Is Bitcoin a Ponzi? — Part 1: “It’s too Volatile”
This past week the left-libertarian Gravel Institute has been trolling the internet claiming Bitcoin is a scam, writing that Bitcoin “cannot ever be used as a currency,” and therefore “it can exist only as a pump-and-dump scheme for gullible investors who want to get rich without doing any work.” They did up a 7-minute video to go with it.
Investment analyst Lyn Alden did a long article on the Ponzi question earlier this year, focusing on the SEC’s definition, and she concluded that the accusation is, essentially silly. But here I want to go through Gravel’s accusations in detail. Not because Gravel is particularly insightful, but because the assumptions underlying the “Ponzi” claim are so common from anti-Bitcoiners.
So today we ask, is Bitcoin a Ponzi?
What is a Ponzi, anyway?
First off, per the SEC, Ponzi’s are characterized by promises of “high returns with little or no risk” that are “overly consistent” and often based on “secretive, complex strategies.”
This bears zero resemblance to Bitcoin itself: returns have been high, sure, but the community emphasizes it comes with enormous risk. In fact, that risk is embraced, celebrated as the glorious HODL. The HODL that means you’ll probably get rich, but it’ll be one helluva ride.
What about that “secretive, complex strategies?” Again, the Bitcoin community has a near-obsession with transparency. Bitcoin’s code is transparent, its movements are transparent, which account owns what coin is completely transparent. Never before has any currency existed with close to the transparency of Bitcoin. Perhaps never before has any major asset class existed with the transparency of Bitcoin.
So, no, Bitcoin itself isn’t remotely secretive or complex. However, there is a currency that is very secretive and complex: government fiat. Entire books have been written about the deceptive and Ponzi-like schemes it took to install the baroque, intentionally difficult-to-understand Rube Goldberg machine we call central banking.
To this day top monetary experts fail to understand what the dollar will do next: after the 2008 crisis, for example, economists on the right predicted calamitous inflation, economists on the left predicted calamitous deflation, and both were caught utterly flat-footed.
So, no, Bitcoin is utterly transparent and embraces the volatility. While its main alternative, government money, is very much a Ponzi — secretive, complex, and historically liable to go to zero.
Gravel: Bitcoin can never be “Real”
So, with that, I’ll go through the Gravel video. The essence of their attack is that, because Bitcoin can never be a “real” currency, therefore it must go down. If it must go down, then it must be a “scheme for gullible investors.”
Taking it point-by-point, first, Bitcoin can hold its value perfectly well without ever being a “real” currency that people use to buy coffee. After all, gold is no longer used to buy coffee, and carries a valuation about 10x higher than Bitcoin. So even if, as Gravel claims, Bitcoin can never be a real money, it can still go up and stay up roughly 10x — about $600,000 per coin in today’s money.
So already we’re out of the shadowy corners of Gravel’s “scheme for gullible investors” and into the sunny vales of Bitcoin’s pros and cons vs gold.
But we can keep going: why does Gravel think Bitcoin can never be a real currency? After all, gold is a lousy currency today — it’s heavy and hard to split up, for example — but obviously it was a great currency for most of human history. Because people were using gold’s “second layer” solutions: they weren’t paying for their coffee with gold dust, rather they were paying with other things like silver, copper or bronze, later even paper, all of which could be exchanged for gold. This “second layer” is very much alive in Bitcoin, of which the most exciting is the Lightning Network.
Indeed, most fiat transactions are also second-layer; when you rent a movie on Amazon, you don’t fold up dollar bills and slip them in the mailbox, telling your kids to wait til the weekend. No, you watch the movie now, because you do a bunch of digital events that, somewhere down the line, yield something exchangeable for dollar bills so Amazon can pay the rent or for space trips.They front you the movie on trust because of that second layer.
So every money today, whether paper, gold-based, or Bitcoin-based, works on layer 2. By the way, Nik Bhatia has written a fantastic book on this, going through the process and the history of money layers.
Bitcoin’s Killer App: Freedom from Governments
Bitcoin as currency actually has an enormous advantage compared to paper: it cannot be printed in unlimited quantities. It shares this core advantage with gold, hence the “digital gold” slogan that Bitcoiners have come to embrace. If you’d like to read much more about that comparison, check out another fantastic book by Saifedean Ammous.
So far we’ve got two strikes against Gravel’s hit piece: Bitcoin is far less Ponzi than fiat, and it’s a superior currency to fiat.
Why is Gravel so lost? After all, they’re not dumb: they wear human clothes and feed themselves. I think because they don’t understand that today’s Bitcoin is an emerging currency. It’s in the process of gaining widespread use, but hasn’t reached it yet. Essentially, they see the volcano and imagine it could never be a normal mountain.
I know this because Gravel, like many anti-Bitcoiners, keeps obsessing about Bitcoin’s volatility.
Volatility is standard for any emerging money that isn’t, at the moment, in widespread use. Gold, for example, has had enormous volatility since it was demonetized, doubling and halving in a matter of months. Not because gold is a lousy money, but because it isn’t widely used.
And, so, as Bitcoin usage increases, its volatility will naturally decline. Its price will be high, sure — perhaps several tens of millions of dollars — but it will no longer be volatile. Why? Because Bitcoin’s volatility today is coming from the fact that Bitcoin’s underlying investment thesis of replacing gold and/or fiat money is uncertain. Once that question resolves, the volatility will therefore go away. It could resolve in the positive: Bitcoin could replace only gold, or it could replace both gold and paper. Or the question could resolve in the negative: it could replace nothing. But the resolution ends the volatility.
So, essentially, Gravel sees a volcano and cannot imagine it can ever be a mountain. It’s got a hole in the middle after all, and the hole’s on fire — not at all normal. It’s a simple lack of imagination.
We’re getting long on word-count here, with lots more from the Gravel video on Bitcoin’s speculative demand, fees, and of course energy. So I’ll save those for next week.
For now, the important point for Bitcoin critics to understand is that whatever Ponzi charges they hurt at Bitcoin, government money fits that crime far better. While whatever complaints they have about Bitcoin as money today are temporary — like gold, or government paper, Bitcoin “in the wild” is a lousy currency until it’s actually used as a currency. The problem contains the solution.
Meanwhile, Bitcoin’s features only improve with time, and those features build on ‘ foundation that, for technological, supply, and control reasons, is inherently superior to government confetti printed up in backroom meetings where you will never have a seat at that table.
See you next week!
If you enjoyed this article, subscribe here for weekly articles on how Bitcoin changes our economy, our society, and our future.
Originally published at https://cryptoeconomy.substack.com on September 12, 2021.
