Bitcoin as Ponzi scheme

Potentially interesting item from Karl Denninger: An unequivocal summary of Bitcoin as Ponzi scheme:

All existing cryptocurrencies are designed around a math problem that gets exponentially harder to solve as time goes on. However, the number of “coins” you achieve for solving it is fixed irrespective of where on the curve you solve it. This is a Ponzi scheme by definition since the first people obtain a given reward for little effort yet later people must expend exponentially greater effort for the same reward

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11 Comments

  1. Justin Thomas

    December 28, 2017 @ 12:43 pm

    1

    > All existing cryptocurrencies are designed around a math problem that gets exponentially harder to solve as time goes on.

    Not entirely true. The difficulty/effort is related to the number of people mining and not time. Currently it’s correlated with time because the price has risen relative to the USD, but that doesn’t always have to be the case. If less people mine the difficulty decreases. There are crypto currencies which have no mining, Ripple, for example.

  2. Scott

    December 28, 2017 @ 12:51 pm

    2

    Misunderstands cryptocurriences, as Justin points out, especially Proof of Stake versus Proof of Work.

    Really misunderstands a Ponzi scheme. In a Ponzi scheme the original investors must be kept in with returns from new investors, not “selling” their original stake. In the crypto markets, in order to get into a currency a person can either mine, adding value, or pay to take away an older investors stake. The coins this amateur economist talks about have no value without the market for buying from older consumers. This is a normal market, not a Ponzi scheme which must add investors without selling many original investments. Selling is the only thing that establishes value here.

  3. lion

    December 28, 2017 @ 2:03 pm

    3

    Just need to solve the problem of creating unlimited numbers of competing cryptocurrencies. There must be 100 billion trillion other currencies now.

  4. philg

    December 28, 2017 @ 2:09 pm

    4

    I have started my own! It is not even encrypted, so you will still have it if you lose your private key. Simply come by the flight school with cash and I will convert to “MindyCoin” at $1,000 per coin. Each coin will bear a unique number, in addition to a portrait of Mindy the Crippler, and is guaranteed to go up in value because “they’re not making any more numbers.”

  5. Jason DQ

    December 28, 2017 @ 3:06 pm

    5

    An investing cliche: there are no bad assets, only bad prices. Bitcoin may be both.

    My guess after a conference ofhuman resourcesis that the next time there is a market disruption, the ensuing flight to safety will cause investors to drop Bitcoin like a flaming porcupine. When markets are frothy, speculative investments can do amazingly well. When investors are fearful, assets which trade way above their intrinsic value (assuming Bitcoin has an intrinsic value) get whacked.

  6. G

    December 28, 2017 @ 6:59 pm

    6

    I disagree with the characterization of Bitcoin as a Ponzi scheme. It is mostly a “Pyramid” scheme with a couple of VERY CLEVER tweaks:
    (1) The promotion of the pyramid is done with a fully distributed approach; no single individual/entity can be held accountable.
    (2) The ‘creator’ of the platform is anonymous so authorities will not be able to hold him/her/them accountable when the whole thing falls apart.

  7. bobbybobbob

    December 28, 2017 @ 8:40 pm

    7

    The increasing difficulty of mining is deliberately modeled on gold extraction. Once upon a time you could wade into a river with a dish and get gold, or even find quite a bit of it embedded in rocks just below the surface. Now you need huge diesel powered machines and large quantities of cyanide and electricity. You’re not mining any gold anywhere in the world unless you have a hundred million dollars to start with anymore. Is gold a ponzi scheme?

    The only problem with bitcoin is it’s insanely energy inefficient. The traditional approach to banking has been to establish networks of trusted agents over time and use trusted third party auditors to keep everyone honest. The essence of crypto currencies is to throw away all the trust and auditors and use huge amounts of electricity instead. Nobody needs to trust anybody and there are no auditors. I don’t see how it works in the long run unless electricity prices plummet. But who knows, that might happen. And the “segwit” modification to the bitcoin protocol has basically been about layering networks of trust on top of the blockchain, so more transactions can be done without wasting so much electricity.

    It’s not a scam. It’s just a big question mark about whether it really can work long term or not. It’s very possible some block of nations might declare that their fiat notes are convertible to bitcoin. Or it could crash to zero because of the energy problem I explain above. Nobody knows. Most people bellowing about it publicly are full of shit and annoyed they didn’t get rich off it and a bunch of 25 yo libertarians did.

  8. anon

    December 28, 2017 @ 9:38 pm

    8

    Meanwhile bitcoin’s creator, Elon Musk (when the press found an actual Satoshi Nakamoto Musk tweeted “well I guess that’s settled ;)”), can sell a few of his billion$ bitcoins to fund his trip to Mars.

  9. anon

    December 28, 2017 @ 9:40 pm

    9

    Oops, misquoted. Actual Musk tweet: “@X4NWO Well, now that Satoshi Nakamoto has been discovered, I guess it is case closed … :)”

  10. John V

    December 29, 2017 @ 11:09 am

    10

    I’m pretty sure this is absolutely false:
    “However, the number of “coins” you achieve for solving it is fixed irrespective of where on the curve you solve it.”
    At least for bitcoin, the mining reward has declined over time. I’m not sure of the exact numbers, but think it started at 100 coins for a solution at the beginning, and has dropped to five coins now. (of course, value has gone up wildly, from about nothing to about $75,000?)

    As others have stated, difficulty is based on the number of miners. Lately I have been wondering what the minimal number of miners to process a round of calculations. My uninformed suspicion is that ten current ASIC miners would be more than enough. All the people pointing out the high electricity costs of mining are somewhat off target. (IMO) it is really more a human psychology cause, competitiveness and fear of loss of control (51% attack).

    Finally, bobbybobbob: History channel did a reality series about gold mining. I haven’t watched it, but I gather the guys went to Alaska and started mining for a much less than million dollar investment. And at least for the first couple of years were profitable.

  11. GermanL

    December 30, 2017 @ 7:21 pm

    11

    @bobbybobbob I’ll admit I am jealous for not getting in super early in the game, but that can be said about any bubble (real estate, tulips, stocks, etc). The volatility is what attracts speculators, and bitcoin has loads of volitality. The question for anyone in a bubble is when to cash out before they are left holding the bag.

    Risk-adjusted returns year to date 2017:
    Euro Stoxx: 13.8%
    S&P 500: 11%
    Bitcoin: 3.1%

    One thing that I don’t understand is the people buying bitcoins now, later in the game. I guess they expect it to go to $40k or something. I wonder if some of these people are weighed down by consumer debt and they figure taking a shot at $1k bitcoin might be a risk worth trying if it would wipe out their debt of ~$30k in a matter of months. Who knows… I would also be worried when the time comes for the collapse how quickly the exchanges will be to convert bitcoins back to dollars, or will they try to throw up barries (more ID needed, more proof of bitcoin ownership, etc etc).

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