When Carlo/Charles Ponzi ran the scam that gave us the generic name
of his pyramid-scheme fraud in the 1920s, he was following in the
footsteps of other imaginative swindles. The South-Sea Bubble, the
Dutch Tulip racket, William (“520%”) Miller’s “Franklin
Syndicate,” all had their moments in the sun. More recently, Bernie
Madoff and Allen Stanford managed to bilk naive investors out of huge
sums. If you’re following the whole George Santos debacle, you’ll
know he’s no stranger to the Ponzi world, either, through Harbor
City Capital, the Florida-based investment firm where he worked.
Charles Ponzi in 1920. Public domain.
Today, one third of the population of the US
believe that cryptocurrencies are Ponzi schemes. At the same time,
around 46 million Americans (22%) own Bitcoin, the most popular
cryptocurrency — none of whom, presumably, think of their
investment as a Ponzi scheme. Worldwide, over a billion folks used
cryptocurrencies in 2022. So which is it? Ponzi or investment?
A Ponzi scheme is pretty simple: Early investors
receive regular high-interest payouts which are sustained just as
long as new investors come in. Eventually the whole edifice
collapses, at which point the mastermind is either arrested or
disappears. The latter happened with a pseudo-crypto Ponzi scheme,
OneCoin, a huge scam based in Bulgaria that collapsed in 2017. The
founder, Ruja Ignatova, disappeared off the map with a huge chunk —
billions! — of stolen money. (She is now on the FBI’s Ten Most
Wanted Fugitives list.) I say “pseudo” because the con artists
simulated transactions on the blockchain, rather than actually
registering them, which would have made them permanent and immutable.
Cryptocurrencies like Bitcoin don’t qualify as
Ponzi schemes. For one thing, Bitcoin certainly doesn’t promise
high rates of return! Its value goes up and down like a yo-yo, and
anyone who buys Bitcoin surely knows it’s a gamble just by looking
at a historic price chart. For another, there’s no “mastermind”
behind Bitcoin manipulating it — the whole point of
cryptocurrencies, from Bitcoin on down, is to avoid centralized
control. Also, transactions are transparent (anyone can access the
blockchain, in which every transaction over the past 14 years is
recorded), they are final (no one can go back and fiddle the books)
and transactions are essentially instantaneous (< 10 minutes),
while the source code is public.
Bitcoin was created in response to the 2008
financial crisis resulting from the failure of centralized government
to avoid unchecked speculation (in worthless mortgages), perhaps as a
precursor to digitize the entire $600 trillion world of financial
assets. When most of us think about money, what we want are two
qualities: wealth preservation and monetary sovereignty,
neither of which are guaranteed by our present fiat system (where a
piece of green paper is worth $20 only because the government says
so). $700 in 1970 is now worth $100, so rather than preserving
wealth, the system has undercut saving. Meanwhile, monetary
sovereignty — the ability for each of us to make free choices in
how to save, invest or spend our wealth, free of censorship or
confiscation — is hardly a given. For instance, Canadian PM Justin
Trudeau used emergency powers to temporarily freeze the bank accounts
of about 200 anti-vaxxer truckers who brought Ottawa to a standstill
last year, while today, a tiny group of Trumpist Republicans are
threatening to cause the US Treasury to default on its debt
obligations in a few months, which could have repercussions for all
of us.
I’m no economist, but I think it’s pretty
obvious that what has worked (just barely) in the past isn’t going
to work in the future, as global problems threaten to swamp the
ability of our current capitalist system to deal with them.
Cryptocurrencies may not be the final answer, but some trustless
system of decentralized money, out of the hands of politicians and
bankers, guaranteed by a secure blockchain, with a finite number of
“coins” (to avoid inflation), may be the only way out of the mess
we’ve gotten ourselves into.
Bottom line: Just because it’s risky doesn’t
mean it’s a scam!
