An Anatomy of Bitcoin Ponzis

A Very Brief History of Bitcoin Ponzis

Bitcoin’s history, sadly, can’t be separated from the word Ponzi. The history of Bitcoin is in a certain way the history of several ill-conducted scams, and while many cryptocurrency detractors will jump on the “Bitcoin is a scam” bandwagon, they would be ill advised to do so.

“For the love of money is a root of all sorts of evil” says the Bible, and it is well-known since ages past that there is a connection between greed and evil. It is not that “greed” is evil per se, as it is really okay to want to improve one’s current situation. The problem is what immoral people are willing to do in order to reach their goals.

Bitcoin is not technically money as it lacks the “store of value” attribute. It certainly is a tool for immoral people to deprive others of wealth. Take for instance Mt. Gox. While it can be debated whether Gox itself was really intentionally fraudulent, or just plain stupid, for practical purposes it was a scam. People put their money into it and poof, it was gone.

Since then, a pair of computer science researchers — Marie Vasek and Tyler Moore — from the Southern Methodist University in Dallas have analyzed a lot of Bitcoin scams and grouped them in four categories: Ponzi schemes, mining scams, scam wallets and fraudulent exchanges.

Marie Vasek and Tyler Moore — from the Southern Methodist University in Dallas

What Is a Ponzi? And Why Do Their Creators Love Bitcoin?

In a nutshell, a Ponzi is a type of scam where you promise people earnings while you don’t produce anything, and pay them with newcomers’ money.

Bitcoin is vulnerable to these type of scams for three reasons:

  • Most people do not properly understand it.
  • Other bitcoin investments can have generous returns.
  • It has an excellent scapegoat.

Since Bitcoin is not easy to grasp, many of the technicalities might confuse people who are too eager to invest and get the generous returns that some — who understand better — are making. Anyone convincing others of how legit his Ponzi is will surely take advantage of this.

Also, it is an exciting innovation that may change the economic landscape permanently, so it would be really stupid to assume that there is no big money to be earned from this.

And finally, Bitcoin has a magnificent (and legitimate) scapegoat story when things go awry: HACKERS DID IT.

Charles Ponzi

Sustainability. The Bane of Ponzis.

Like all fairy tales, the Ponzi promise has no way of materializing. As with constant population growth and oil drilling, these scams are unsustainable and thus condemned to implode miserably — simply because there is no such thing as free lunch.

Let’s take for instance PB Mining, a scam that I analyzed in the past. There was a big reason why everyone believed in PB’s operations. It had been paying consistently for a reasonably long amount of time — five years. Perhaps it had been “piggybacking” other mining ventures. No one knows for sure where their coins came from. According to my cloud mining review, PB had no proof of mining.

In that Ponzi, you could achieve a return on your investment in about 161 days (~5 months and 11 days), and many people did reinvest their earnings into more hashing power, increasing the big ball of income they were expecting to get. Remember this well: Ponzis are greed demons. They feed on it.

With such high profits and so little hassle to get them, PB was likely to be a scam,  but if the bubble was still far from bursting and I refrained from reinvesting, it would make a nice experiment and I would make a small profit at the end. It turns out I did make a profit (in BTC), but I had a net loss in U.S. dollars due to Bitcoin depreciating so much. That’s what you get for “thinking ahead.”

Let’s Coin a Term: Ponzi-Surf