The Bitcoin Ponzi scheme: unveiling the truth

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Discover the Bitcoin Ponzi scheme debate. Test the criticisms, Ponzi clarification, and why Bitcoin isn’t one.

Actor Ben McKenzie is principally recognized for his roles in The O.C., Southland, and Gotham, the place he performs Jim Gordon, an unyielding cop plowing a lone ethical furrow in a metropolis beset with crime and violence.

Nonetheless, these days, McKenzie has borrowed a leaf from his Jim Gordon character and has launched into a campaign of his personal, this time not in opposition to the Joker or the Maroni crime household however in opposition to crypto.

McKenzie is a vocal critic of the crypto trade. He even wrote a e book, “Simple Cash: Cryptocurrency, On line casino Capitalism, and the Golden Age of Fraud,” which dives into the risks of cryptocurrency.

The actor argues that cryptocurrency lacks inherent worth and is ripe for manipulation. In 2023, he appeared earlier than the U.S. Senate Banking Committee, calling crypto the “largest Ponzi scheme in historical past.” McKenzie in contrast the crypto trade to disgraced financier Bernie Madoff, who defrauded traders out of billions of {dollars} between the early Nineties and late 2008 when his scheme lastly unraveled.

Is McKenzie proper? Is crypto a Ponzi scheme? Are hapless traders being taken for a experience by shady cryptocurrency operators? Let’s discover out.

Desk of Contents

What’s a Ponzi scheme?

First, we have to know what a Ponzi scheme is. a sort of rip-off the place the cash from new traders is used to repay earlier traders, as an alternative of incomes income by authentic investments. These schemes promise excessive returns to draw folks.

They’re primarily a home of playing cards that retains going so long as there’s a gradual circulate of latest cash to cowl payouts to earlier traders. Nonetheless, they inevitably collapse when it turns into troublesome to recruit new traders.

Named after Charles Ponzi, an Italian businessman who grew to become well-known for such a rip-off within the Twenties, Ponzi schemes are much like pyramid schemes. Each rely on a relentless inflow of latest traders to maintain going, utilizing the brand new cash to pay promised returns to earlier traders.

The primary variations are that Ponzis focus on promising excessive returns on investments whereas pyramids supply individuals commissions primarily based on the variety of folks they recruit. They could have underlying services or products, however their focus is normally on recruitment.

Neither scheme doesn’t make authentic income and is inherently unsustainable, ultimately collapsing when it turns into troublesome to recruit new traders. Crypto has been likened to each.

Is Bitcoin a Ponzi scheme?

Going by the definition above, you’d most likely really feel like there are similarities between crypto and Ponzi schemes. It’s most likely why Bitcoin (BTC), the biggest digital asset by market capitalization, has been on the heart of assertions that it resembles a Ponzi scheme.

Critics argue that Bitcoin’s worth relies upon solely on folks persevering with to put money into it. They consider that if the speed of funding slows down, Bitcoin’s market may crumble. This view raises doubts about whether or not Bitcoin has any sensible use past being an object of hypothesis, questioning its effectiveness as a means to purchase issues or as a dependable option to preserve cash.

Bitcoin and Ponzi allegations

In a previous weblog submit, software program engineer and crypto critic Stephen Diehl tried to make clear what he believes is the Bitcoin Ponzi scheme. Diehl deconstructed Bitcoin’s elementary worth proposition in his evaluation, arguing that it lacks any tangible asset or financial use.

He argued that the thought of Bitcoin being a Ponzi scheme relies on the assumption that its worth comes solely from hypothesis slightly than any actual usefulness. He thinks that Bitcoin’s value is stored up by a cycle of hypothesis, with traders hoping that new folks will be a part of and push the costs up.

The aim of crypto has at all times been for just a few insiders and hedge funds to tear off determined (or silly) retail traders who toss their cash away right into a rigged on line casino.

The tech and every little thing else is simply advertising and marketing for the on line casino.

— Stephen Diehl (@smdiehl) December 22, 2023

Diehl additionally highlighted the unsustainable nature of Bitcoin’s worth proposition. He argued that the crypto market operates on the idea of irrational sentiments, with traders chasing returns with none elementary understanding of the coin’s underlying mechanisms.

Moreover, the software program engineer criticized the broader cryptocurrency ecosystem, suggesting that different tokens observe the same sample of speculative buying and selling and wealth redistribution. He contended that these tokens supply little past the promise of fast riches, echoing the age-old attract of “cash for nothing out of nothing.”

In Diehl’s opinion, Bitcoin and different cryptocurrencies stray removed from conventional investing rules, counting on advanced expertise and market pleasure to maintain their excessive costs. He cautions in opposition to the widespread lack of awareness that helps the Bitcoin rip-off, advising traders to be cautious of engaging however baseless guarantees.

You may additionally like: Will Bitcoin’s success deliver its doom?

Examples of Ponzi schemes in crypto

Certainly, crypto’s decentralized nature has supplied a platform for potential scams, the place pretend tokens promise excessive returns solely to fade with traders’ funds.

Some notorious examples of crypto Ponzi schemes embody OneCoin and Bitconnect. In OneCoin alone, traders reportedly misplaced greater than $4 billion, lured by guarantees of huge returns on a pretend cryptocurrency.

Bitconnect, alternatively, which at its peak reached a valuation of $3.5 billion, provided a high-yield lending program, encouraging traders to purchase its Bitconnect Coin (BCC) and lock into this system for a set interval.

Nonetheless, it turned out that this system was a Ponzi scheme, with early traders getting paid from funds generated by new traders. This system shut down in 2018, with its founder, Satish Kumbhani, indicted by the U.S. authorities for his position within the scheme.

Why Bitcoin is just not a Ponzi scheme

Regardless of these examples, it’s vital to inform the distinction between scams and real cryptocurrency initiatives.

One compelling argument in opposition to claims of Bitcoin being a Ponzi scheme facilities on its finite provide. Bitcoin is completely different as a result of it has a most restrict of 21 million cash, not like Ponzi schemes that want steady new funding. Supporters argue that this restrict modifications how Bitcoin works, basing its worth on shortage and demand slightly than simply bringing in new folks.

One other protection in opposition to the Ponzi accusation is Bitcoin’s decentralized community. Working on a blockchain system, BTC transactions are verified and recorded by a dispersed community of computer systems or nodes, eliminating the necessity for centralized management.

This starkly contrasts with how Ponzi scheme organizers function, since they usually exert centralized management over investor funds, manipulating them to maintain the scheme.

Bitcoin fans declare the cryptocurrency holds intrinsic worth, even throughout market downturns. Of their opinion, traders can commerce their Bitcoin for different property or conventional currencies each time they discover a keen associate.

Moreover, the transparency of blockchain expertise ensures that each transaction on the Bitcoin community is seen to anybody, anytime. It’s fully reverse to the secrecy Ponzi schemes depend on to deceive traders and authorities alike.

Now, let’s speak about volatility. Whereas Ponzis and pyramids promise constant returns which can be typically too good to be true, Bitcoin’s market swings are something however predictable.

Take into account the curler coaster experience of features and losses that day merchants expertise, generally inside a matter of hours. Such erratic motion doesn’t match the invoice for the regular facade of a Ponzi scheme.

Dangers and concerns

As a lot as many might view cryptocurrency as an exciting funding alternative, it’s not with out dangers.

First, not all cryptocurrencies and buying and selling platforms supply the identical degree of safety. Some newer cash could possibly be particularly dangerous and vulnerable to the Ponzi scams we’re discussing right here. Plus, there’s no security web in case your crypto will get misplaced or stolen, so make sure to analysis completely earlier than diving in.

A earlier report from the annual Monetary Cryptography and Information Safety convention, recognized these dangers. Per the report, the specter of scams looms giant inside the crypto group. Scammers make use of a wide range of ways, from spamming boards and social media platforms with pretend hyperlinks to creating a number of usernames to bolster their schemes.

The analysis additionally revealed alarming tendencies, with scams typically originating from the identical supply, utilizing completely different aliases to masks their true intentions.

The lifespan of those scams varies, with some truly fizzling out in a mere day whereas others persist for years. In line with the report, discussion board moderators play an important position in shutting down apparent frauds, however the degree of exercise inside rip-off threads can affect how lengthy they run.

There’s a regarding pattern: elevated interplay between scammers and potential victims tends to lengthen the lies and the phantasm of legitimacy. Nonetheless, direct engagement between them can even assist put a fast cease to the schemes. It’s because victims usually tend to uncover the reality, sound the alarm and thwart the fraudsters’ plans.

Furthermore, fame performs a fundamental position in figuring out the potential success of a Ponzi scheme. A scammer’s credibility — or lack thereof — can considerably affect the variety of victims they lure.


In the end, whether or not Bitcoin capabilities equally to a Ponzi scheme stays a matter of perspective. Whereas proponents spotlight its distinctive options, equivalent to finite provide and decentralized governance, skeptics level to its speculative nature and regulatory challenges.

As with every funding alternative, people should conduct thorough analysis and train warning earlier than getting into the unstable cryptocurrency world. Being conscious of the dangers and understanding the nuances of the talk may help traders make knowledgeable selections in regards to the position of Bitcoin of their portfolios.

Learn extra: What’s a crypto bubble? Navigating the storm

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