People who don’t fully understand what crypto-currencies are and see them more as some form of “imaginary money” are inclined to make unflattering comparisons between Bitcoin and ponzi schemes. Many countries and central banks have issued warnings on the crypto-currency and attacked it using this allegation with little substantiation. A few simple tests and closer examination will reveal whether there is any truth in such accusations.
The interest towards Bitcoin became immense during the past year. As it is decentralized, promotes libertarian ideas and aims to help people, the virtual asset hardly matches traditional principles behind fiat currencies. It simply breaks ll crusty and outdated rules.
Being too alternative, too interesting, progressive and relevant to changes, Bitcoin scares conservatives who either do not understand it or fear its implications. Skeptics doubt its origins, claim it to be the invention of one or another government trying to shake the leading global currencies like the US dollar, and even accuse it being a ponzi scheme.
The absurdity of most of these claims speaks for itself. Only the ponzi scheme
is a burden to be dropped off with sufficient analysis and strong proof.
Generally, a ponzi scheme is a fraudulent investment process, where the responsible person or organization pays out dividends from new investments, because no profit has been earned. The money collected is not completing any work, being simply collected for an idea.
The operation was named after Charles Ponzi, who was first in 1920 to create such an investment initiative on the arbitrage of international reply coupons for postage stamps. It did not last long proving the futility of the criminal activity.
Experimenting with Ponzi Schemes
The first mark of the Ponzi scheme is the transparency aspect. In case of fraudulent investments mechanisms to follow the flow of money simply do not exist. There is nothing that can be followed – the funds stay in the pockets of organizers and sometimes are paid to the initial investors to increase public interest.
The BlockChain of Bitcoin is the key instrument that makes the currency transparent. Personal and other money movements can be followed and dated back. Of course, processes inside companies, as well as exchange services, stay unavailable, but often are traced by hobby-detectives as has been done in the case of Mt. Gox.
The second aspect to consider is ownership. Ponzi schemes are established by a single person or organization commonly known by the investors. Bitcoin has already proven that there lack of central guidance and governance. It belongs to no one and everyone at the same time.
It is a matter of fact that Bitcoin has a creator or inventor known to the public as Satoshi Nakamoto, but the principles behind the system provide no central point of control. Bitcoin is based on a very strong equality for its users.
It is clear Bitcoin, as a currency is not a Ponzi scheme. However, as Mt. Gox shows, while the currency might be genuine, there is no real way of ensuring that people are and the crypto-community should be aware that crypto-currencies, just like any other currency can be used for fraud.