I went back to Calcutta this December, and the number of times people told me Bitcoin was a Ponzi scheme was more than the number of times I’d been offered a plate of dahi wada by random relatives, and considering Calcutta, that was pretty jarring.
There are very few paragraphs or sentences you can say that would be completely wrong. If I said, “Mars is a green planet”, it atleast implies that Mars is a planet, which it is. But if Bitcoin is a ponzi scheme, either you don’t understand Bitcoin, or you don’t understand Ponzi schemes. It’s not possible for Bitcoin to be a Ponzi scheme, because there is no Charles Ponzi or Bernie Madoff running it. There’s still a slight possibility this whole Bitcoin thing was created by aliens to undermine various all the world’s governments, in which case it still wouldn’t be a Ponzi, because wealth and ownership would be ancient concepts while you’re floating around in a jar of green fluid in a spaceship halfway to Andromeda.
Let’s clarify a few things:
- There is no central authority behind Bitcoin. All that the network has is a piece of code, and the people who enforce that code are called “Bitcoin miners”. The code is based on various mathematical concepts such as ‘proof of work’ and ‘Byzantine fault tolerance’, which means it’s very secure.
- Buying Bitcoin from an exchange is like buying Forex from a bank – you have to trust the bank to not mess things up. If the bank messes up and you lose your forex, you blame the bank, not the US dollar you are buying.
- Unlike having to place trust in the RBI for INR, or US Federal Reserve for USD, there is no third party issuing Bitcoin willy-nilly. The issuance, difficulty of mining and deflation rate of Bitcoin are all bound by the mathematics in the code, which is public and open source on the Bitcoin github.
For someone who actually understands what Bitcoin is and what it isn’t, it sounds laughable to call it a Ponzi scheme. It’s not possible for it to be one because there is no puppeteer practicing dark arts, and fooling millions of young people into buying their magic internet money. There’s no Charles Ponzi for Bitcoin.
Or is there?
More than half of all Bitcoin mining takes place in China by a company called Bitmain, owned by Jihan Wu, which uses a Bitcoin mining pool called Antpool. However much Bitcoin supporters may cry of their new ‘decentralized’ cryptocurrency, the fact is that Bitmain, one singe company, can exert a lot of power over the Bitcoin network. If Bitmain shuts down, it leaves the rest of the network vulnerable and scurrying to mine the transactions. It requires hundreds of millions of dollars of investment to match the efficacy of Bitmain’s enterprise. Bitmain also sells the most popular retail mining card (ASIC), known as ASICBoost. They’re also a large part of the reason that Bitcoin’s hard fork, Bitcoin Cash, exists. So at the end of the day, Bitcoin isn’t very decentralized. The code is open source, and right now anyone can still get in this unregulated game, but there are definitely large islands of power.
Now all this doesn’t really matter for the regular old person who thinks Bitcoin is a ponzi because CNBC told him so, but it does add some unforeseen merit to their arguments. That merit exists in the form of the weird grey area that Bitcoin is in right now, where the original claims of the ‘instant, fee-less’ Bitcoin network stand untrue.
The reality of Bitcoin today is this:
- $10-$20 mining fees to transfer any amount of Bitcoin. This number isn’t going down either, because miners have an incentive to keep it up. Exchanges don’t want to implement solutions such as SegWit that reduce the fees.
- 3 transactions per second – which is a far cry from VISA levels (2500 tps) or even the purported (which means as of now untested) tps of other cryptocurrencies (1500 tps for Ripple, 7000 tps for RaiBlocks).
- Bitcoin is at its lowest Cryptocurrency market cap dominance since inception, which means that Bitcoin’s share of the total cryptocurrency market is at its lowest ever. I don’t know what it means for the future of the network, but it’s not a good sign to be on a downtrend.
- Bitcoin is a dinosaur when compared to new cryptocurrencies. Stellar Lumens, NEO, Ethereum, Ripple, RaiBlocks, Monero and hell, even BazingaCoin, all run circles around Bitcoin’s tech.
The problem, however, is that none of this makes sense to the non-dahi wada giving uncles who think Bitcoin is a Ponzi scheme.
The arguments I keep hearing are:
- Bitcoin isn’t backed by anything, therefore it is worthless and has no intrinsic value.
- No stock can grow this fast and this high, therefore Bitcoin is a bubble.
- Bitcoin is used for drugs and is a network for criminals.
- What if Trump/Modi makes Bitcoin illegal?
My short counter arguments for these are:
- The entire value in Bitcoin lies in the fact that it isn’t backed by a centralized organisation. The enforcement of rules and economic stability provided by a government treasury is done by the mathematics of the code of the Bitcoin network. This code can be adjusted through soft-forks, should changes be needed. However, getting consensus from the entire community is difficult, which is a good thing.
- Bitcoin isn’t a stock. It’s not a currency or a commodity either. It’s probably something in between, and the value of a Bitcoin can only be correlated with the value of the entire network. Metcalfe’s law states that the value of a network is proportional to the square of its number of users, and Bitcoin has met that rule so far. Is the price rising too much, too fast? Yes. But that’s because of predictable pumps into Bitcoin by institutional investors and other crypto enthusiasts. Bitcoin may or may not survive long term, but cryptocurrency isn’t slowing down.
- Bitcoin was one of the many currencies used for buying drugs on the Silk Road, because no government had heard of Bitcoin in 2010. Criminals who are using Bitcoin today are either suicidal or incompetent, because the entire history of every transaction, from every wallet address, is available publicly on the online ledger. You can check it out in real time on blockchain.info. Bitcoin is the opposite of private. If you want to buy drugs, use a real private cryptocurrency, like Monero.
- That’s always a risk, but it’s unlikely to happen. For one, a ban on Bitcoin is logistically impossible to implement. All it does is stop a Bitcoin owner from cashing out in the local currency. The fact that Bitcoin isn’t banned in either of these countries already, and both the US and India have thriving cryptocurrency/blockchain development projects, means that their governments are predisposed towards keeping it legal and regulated.
The problem lies in the fact that people keep circling around the same few arguments in their head, and talk within their limited circle of corporate bigwigs and Economic Times reading stock market enthusiasts. None of them have taken the time to research what Bitcoin actually is, or what the difference between a cryptocurrency and fiat is, or why the technological backbone of blockchain will change the world. Their knowledge stems from media outlets, which are owned by investors of big banks and big government, neither of whom have a vested interested in letting decentralized cryptocurrencies see the light of day. Now that might be my tinfoil hat speaking, but I can’t help but wonder whether the general indifference towards Bitcoin stems from not understanding it, or not believing in it.
Now why do I care what old people say? Well, they’re the ones who run the banks and the companies and the taxi unions and the government paper pushers – they’re the reason the economy works today. If they truly think Bitcoin is a Ponzi scheme, then the trickle down effect from their capital not going into Bitcoin, will one day stop Bitcoin from growing. Truthfully, the current crypto market is so small, that that day is a long way away, but it’s interesting to see what comes first, a change in mentality within the general public about cryptocurrencies, or the imminent crash of made up, magic internet money.