Is Bitcoin a Ponzi?

This is educational video series explaining common stumble blocks and misconceptions about Bitcoin!

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Here is a transcript of the video:
Hello, in those videos I’ll be addressing common questions and misconceptions about bitcoin!
Todays question is “Is Bitcoin a Ponzi?”

Now first, it’s important to differentiate between a scam, where a person or entity stands to profit fraudulently from others, and a high-risk investing decision, where there is potential for a person to lose significant amounts of money without being defrauded by anyone. With that clarification, BitCoin is clearly not a scam. Like any other currency, BitCoin is designed to be used as money, not as an investment.

A Ponzi scheme is a type of confidence scam where people who think they are earning unusually high returns on an investment are actually being paid from their own money and that of later investors. If too many investors withdraw their original investment from the Ponzi operator, the scheme collapses because no actual profits exist and there is not enough money to return the deposited amounts. Alternatively the Ponzi operator may simply leave and take the investors’ money with them.

Similarly, a pyramid scheme is a type of confidence scam where people who “enroll” by paying a certain amount of money are made to believe they can make a large return on their investment by recruiting other people and receiving some portion of their enrollment fee. The scheme collapses because it requires exponential growth, so it quickly runs out of new people to enroll. The person starting the pyramid scam, who didn’t have to pay an enrollment fee, makes money off of all their referrals; while the people at the bottom parts of the pyramid, who cannot find anyone new to refer, are left with no return.

Unlike either of these situations, BitCoin has no person “at the top” who collects money paid for bitcoins, or has to pay out when bitcoins are sold. Neither is there any kind of scheme in BitCoin to harvest money off of unsuspecting people in complicated ways. Instead, bitcoins are bought and sold on public exchanges amongst members of the general public who must all obey the same rules. If someone has told you that BitCoin is a moneymaking scheme, they have misconstrued it–bitcoins follow the same economic model as any other finite commodity and over time will tend to approach a price that reflects the value people ascribe to being able to use them. People who have made money off of buying and/or selling bitcoins are either lucky or have correctly predicted an increase in demand for them. People who earn bitcoins through “mining” are being paid for verifying and securing network transactions in a highly competitive market. In neither case is any kind of fraudulent activity or confidence scam happening.

As with any other valuable commodity, there are many people willing to separate your bitcoins from you in sneaky or fraudulent ways. Remember that for all practical purposes BitCoin works just like cash. Bitcoin Ponzi and pyramid schemes do exist and if you fall prey to them you will suffer the consequences.

In addition, bitcoins are a very new type of money. Because their value depends on how widely they are accepted, they are susceptible to the same types of economic bubbles as any other commodity that is surging in popularity.
But it might not be a bubble with bitcoin, super fast almost vertical growth is not unusual for something extremely successful. For example the value of companies like facebook and twitter have had similar pattern of growth in their pre-IPO stages. We just didn’t see those graphs, because before the IPO the companies don’t have to report those numbers.

Now, if you have friend that at some point told you bitcoin is a Ponzi, just send him this video and see what he says to those arguments? 🙂
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