Bitcoin is not a Ponzi scheme, it’s an outcome of capitalism’s failure


Bitcoin can be many bad things: speculative bubble, energy consumer, vehicle for scams, but it is not a Ponzi scheme.

The particular scam of Charles Ponzi involved financing your mutual fund’s returns with new money rather than actual investments; all Ponzi schemes fall apart when asset values ​​fall and new money dries up.

Bitcoin does not offer returns, so it is not a Ponzi scheme. But what it is, exactly, is harder to name. It is both nothing and everything.

What I mean is that Bitcoin has no substance and is not inherently useful, unlike earlier bubble objects such as Dutch tulips in 1636, South Sea Company in 1711, Japanese real estate in 1989, or Internet stocks in 2000.

Those other bubbles involved the frenzied overpricing of an existing item that had some inherent utility, and continued to exist after the price crashed and the last speculators went bankrupt.

the bitcoin bubble

Bitcoin was created out of thin air in 2008 and although it was supposed to be a new form of money, it is clear that will never happen. It will not be allowed.

So why do people keep paying $30,000 each for them, an amount that could get them a decent car or a very nice family vacation?

It is because, I contend, Bitcoin is a magnet for the victims of modern capitalism, like lottery tickets, and is therefore both a symptom and a symbol of its failings.

It is now fairly well understood that the neoliberal version of free-market corporate capitalism introduced in the 1980s by, among others, Milton Friedman, Margaret Thatcher, and Ronald Reagan, has greatly benefited the wealthy and vastly increased inequality.

Profits have expanded at the expense of wages, while money printing by central banks, to rescue the economy from the banking excesses that undid it in 2008 and after the pandemic, has inflated stock values. assets, further benefiting the wealthy owners of the assets.

But while everyone knows all this, nothing changes because the dice are still loaded and the winners are still in charge.

In October 2008, the heyday of the GFC, and a month before the Federal Reserve began printing money, Satoshi Nakamoto posted a paper on a crypto mailing list headed Bitcoin: A Peer-to-Peer Electronic Cash Systemessentially describing an ingenious alternative to the existing financial system for those left behind.

He or she did not design an investment asset, but a new way of recording transactions using a generalized chain of messages that cannot be changed, backed by a token called Bitcoin.

But because there is a built-in limit of 21 million on the number of tokens that could be created (as opposed to ever-expanding fiat money), and because the existing financial system had so egregiously failed so many, it gradually built a large following: first a smallish cult, then a movement, then a speculative bubble.

(As an aside, a month after the birth of Bitcoin, Barack Obama was supposed to provide a political rebalancing for those left behind by capitalism, but he didn’t, and things remained as Leonard Cohen described in 1988:

Everybody knows the dice are loaded
Everybody rolls with fingers crossed
Everyone knows that the war is over.
Everybody knows the good guys lost
Everyone knows the fight was fixed.
The poor stay poor, the rich get rich
this is how it goes
Everybody knows

Eight years later, Donald Trump presented himself as a more extreme outsider, but in reality he was just one of the rich winners, and in his one term permanently changed America by stacking the Supreme Court. But that’s another terrifying calamity altogether.)

1646137496 cryptocurrency phone
More than three million Australians own cryptocurrencies and more regulation is called for. Photo: AP

The Bitcoin/crypto bubble has been fueled by three types of people: First, the scammers, with whom the world is and always will be infested; second, those against whom the dice are loaded, who are sick of losing and think they have found something that will help them win; and third, those who really want an alternative to the existing financial system, which they believe is rigged.

I’m guessing the two seconds are basically the same, just true believers have a longer time horizon than gamers.

Is this the end?

In early 2010, 18 months after its birth, Bitcoin was quietly changing hands for a fraction of a penny. In the middle of that year, his first large print run came, when he charged up to 10c.

And then in 2011 came its first bubble and crash: it went from 30c to $30 and back to $3, a 100x rise and a 90 percent drop.

Then, in 2017, it rose to $17,000, at which point it was compared to the tulip mania of 1636 and every other bubble in history (it was the biggest of them all, even then). It collapsed back to $3,500 dollars – a drop of 80 percent.

And then, after the pandemic unleashed a new wave of money printing, further eroding the foundations of the existing financial system in the eyes of many, the price rose to a high of $69,000. It has now plunged for the fourth time, to US$21,000, a drop of 70 per cent.

The corrections are getting smaller and smaller: 90, 80 and now 70 percent.

Is this the end of the global flirtation with cryptocurrencies and peer-to-peer cash?

Probably not.

Bitcoin is one of several blockchains that are gradually infiltrating the financial system and commerce in general as part of what is being called Web 3.0, although there is an interesting debate about whether this new version of the internet is real or hype.

It could end up being the latter simply because the Empire strikes back i.e. the industrial, banking and political oligarchies combine to ensure peer-to-peer trading doesn’t happen i.e. we should continue to pay corporate middlemen to conduct business instead of using blockchains to deal with each other directly.

So it could all end up being a utopian anarchist experiment crushed by plutocrats, like the ill-fated anarcho-syndicalist movement of the early 20th century.

But 14 years after Satoshi Nakamoto published his groundbreaking article, there are around 20,000 cryptocurrencies worth just under $1 trillion, including Bitcoin’s $405 billion, down from a peak of 2.8 billions of dollars.

So there is some substance, but by comparison, the total value of the global stock market is $120 trillion, so the crypto world is still small.
Many of those 20,000 cryptos will disappear, possibly even most, but not all.

Alan Kohler writes twice a week for the new daily. He is also editor-in-chief of Eureka Report and finance anchor on ABC News