Is Bitcoin A Ponzi Scheme?

4 min readDec 17, 2020

Well, Sort of. But don’t get your hopes up.

Every time Bitcoin comes to life, you can count on a fresh debate about everyone’s favorite future-of-money/colossal scam. Amy Castor, whose work I’ve generally enjoyed, is the latest to poke the hornet’s nest, comparing the latest price spike to a Ponzi scheme:

David Gerard, another favorite critic, chimed in as well: “Bitcoin is not a Ponzi scheme! It just works like one.” The unsubtle implication is that since a Ponzi scheme is a scam, then bitcoin must be a scam too. And since Ponzi schemes tend to collapse suddenly, Bitcoin is likely to collapse suddenly, too.

From the bitcoin crowd, the counterargument can be fairly summarized as: Look at all The Money We’re Making.

Who’s This Ponzi Fellow, Anyway?

A Ponzi scheme is an affair where money from new investors is used to pay out old investors, creating the illusion of impossibly-high returns until the new money runs out. They’re a bit similar to pyramid schemes, where each member makes money by recruiting new s̶u̶c̶k̶e̶r̶s̶ investors. Both are inherently unsustainable, since dumb money is a finite resource.

Bitcoin certainly relies on a high degree of Ponzi-logic, at least when coiners predict endless price increases. All that money has to come from somewhere, and any profits you make have to come from new investors. But as for whether it’s going to go the way of the Dutch Tulips…well, we’ll see.

Another thing: they may be unsustainable, but Ponzi schemes don’t typically fail because people lose faith . Usually the authorities shut them down; sometimes the founders run away with the money; and if neither of those happens, they go bankrupt. Often it’s a combination of all three: Madoff Investment Securities was already wobbling when Federal authorities arrested Bernie Madoff, and the same goes for the original version by Charles Ponzi.

But the victims of a pyramid/ponzi schemes are typically the last people to realize that it doesn’t work. If you know anyone who’s been tangled in multi-level marketing, you already know how hard it is to convince someone that their golden ticket is printed on toilet paper. I remember visiting the BitConnect subreddit after that pyramid scheme was shut down, and reading posts by people who still thought that they were on track for unbelievable riches. It was already the most famous scam in crypto, and for days after the exit scam, BCC tokens were still trading in the double digits.

Robert Shiller, the Nobel-winning economist who predicted the collapse of the tech sector in 2001, referred to bubbles as “naturally occurring Ponzi schemes.” There’s no Madoff at the top, and nobody is in charge of recruiting new members or raising new money. But when people see the price of going up, and hear their friends bragging about new riches, it’s easy to get sucked in without asking too many questions. And as the prices continue to rise, the new money speaks louder than the skeptics.

That might explain why so many bitcoiners seem to go out of their way to tell strangers about their brilliant investment, and why bitcoin ads keep showing up on the London Tube or The Times. Even though there’s no one “in charge”, every single bitcoin owner or business has a shared interest in seeing the prices go up. There’s a whole industry of crypto news sites and analytics firms whose business models depend on spreading the bitcoin gospel, while conveniently ignoring the red flags.

“Bitcoin is the Robin Hood of banks.” Crowdfunded subway ad in Hungary.

So will Bitcoin go to zero?

Suppose Bernie Madoff went back and restarted his old company, with one weird twist: if anything happens to the founder, the remaining investors will continue the company with the remaining assets. In other words, even a bottom-tier member is a potential Madoff. And if the government tries to shut the whole thing down, it only takes one survivor to keep the game going.

This version of the scam would probably last a lot longer than the original.

Incidentally, something similar happens in real life: whenever the government shuts down a big pyramid scheme, you can count on some of the survivors to create their own ‘fork’ schemes and start the grift anew.

It’s also similar to what’s happened in bitcoin for the past decade. When the price rises, it attracts new investors with the prospect of getting rich. When the price falls, it’s a chance to buy back in lower….for the chance of getting rich.

For this reason, bitcoin can rise and fall, but seems unlikely to go all the way to zero. Even a crash to pre-tether prices would probably get bought up by the most committed hodlers, who see a sharp drop as a steep discount. And, for reasons already mentioned, the people on the inside are typically the very last ones to lose faith.

It could still collapse for extrinsic reasons: if governments coordinate a crackdown on exchanges, or quantum computers crack ECDSA, or the internet simply stops working, that might be the end of it. But otherwise, as long as there are still people willing to buy the dip, bitcoin could just keep sucking up money and electricity forever.

When someone like Castor or Gerard compares bitcoin to a Ponzi scheme, they seem to be warning about a bad ending where it collapses to zero. But the really scary ending is the one where it doesn’t.