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Why Exactly is Bitcoin Not A Ponzi Scheme?

Bitcoin is definitely not a ponzi scheme. For most of us, this is obvious. There is the odd detractor that needs this explained to them in depth. This article is for them. So why exactly is Bitcoin not a ponzi scheme? For the exact same reason that the dollar is not a ponzi scheme. Calling Bitcoin a ponzi scheme illustrates a fundamental misunderstanding of how the entire system works. Furthermore, it illustrates a misunderstanding of what money is in general. In order to fully debunk the narrative that Bitcoin is a ponzi scheme it is important to cover both of these topics.

dollar bill in the shape of a pyramid indicating a ponzi scheme

Definition of a Ponzi Scheme

A Ponzi scheme is where profits given to earlier investors are taken from later investors. The perpetrators of ponzi schemes build a layer of deception into the model. It is important that no investor knows the truth behind how profits are generated. The profiteers behind the scheme intentionally mislead investors by feeding them a false narrative about the product or service. Lastly, ponzi schemes eventually collapse underneath their own design. Ponzi schemes end up structurally looking like pyramids, with the early investors at the top and the newer investors at the bottom.  The model of giving newer profits to older investors eventually breaks down when the pyramid gets too large.

All of the Reasons why Bitcoin is not a Ponzi Scheme

Now that we’ve covered what a ponzi scheme is, we can properly dismantle the narrative that Bitcoin is one. There are three things that we need to address. The lack of centralized control, the hierarchies of Bitcoin, and how Bitcoin is a form of money.

The Lack of Centralized Control

First thing is first, there is no company, organization, non profit, government, or business of any kind behind Bitcoin. Therefore there is no “top” of the pyramid. There is no entity at the top of bitcoin to siphon away the profits of later investors. This fact alone disqualifies bitcoin from being a ponzi scheme. Bitcoin is a network that is co-run and co-utilized by millions of anonymous (and known) entities around the planet. Yes, there are companies that profit, and build their business models on top of Bitcoin, but that is not the same thing as completely owning or controlling it.

The Hierarchies within Bitcoin

There are admittedly two hierarchies in the Bitcoin network, one is the miners, and the other is the balance of bitcoin. There are miners that have more mining power than others. This does not mean that the miners that have more are taking away from the miners that have less. This also does not mean that the early miners are taking away from the early investors. They are bringing more bitcoin into circulation through a process of work. Furthermore, this entire process is transparent. Everyone in the Bitcoin community knows that this is the way things work. No one is trying to deceive others as to the way that the miners earn their wage. It would be futile to do so as every aspect of the Bitcoin network is transparent in nature.

The other hierarchy present within the Bitcoin network is the amount of bitcoin sitting in peoples addresses. This is the best argument against Bitcoin, and the best argument for it being a ponzi scheme. For those of us who mined, or obtained bitcoin within the first 5 years of its existence, bitcoin is extremely profitable. We may sell our massive amount of bitcoin to the market, and capitalize on the high value of the asset. This could be construed as early investors profiting from later investors. This could also be construed as a simple, and completely normal commodity exchange.

Bitcoin is Money. Money is a Belief System

The last reason why Bitcoin is not a ponzi scheme is simply because it is money. It’s just as easy to call the USD a ponzi scheme because it has equally as little inherent value as bitcoin does. The only reason Bitcoin and the USD have value is because people believe it does. Without a sufficient amount of individuals willing to exchange something useless for something useful, the money would have no value at all.

Yes there are less individuals on the planet that believe that bitcoin is money. It would be outright disingenuous to say that bitcoin is not money though. There are approximately 100 million people on the planet that believe that bitcoin has value. To say that every one of these people are involved in a multi level marketing scheme is ignoring the core issues here.

Bitcoin is a Service, a Technology, and an Asset

A true ponzi scheme has very little value to offer. Whatever service or product that is being offered to the public is often amplified by those who have been recruited by the marketing efforts. Bitcoin is the complete opposite of having no value to offer. The underlying asset is inherently useless. You cannot hold bitcoin, you cannot eat bitcoin, you cannot build a house with bitcoin. You can however send it across borders, not duplicate/counterfeit/double spend it, and divide it into 100 million pieces. The things you cannot do with it, and the things you can do with it are exactly what makes bitcoin an excellent foundation for money. Bitcoin is simultaneously a money transfer service, a networking and monetary technology, and an asset that has value. For something that has so much utility, it is really hard for me to imagine calling it a ponzi scheme.