Is Bitcoin a Ponzi Scheme?

Money Morning Article of the Week

by David Zeiler, Associate Editor, Money Morning

Even before digital currency landed on the public’s radar in 2013, people have been asking,

“Is Bitcoin a Ponzi scheme?”

Many of Bitcoin‘s critics are convinced the answer is yes. Look at the comments section of almost any online story about Bitcoin and you’ll see at least one self-appointed expert declaring Bitcoin a Ponzi scheme.

They’re not alone, though. A fair number of financial pundits and bona fide financial experts periodically denounce the digital currency as a Ponzi scheme. Even institutions have chimed in.

Back in 2012, none other than the European Central Bank put out a study that called Bitcoin a Ponzi scheme. Since then, the ECB has only backed off a little. Earlier this year, a new report said Bitcoin is “inherently unstable” and ripped cryptocurrencies in general as “scamcoins.”

The collapse of the Mt. Gox Bitcoin exchange in February 2014 had many announcing that not only was Bitcoin a Ponzi scheme, but that it was finished.

One of the harshest critics at that time was Bruce Richards, CEO of Marathon Asset Management, in an appearance on Bloomberg Television‘s “Market Makers” program.

Richards said:

“I think it’s a Ponzi scheme, I think it’s a fraud. I believe that Bitcoin will not have a legitimate place in history as a currency.”

But while Bitcoin survived the Mt. Gox debacle and has continued to draw Wall Street interest and venture capital at an increasing rate, many remain unconvinced.

Like Washington Post reporter Matt O’Brien, who has written not one but two articles this year denouncing Bitcoin as a Ponzi scheme.

Making matters worse is that some bad actors have used Bitcoin to perpetrate real Ponzi schemes. In particular, Bitcoin cloud mining is overrun with fraudulent operators.

But there have been more conventional cases as well, such as New York-based Bitcoin Savings & Trust. In November, BS&T operator Tendon Shavers was arrested and charged with fraud for allegedly taking thousands of investors’ bitcoins for himself, as well as paying off early investors with bitcoins from later investors.

And yet such activity is no different than Ponzi schemes and fraud committed using U.S. dollars. In other words, while Bitcoin can be used in a Ponzi scheme, the digital currency itself is not a Ponzi scheme.

To get a clearer answer to the question “Is Bitcoin a Ponzi scheme?” consider how a Ponzi scheme is defined…