Surrounding the new and booming cryptocurrency industry is a lot of controversy. Controversy that it is not what it appears to be and some of the most negative allegations is that it is nothing more than a Ponzi scheme. But is this true? Is cryptocurrency a Ponzi scheme that you need to avoid like the plague? Or are these just rumors being spread so that others get their share of the crypto pie before you?
There is a lot of misinformation out there and this article is going to take a level-headed approach and go over exactly what is going on here. The truth is that people are calling this a Ponzi for a good reason…. but does this reason make it such?… You will see.
What a Ponzi Scheme Is
A Ponzi scheme is a type of scam where older investors are paid off by the investments of newcomers. They are often elaborate and may appear to be legitimate opportunities from a glance, but a deeper look into them reveal that they provide no value and are basically just a big exchange of money.
Ponzi schemes make early investors rich while sucking money out of the newer investors’ pockets. Because they provide no real value and because they have a pyramid like structure, the majority of people are guaranteed to lose money in such schemes. Once the steady flow of new money begins to dry up or ceases to exist, the scheme collapses and all of these at or near the bottom lose out.
What a Cryptocurrency Is
A cryptocurrency is a type of digital currency that is built upon cryptographic coding to keep the network safe. There are many different types of cryptocurrencies that exist but because Bitcoin came first much of the definition came from what it brought to the table.
Cryptocurrency purists will tell you that in order to be considered a cryptocurrency it must be decentralized and out of the control of any single person or entity.
Now you may be wondering… well what does this have to do with being a Ponzi scheme? And you would be right to wonder this. The basic definition of a cryptocurrency offers no explanation as to why it would be considered as such. However, there is on very important property that many cryptocurrencies have which leads people to believe that they are.
Why People Call It a Ponzi Scheme
The reason people are calling cryptocurrencies Ponzi schemes is because early adopters, or investors, become rich if the particular cryptocurrency they invested in goes up in value, which largely is due to new investors coming into the market and increased adoption.
So think about this… the value is going up from new investors buying cryptocurrencies and this is making the older investors more wealthy. Now you can see why this is being called a Ponzi.
The reason that the price increases so much when newer investors buy into the market is because many cryptocurrencies have a maximum supply. Bitcoin for example has a maximum supply of 21 million coins. Since there is a limit and no more coins can be produced after that, it has a deflationary effect. As the demand increases from new investors the price is driven up.
Skeptics believe that this deflationary aspect is was carefully and purposely designed to make the creators and early adopters rich, which is why they call it a Ponzi.
But I Beg To Differ…
The major difference between the two is that cryptocurrencies provide real value whereas Ponzi schemes do not. Now this is something that there is controversy over because coins like Bitcoin don’t really have any realistic real use cases. Sure you can argue that you can purchase things with Bitcoin but its Mastercard and Visa are much faster and more plausible to use in real life cases.
Bitcoin is best used as a store of value, similar to gold. No one goes out and buys things with gold but they do hold onto it because it is worth something, just like Bitcoin.
However, there are plenty of cryptocurrencies out there that do have real use cases and accomplish great things. For example with Nano you can make transactions insanely fast which makes it very good for everyday peer to peer transaction; and the Powr coin is making renewable energy trading easy and extremely efficient.
There are plenty out there that have real use cases and have an immense amount of technology behind them, which in turn makes them valuable.
So no… cryptocurrencies are not Ponzi schemes. However, there are Ponzi schemes that are capitalizing on the big crypto boom.
Beware of The Real Ponzi’s
Although cryptocurrencies themselves are Ponzi schemes there have been plenty of cases where Ponzi schemes sucker in new investors by offering their own miraculous new crypto’s. Instead of the traditional Ponzi schemes these new ones will distribute coin own digital coins that are worthless but are marketed as being the next big thing.
Bitconnect is the most famous cryptocurrency Ponzi scheme that has existed and that will probably ever exist. It was an absolute monster of a Ponzi. At its peak in early January of 2018 a single BitConnect coin (BCC) was valued at just under $450.
It was at around this time that it was getting a lot of bad press. There was a lot of FUD (fear, uncertainty, doubt) being spread about and the cease & desist letters it was receiving from state governments, such as Texas, were not helping either.
When things took a turn for the worse it fell fast…. and I mean FAST, dropping in price well over 10,000% in just a few days. The chart below says it all…
Tips To Avoid Crypto Ponzi’s
#1 – Don’t Fall For “Get Rich Quick” Talk
Legitimate cryptocurrencies aren’t going to be marketed by people telling you how you can get rich overnight. They will focus on why they are important, what they do, how they work, the technology behind it and so on.
If you come across one that is promising fixed returns if you invest or a massive price increase avoid it.
#2 – No Dev Team = No Deal
Always look into the team behind the project before investing in anything. With crypto Ponzi’s the team members will keep their names hidden so that when the scheme collapses, which it will, they cannot be identified.
Any legitimate cryptocurrency opportunity will provide real information on the team behind it.
#3 – Lack of Information
Crypto Ponzi’s often lack vital information. They usually provide only very vague info about how they are supposed to make you tons of money but do not go into detail at all. And.. if they do go into detail it likely doesn’t make any sense.
Questions, comments, concerns? Please leave them in the comment section below and I’ll get back to you soon 🙂