This article tackles the belief that cryptocurrency is a Ponzi scheme.
Apart from calling it Ponzi, some folks say cryptocurrency is a game, others call it gambling or a game of chicken.
Even at the office, my colleagues have argued over cryptocurrency being a Ponzi scheme or game.
Interestingly, the argument lasted a while and it was not resolved.
So, I decided to research the topic and guess what I found?
Read this article to the end and you’ll find out 😉
Table Of Contents
- Definition Of Terms
- Why People Think Cryptocurrency Is A Ponzi Scheme
- How Cryptocurrency Is Not A Ponzi Scheme
Let’s get to it!
Definition Of Terms
Before we start discussing whether Crypto is or is not Ponzi, let’s define both terms.
A Ponzi scheme is an investment scam where existing investors are paid alleged returns from funds contributed by new investors.
Usually, the organizers promise to invest the funds in opportunities that will generate high returns.
And that’s how they convince people to put their money into the project.
However, they do not engage in any legitimate investment activity.
Rather, they focus on attracting new money to make promised payments to earlier investors.
The same lie they told Chike is repeated to Ada and so on.
Also, they divert some of the “invested” funds for personal use.
After a while, when new members are not forthcoming, or many old members cash out, they pack up and do away with investors’ funds.
Then new investors end up in premium tears.
Fun fact: Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.
Next, let’s define Cryptocurrency…
Cryptocurrency is virtual money that is secured by cryptography.
And it is nearly impossible to counterfeit or double-spend.
Also, crypto transactions are verified and recorded on the blockchain.
[Suggested Read: 7 Top Facts You Need to Know About Cryptocurrency: The Newbie Guide]
Already from the definitions, you can tell that there is a wide gap between crypto and Ponzi.
Yet, people are thinking that Crypto is Ponzi. Why is that?
Join me in the next section let’s see…
Why People Think Cryptocurrency Is A Ponzi Scheme
It all boils down to the modus operandi.
Firstly, the same way a Ponzi Scheme depends on new people to buy into the project, cryptocurrencies also need a large number of people to buy into it.
For a Ponzi scheme, new timers funds are used to pay early investors.
And in crypto projects, if new people don’t buy a token, early investors will not profit from their investment.
2. Coin distribution
Another thing that gives cryptocurrencies away as Ponzi is the coin distribution strategy.
Although it is not all of them, most crypto projects distribute a reasonable percentage of the total token supply to founders and seed investors upon launch.
These guys get most of the initial tokens, leaving later investors to mine from scratch or buy into it.
In a Ponzi scheme too, organizers profit the most, initial investors profit a little, and later investors are left at the mercy of how long the scheme will last.
Some persons have even argued that if only a Tweet by a big personality can affect the prices of cryptocurrency then it might as well be a Ponzi scheme where the organizers call the shots.
3. Campaign methods
Again, crypto has been compared to Ponzi because they use the same methods for campaigns.
Ponzi schemes rally on Twitter and other social media apps to attract investors and crypto projects do likewise.
But doesn’t everyone advertise their businesses online? 🤷♀️
One reason we write off a project as Ponzi or scam is when it is not regulated by a financial authority.
Well, cryptocurrencies are not regulated too.
In fact, that’s the whole essence of crypto, to give users full control of their funds. 🤷♀️
5. Outrageous returns
Earlier today, my boss said that cryptocurrency has spoilt people’s notion of returns on investment.
Normally, when people make up to 10% returns on their investment in the course of one year, they’re grateful.
But in crypto, you’ll see coins doing 10X, 100X, 500X, 1,000X in months.
Now, when people see a decent investment opportunity, they wouldn’t opt for it because it is not promising high returns.
Similarly, Ponzi Schemes promise members outrageous returns.
Some offer 50% return, others 100% or more, and all you need to do is to make an initial deposit and then refer people.
Now you can see why certain folks are perceiving cryptocurrency as Ponzi.
But are these reasons enough to say that cryptocurrency is Ponzi?
Jump to the next section to know what I think.
How Cryptocurrency Is Not A Ponzi Scheme
1. Introduction to the public
When cryptocurrencies are launched, there is usually a white paper that explains everything prospective investors need to know about the project.
Not just that, communities are created where investors can follow up on what the team behind the coin is doing.
Also, cryptocurrencies are launched on blockchains where their transactions are verified.
But the case is different for Ponzi schemes. There is no white paper explaining anything.
At most, all investors get to see is a website full of empty promises.
Besides, they’re not launched on blockchains and investors cannot follow up on their transactions.
This is close to the first point.
Another contrast between cryptocurrency and Ponzi scheme is that cryptocurrency is open source while Ponzi scheme excels on secrecy.
All crypto activities are recorded on the blockchain and everyone has access to it.
And the blockchain is public, transparent, verifiable, auditable, and analyzable.
But there is no way investors in a Ponzi scheme can monitor what the organizers are doing with their funds.
Although there are claims that the funds are put into lucrative projects, investors don’t get to see any proof, even when they do, the reports are fake.
It’s not like users can access the bank account statements of the organizers. 🙄
And because there is no investment anywhere, new members just pay old members without knowing.
3. Promise of returns
In a Ponzi Scheme, investors are made to believe that their funds will be used for worthwhile investments like real estate, metals to yield mouthwatering returns, and no risk is involved.
But while large returns are promised in cryptocurrency, investors are also warned of the volatility of the market.
In fact, if crypto traders will be honest with you, they will tell you that they lost a lot of funds in trying to master the market before they started making a profit.
Usually, you’d have to do some technical and fundamental analysis before knowing the coin to invest in.
But for a Ponzi scheme, just put in some funds and it will be multiplied.
Furthermore, leadership in crypto projects is decentralized but it is centralized in Ponzi schemes.
Additionally, crypto projects adopt different mechanisms to achieve consensus – PoW, PoS, PoA, etc.
And this makes the community involved in decision-making unlike what happens in a Ponzi scheme, where only the organizers have the final say.
Lastly, I want to talk about Continuity
Cryptocurrency prices may be affected by market trends but the coins are still there.
Moreover, you can invest in multiple coins at the same time.
But with no new recruitment, a Ponzi scheme folds and that’s it.
Furthermore, cryptocurrency is versatile, some serve as a store of value, others are used for digital payments or to execute smart contracts, etc.
Plus, the nature of crypto projects provides job opportunities for many: developers, writers, digital marketers, influencers, and more.
But in a Ponzi scheme what do we find? People are given false hopes that their funds will yield multiple returns.
And at the end of the day, it folds up and leaves people broke.
Hey, this is not to say that cryptocurrencies have not been used in Ponzi Schemes.
Are you interested in trading crypto?
Cryptocurrency may depend on mass adoption to scale but that does not make it a Ponzi scheme.
There are available tools that prospective investors can use to analyze the market, and determine for themselves the risk/reward of buying into any crypto project.
With that, I’ve come to the end of this article. And I hope it was worth your time.
Now, I’d love to know what you think. Is cryptocurrency a Ponzi scheme and why?
Let your fingers do the talking in the comments section.
Also, share this article with your friends. Thank you!