The majority of people don’t understand Bitcoin, many people seem to be in on it – making impossible fortunes – and many others are sounding the Ponzi alarm.
Distinguished fellow at Carnegie Mellon University, Vivek Wadhwa, explains why he thinks Bitcoin is the largest Ponzi scheme in human history.
He says the current Bitcoin saga is a repetition of history, specifically the collapse of the dot.com companies in the late 1990s. That’s when there were also ridiculous valuations of the dot.com companies even when they didn’t have revenue. Everyone supposedly understood it was because we were entering an entirely new economy.
The unsuspecting public believed the story, invested their life savings, the bubble bust and they lost everything, says Wadhwa.
“Through a transfer of wealth in the billions of dollars from Main Street to Wall Street, VCs, unscrupulous CEOs, and bankers had effectively enriched themselves at the expense of hundreds of thousands of ordinary investors, leaving them to despair about their futures.”
The problem is this time around more people, including from the developing world, will be affected, says Wadha. Technology has made it possible for those in Silicon Valley, China, and New York City to fleece anyone, anywhere, who has a bank account and an Internet connection.
The public is being sold a lie
The story is that we can’t trust government-issued currencies and therefore Bitcoin is the future of money.
On the other hand, the price of Bitcoin keeps rising. Doesn’t that make it the ultimate investment? Some investors have even called it the new gold.
The thing is, the rising price is based on pure speculation and stories of it rising feeds such speculation, says Wadha.
“But Bitcoin’s market price is almost certain at some point to crash and burn, just as the dot-coms did, and for the same reason: because it is all hype. And there will be no one to turn to when it does, because no government or bank is backing it up; and the people who are hyping Bitcoin will have cashed out and be long gone,” he states.
It is not difficult to grasp his argument. The price is not rising because Bitcoin is increasing in value – it’s rising because people hear stories of how investors have doubled or tripled their money in a short period and they want to do the same.
Wadha says many ordinary people are taking out loans to buy Bitcoins.
As the price keeps going up, they hoard their Bitcoin.
There seems to be little incentive to buy and sell Bitcoin, in other words, to trade in it (apart from keeping on buying it at increasing prices).
The reason for this lies in how Bitcoin has been set up to come into existence
Bitcoins are created (or “mined”) at predetermined and gradually decreasing rates as there are only 21 million coins that can be mined. The number of people who want to buy them is increasing, but the number of coins that are becoming available is decreasing, so the price of a Bitcoin keeps going up.
Because its price increases, both its “miners,” who use their computers do complex calculations in order to mine the currency, and those who buy Bitcoins from others feel reluctant to use them as currency by spending them. Instead, they hold on to their coins while they wait for the price to rise further, explains Wadha.
“With Bitcoin supply constrained and increasingly falling short of demand, instead of functioning as a currency, Bitcoin is a speculative empty asset,” concludes Wadha.
One can’t help wondering what will happen when the last coin has been mined.
Players within the cryptocurrency market are also becoming jittery about the crypto gold rush.
In July 2017 the co-founder and former CEO of the organization behind Bitcoin rival, Ethereum, Charles Hoskinson, told Bloomberg people are being blinded by fast and easy money.
Just a week ago, Ethereum’s founder, Vitalik Buterin, told Business Insider that he thinks crypto is heading in the wrong direction and threatened to leave the space altogether if the crypto community doesn’t grow up.
He told Business Insider that people in the space should understand the difference between enacting positive change for society and just moving a bunch of money around.
After all, cryptocurrencies were invented to benefit society by ensuring secure transactions directly between individuals without the need for third parties like central banks.
Buterin is critical of the energy being squandered on meme-ing about luxury cars and inappropriate jokes and questions whether the community has achieved anything useful for society.
So it looks like cryptocurrencies have become the digital equivalent of the gold rush with investors pouring as much as they can at it in order to make huge profits. And the so-called benefits for society is once again forgotten.