operator of the scheme (scam) takes the remaining balance of whatever was invested and runs for the hills.

This has nothing to do with long term viability. You can string a ponzi scheme along for years, if not decades, if you do some basic number crunching to manage the rates and policies of your scam...but it does not change the fact that ponzi scheme investments have no opportunity growth and rely solely on new investments to exist.

Bitcoins are not an investment scheme and do not rely on newcomers to sustain themselves. Do do rely on community participation, however they can be thought of as freelancers rather than investors. As long as there is interest in bitcoins they will be able to exist.

I think that distributing bitcoins that a Skittles the unicorn farts out would be more effective marketing than the existing method where a dollar's worth of bitcoin is spent on "marketing" yet the recipient, the miner, only gets a few cents of that (after subtracting costs for electricity and capital costs).

Bitcoin needed a system to subsidize the mining function until the currency has enough traction where it can be self-sustaining with transaction fees.  Now once the bitcoin subsidy drops in half, there will still be enough mining capacity remaining to provide the needed service (preventing double spending).  And in four years when it drops again, the number of transactions fess will be higher so there will be even less need then for the higher subsidy.  And four years after that, even more transaction fees and thus less subsidy is needed.  And on and on.

There's currently way more capacity than is needed, but there is not yet enough from the transaction fees to meet the needed level.  So the subsidy is doing its jobs, and it dropping in half next week won't hurt the security of bitcoin.

Sure, there will be about 2.5 million BTC paid to miners this year. That is a lot. Say we wanted raise that with fees. At current rates there are about 7300 BTC raised per year. Thus the fees would need to be raised by 340-fold. Such fees would be salient. You would see them leave your wallet everytime you make a txn. Rather than...


It would be
This difference is what I mean by salient vs. hidden. Opting for hidden fees, 'free money', and 'no fees' is a clever marketing scheme. But it is an illusion.

I see what you mean, though this is a bit of a loose analogy. Payment by devaluation, again a bit of loose usage with the term payment. Well that is fair, though I don't know that people are unaware of this fact, or at least not as unaware as you say. If it is known that X coins are generated every day, at a specific rate, it is fairly clear that this needs be made up for in some way.

Okay, an analogy may help. Who pays for the money the FED lends to banks? The discount rate is completely transparent. What do people holding USD have to do with this?

[I'm reluctant to go into to more detail here because the issue should be obvious. The details are distracting.]

To what end? People should not in their own self-interest see the coming technology as a way to profit? Should they avoid ASIC altogether? It is something that has been a long time coming, and there really is no way of stopping it (whether it is now, or if it's a scam, in the future). Ideally there would be tons of kick-ass services, and easy to use mining for everyone, but the system has to grow organically, and as always happens that means inefficiently at best, and crazily at worst. I'm glad that there are people working towards the best interest of bitcoin as a whole, by providing services for BTC, and programs to help make the network more accessible, but I certainly don't expect everyone to stop themselves from any venture if it could be at all potentially harmful to BTC.


To be fair, I do have a problem with paypal, and also need to send money halfway around the world, and there are no good options for me, sadly bitcoin is not really a good solution for me here either. If it were to grow however I would certainly be quite happy to use it in this manner, and it would be a great legitimate service. I see many others, who would be interested as such.
Mining does matter, but it is separate from the use of bitcoin, and the two need not be considered together.

As regards Ponzi schemes, people will be people and will always mislabel things, because they don't bother to learn the proper terminology, so it goes. Doesn't help that Ponzi schemes have been on peoples minds lately in larger news, what with Madoff and whatnot.


This one I'm not sure I follow. How are mining proceeds paid for by anyone simply holding currency? Do you mean that people who support the current valuation of BTC are paying miners? Or is it something separate? As it stands, mining is not hidden anything, they generate X coins per day which are then either held or dumped into the system, very transparently.

Mining does matter. Mining proceeds are paid for by anyone who uses bitcoin as a payment medium or store of value. Right now you pay people to mine just by holding currency. People do not understand that they are paying miners by agreeing to hold currency. Just like people don't understand that they are giving the government revenue by holding dollars. It is a hidden tax. Mining just seems like free money. The future 'necessity' of mining justifies the distribution of free money today.

You also pay people to mine when you send currency. And the plan is to make you pay more and more over time. This is a salient tax on the user base. The myth is that this tax is necessary. People are happy to accept this myth. Right now, mining means 'free money' and the tax is some vague thing people will pay in the future.

In the future, mining will just mean straight tax. That sort of myth is quite hard to swallow. People will vote with their feet. Opting for almost free transactions instead of txns with salient fees.

This makes bitcoin very much like a ponzi. It closer to multi-level marketing, but ponzi is a more familiar term.

The frustrating thing is that it is hard as hell to break the myth right now. A lot of monetary myths are like this. Thus the famous saying about monetary crises: "The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought"

I also believe bitcoin mining should be used as a marketing tool to get people interested, it should be easy to use, like bitminters client with easily available hardware, not asic devices which will probably be backordered until they are no longer profitable. Then when people have them we need great services to spend them with, but people are unlikely to buy bitcoins when they can use cash or credit card instead. At least until vendors provide discount for bitcoin or only sell via bitcoin. Amazon could start accepting bitcoin tomorrow, and little increase of demand for bitcoin would occur, other than purely speculation based.

What I'm trying to do with this thread is warn people that this thought "ASIC is going to make me filthy rich in just months" does not make our endeavors look more legitimate to the general public, in fact it does just the opposite. Its obvious to me that bitcoin is attracted many more fraudsters and thieves based on this idea of getting rich, than would exist in other circles.


yes but those people who power down are more likely to be small time miners, who once they stop won't look back at bitcoin any time soon.


I understand what your saying here, that mining doesn't matter. But realistically I think it is a very idealistic answer. Its like saying the fed only exists to keep the economy more stable and prevent bubbles/recessions. People do not have a good reason right now to use bitcoin. Most people don't have a problem with paypal/credit cards. Most people do not notice inflation of their fiat currencies. Most do not need to send money half way around the world, and if they do will probably do it at walmart.



I should have clarified I was speaking about price/difficulty not the price directly

What are the miners for? It is a marketing scheme. An extremely clever one, I admit. However, mining has become weaker and weaker as a marketing tool over time. June 2011 bubble. That is the power of marketing.
We can't expect mining to help deliver anything like that again. Mining is becoming a pure liability.

Last month Bitcoin miners received a little over 200K BTC, or about 2% of all bitcoins that have been issued.   Next month Bitcoin miners will receive just 100K BTC, or less than 1% of all bitcoins that have been issued.  

This alone will cause many miners to power down their GPU hardware and quit mining.    This should not be a surprise to anyone.  

Here's from March of this year:

Bring Out Your Dead (GPUs)
 - http://bitcoinminer.com/post/20028732430



But Bitcoin doesn't exist for the benefit of miners.  Bitcoin exists because there was the need for a type of money that will not be devalued by political influences and a type of money that has no prejudice as far as how it is used.

It doesn't matter a hill of beans to Bitcoin gaining traction if those who are mining are making any money from it.   It only matters that there be sufficient mining capacity to ensure the blockchain is protected, and it is currently (and will continue to be) protected at a level that is way more than currently necessary.


When you stated "we are heading for another several bad months like the end of last year", I assumed you were referring to the exchange rate.  If you weren't referring to the exchange rate then I'm confused as that has a huge role in determining a miner's profit.

Thanks. Case in point. ↑

Kind of a chicken and an egg thing here, without mining you don't have bitcoin but without bitcoin you can't have mining.  Ponzi is a bit harsh if you ask me and so trying to compare this to that is not a very easy thing to do.

Right. That is why everyone defends mining even though it is obvious that mining is extremely expensive and unnecessary. People like "free money" so much, that they convince themselves that the distribution of "free money" via mining is essential in some way. It is like pirate's essential secrecy.

Mining is a very important reason why bitcoin looks so similar to a ponzi.

In many ponzis, participants are asked to do some kind of useless work to make rewards seem justified (see Zeek rewards or whatever it was).

I think the average person is less interested in the exchange rate and don't think any of my post referred to that. More people are interested in the "free money" idea. Right now the general public is mostly blind to the inflation going on in this and many countries. When we see more hyperinflation, which won't surprise me, more people will care about the exchange rate.

I don't think you understood me at all. I think it will be almost impossible for anyone to mine at a reasonable profit. The hardware is too much of a jump that after the people who "know someone" profit (didn't mean to single out Inaba was using him as an example) the difficulty will be too high for me and you to make our investment back in a reasonable time. Most people are not attracted to bitcoin because of making anonymous low fee transactions. When bitcoin falls again to almost break even mining rates, like November of last year, its bad news. Bad mining returns equals less people learning about bitcoin which is in the end bad for bitcoin. People then think the free money is over, therefore bitcoin is over. Just like they were saying when profitability rates were low last year

I agree with you. As you point out, sustainability is not a 0 or 1 categorization. An obviously unsustainable system is analagous to a ponzi. Thus the close association between bitcoin and ponzi. I would not recommend bitcoin, it is not sufficiently sustainable.

Nothing is sustainable over a long enough period! It doesn't make everything a ponzi...

Bitcoin is analogous to a ponzi scheme because it is cannot be sustained in the long-term.
People have an intuition that this is true (though they don't know why), so they sloppily label it a ponzi.

A panic?   Right now?


Bad for the Bitcoin exchange rate or just a bad time to be trying to use FPGAs and GPUs to mine at a profit?


By the time ASICs ship the block reward subsidy will already have dropped to just 3,600 BTC mined per-day.  It doesn't matter if there is 24 Thash/s mining or 60 Thash/s mining away, or 600 Thash/s ... the same number of BTC are mined each day -- 3,600 BTC.


You are saying the distribution of those coins will change?  Like are you saying that many of the bitcoins will be going to those few who will receive ASICs first?   If so, then you might be correct.  If just one manufacturer ships, and the shipments are batches of pre-orders, then for a number of weeks that is very likely going to be true.

Let's say the initial ASIC shipments include 75 Thash/s (which is probably too low).  Today, the combined total of all existing FPGA and GPU miners is 25 Thash/s.   So those FPGA and GPU miners who were used to splitting 7,200 BTC per-day, will then be splitting just 900 BTC per-day   (3,600 BTC after the block reward subsidy drop, and then 25 Thash/s is only a quarter of the entire hashing capacity, after considering the 75 Thash/s added from the initial ASIC shipments.)

So yes, if you were receiving $100 worth of bitcoins in October (at $11 BTC/USD), that same hashing capacity will bring in just $12.50 worth of bitcoins in January (assuming BTC/USD is still $11 and also assuming that 75 Thash/s of ASICs is online by then).   So if you are mining with GPUs, either hope that the exchange rate skyrockets into record territory or plan to retire those power sucking GPUs as soon as ASICs ship, if not earlier at block 210,000 (Nov 28th).

But this has very little negative impact on the bitcoin exchange rate (which is generally what is inferred when using the term "ponzi scheme"), and I got the sense from your post that you felt it might.

It is because they don't know what a Ponzi scheme is. What they mean to say is that Bitcoin is a pyramid scheme.

By their definition, any asset that doesn't produce income is a pyramid scheme. If Bitcoin is a pyramid scheme, then every currency and every commodity is a pyramid scheme.

If your like me, you probably first heard about bitcoin because you could earn money with your computer.  Although I don't think bitcoin is a ponzi scheme, I think it does make some sense to see it that way. Just take the last few weeks for instant. In anticipation of the block reward halving prices have mostly stagnated but difficulty has skyrocketed. As if after block halving there will be no more money to be made, like the end of a ponzi. People seem to be mining every coin they can in anticipation of the end and although some are hoarding it seems many are selling to recoup quickly while they still can. Now I understand alot of that is because of anticipation of new hardware.

But if as many asic devices have sold as vendors and some others would like us to believe, I can only see that after a few months people will be dumping coins to make up for the huge increase in difficulty and struggling to make their investment back. Creating a very similar cycle to where we are now, a panic. Which I believe will continue until the cost of asic devices becomes much cheaper and people see it as a good investment again and not something that will only benefit early investors. Unless a discounted used market or major competition between vendors causes a huge price decrease shortly after release it seems to me that we are heading for another several bad months like the end of last year. I think increasing the power of bitcoin mining devices so quickly will cause a bubble in what a miner can earn as profit, I don't think the bitcoin market will be able to handle, short term, terrahashes getting into the hands of someone like Inaba. (does anyone seriously think he will not be the first one to have a bfl asic?)