Billionaire investor Marks, who called the dotcom bubble, says bitcoin is a 'pyramid scheme', CNBC, The Gantt chart, a working tool of. Apr 24, - What looks like a new Bitcoin ponzi scheme, recently surfaced, has the cryptocurrency market up in arms this week. Offing % daily returns. The bitcoin haul of one of the cryptocurrency sector's most infamous pyramid schemes could be considerably larger than initial estimates.
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Often the sale of product is purposefully woven into the recruitment process. In a normal sales-driven business, the company takes on the inventory risk and pays commissions based on sales to end users. In a pyramid scheme, the sales people take on the inventory risk, rather than the company, and compensation is paid for recruiting more sales people and selling product through to new participants. It all falls apart because sufficient end demand for the product does not actually exist. Everyone up the chain can make money at the expense of the new recruits at the end of the line.
This is a pyramid scheme. Bitcoin is not. Bitcoin is not a company. It has no employees and its supply is finitely scarce. No matter how many people adopt it, there will only ever be 21 million bitcoin. The distinctions should be glaringly obvious, but because bitcoin is complex and the very idea of money is not well understood, it can easily be confused.
Bitcoin will only become a global reserve currency if hundreds of millions if not billions more adopt it. And seemingly everyone that goes down the bitcoin rabbit hole ends up on the other side explaining it to their family and friends, pitching it as a better form of money. Sounds kind of like a pyramid scheme, right? When Dell started selling PCs on its website in and everyone told their friends to get a Dell, was it a pyramid scheme?
When Apple released the first iPhone in and everyone told their friends to drop the Blackberry for its superior successor, was it a pyramid scheme? Technological shifts often happen fast. Ten and twenty years later, smartphones and PCs are ubiquitous. It is all about the quality of the product and the incentive structure. If someone owned Apple stock or Dell stock, did it change the fact that the product itself provided a real value proposition? Was there a direct benefit for telling people about a new technological innovation?
The value proposition of an innovation trumps all else. It does not matter how you learn about it; all that matters is whether the innovation provides utility. That is what makes a market. It has a market because it solves a problem inherent in modern money.
Not only is bitcoin not a pyramid scheme; it is fundamentally distinct from the class of innovation that could be offered by any individual company. Bitcoin is not Dell and it is not Apple. It is not a tech stock. There is no company that exists behind bitcoin. Bitcoin is not a company selling a product and there is no income stream to pay future dividends. Bitcoin is not about making money ; instead, bitcoin is money , or at least it has become money to those choosing to store a portion of their wealth in it.
Bitcoin is a bearer asset; however, unlike a bearer bond, there is no income stream. The only utility of bitcoin is in holding it as a currency and transacting with it in the future, whether that be in exchange for legacy currencies or other goods and services. Bitcoin is only useful as a form of money, and it will only maintain value if others demand it in the future.
But this is true of any form of money not just bitcoin. Money is not a collective hallucination or merely a belief system; monetary goods have distinct properties which make them more or less effective in facilitating exchange. However, monetary properties are not absolute; the relative strength of monetary properties is the fundamental basis of demand.
When the market evaluates bitcoin, it does so relative to other monetary mediums the dollar, euro, yen, gold, etc. There will only ever be 21 million bitcoin. Everyone knows it; everyone remembers it. Everyone can also verify it at any point in time. But for now, just work on the assumption that the supply of bitcoin is capped at 21 million. In contrast, no one knows the supply of dollars. The Fed estimates the current supply of dollars, but no one knows how many dollars will exist in the future.
There is no constraint on the supply of the dollar, other than the Federal Reserve, and all we know for sure is that many more dollars will exist in the future; it is a limitless function. In the end, there is fundamental demand for bitcoin because its monetary policy is i optimally engineered and ii credibly enforced. Relative to its competition, bitcoin is a vastly superior monetary medium.
Exhibit A — Dollar Historical Supply. Exhibit B — Bitcoin Supply Schedule. The monetary base in fiat systems changes unpredictably whereas the monetary base in bitcoin is governed by a well-defined supply schedule. Think about the monetary base as setting the foundation of a global economic system. The unpredictable changes in the supply of dollars is not merely akin to shifting the proverbial goal posts.
Instead, it is more similar to building the field on a s-style water bed, and then shifting the goal posts. The whole game is distorted, not just the end points. Bitcoin, on the other hand, is a bedrock as a function of its fixed supply, and over time, the foundation becomes stronger and stronger.
The credibility of its supply schedule is reinforced with each passing bitcoin block. As adoption increases and as value rises, bitcoin becomes further decentralized. And as bitcoin decentralizes over time, it becomes harder to change, reinforcing the credibility of its foundation: its fixed supply. In a pyramid scheme, the people selling the scheme are the scammers.
These scammers are selling the promise of future monetary gains through high-pressure sales tactics and by recruiting new members to the scheme as the primary compensation mechanism. If this is you, you are the scammer. In most cases today, whenever someone buys bitcoin, they are directly trading a fractionally reserved form of currency with the promise of future debasement in return for a bearer asset with a finite supply and a vastly superior monetary policy.
The person on the other end of the line is getting the raw deal. It is not to say that literally everyone that sells a bitcoin does so without good reason. It is money after all, and its utility is in exchange; by definition, market participants have a wide variety of present needs for liquidity and real value is transferred every time a bitcoin is transacted, whether for dollars or for goods and services.
However, on average and over the longer-term, it is information asymmetry in full effect. A monetary medium with the lowest rate of change is most effective in communicating economic signals, and a fixed supply zero rate of change is the optimal monetary policy end game. While the monoculture that is modern mainstream academia disagrees with this view, a fixed supply currency is superior to a currency that increases in supply over time and at unpredictable rates. In any economy, supply and demand for goods and services relative to the supply and demand of money dictates prices.
Price is what ultimately coordinates economic activity, and money is the foundation of the pricing mechanism within an economy. A currency with a fixed supply would remove the noise created by changes to the money supply in the price system, thus creating more reliable market signals. Because a monetary good facilitates the exchange between goods used for the purpose of either consumption or production, the form of money with the lowest rate of change will most accurately reflect changes in supply and demand of all other goods.
Essentially, money is used to communicate the relative value of other goods and services, and changes in the money supply distort the communication of this information by introducing an extraneous variable to the equation. The information communicated through a monetary medium is that an iPhone costs approximately 20 times more than a barrel of oil.
Money communicates opportunity cost economic trade-offs through its price system, and the more constant the quantity of money lower rate of change , the more reliable the communication of information and economic trade-offs. An iPhone would still cost 20 times more than a barrel of oil, and that is the relevant information which all market participants rely upon.
In the real world, the problem is that prices do not adjust equally as the money supply changes. Instead, price signals become distorted. In a world with a constant money supply, changes in price would more accurately reflect changes in supply and demand in underlying markets for goods and services rather than also reflecting the unequal impact of a changing money supply. Changes in the money supply create noise extraneous to the underlying economic activity.
Price coordinates economic trade-offs, and the reliability of a pricing system is dependent on the stability of the form of money used to communicate information. In that regard, monetary goods are differentiated at least those that emerge on the free market ; it is why money is an effective communication tool. The market structure for money is different than that of all other goods. A consumption good is consumed and a production good is ultimately consumed in the production of other consumption goods.
Whereas, the utility of money is in exchange; it is functional in the coordination of trade by and between consumption and production goods, rather than being consumed itself. Because the utility of money is in exchange, scarcity is more important than the nominal amount of money in an economy.
As demand for money increases and as its price rises, there is not a commensurate supply response because of natural supply constraints. The same is not true for any individual good or service. The relative supply constraint of money is what allows it to communicate relative value between other goods and services.
Consumption goods and production goods can be substituted for each other, but money facilitates virtually all exchange between all other goods. The value of a money may fluctuate relative to goods and services but relative scarcity of a money supply allows price to be communicated in terms of the money itself.
Prior to bitcoin, no form of money was finitely scarce. Bitcoin has a fixed supply, capped at 21 million. Finite scarcity creates a constant where none existed previously. Imagine the supply of one good being perfectly constant while the supply of all other goods fluctuates.
Demand for all goods changes, but only one constant exists: the supply of bitcoin. In this world, everything would be measured against the constant. The purchasing power of money would communicate far more perfect information through this pricing mechanism than if the supply of the money itself were changing. By creating one constant, everything else can be more reliably measured. And the desired information is not the absolute value of any one good. All value is subjective.
Instead, the critical information communicated through a pricing mechanism is the relative value or relative price of many goods to each other. While price levels are ever changing due to constantly shifting supply and demand, the stability of the pricing mechanism itself allows for economic coordination via the communication of opportunity cost i. In our current system, the supply of money changes unpredictably and increases over time. This is core to the central banking monetary model, and it derives from monetarist economic theory which argues that an active management of the money supply stimulates aggregate demand and ultimately promotes full employment.
What it technically does is manipulate interest rates downward by increasing the supply of money. Lower interest rates increase the willingness and incentive to borrow; however, all else being equal, a lower interest would otherwise decrease the willingness to lend.
Essentially, by inflating the money supply, the central bank artificially manipulates the function of credit, creating a sustained imbalance between the incentive to borrow and the willingness to lend. The more pervasive consequence is the distortion of the pricing mechanism that coordinates economic activity. By manipulating the supply of money and the supply of credit, central banks distort all prices throughout the market.
False signals and bad information are distributed to all market participants. The entire supply and demand structure of the economy becomes distorted as hundreds of millions of people respond to manipulated price signals and when resources within the economy are re-allocated based on those signals. When the money supply is increased, new money and credit enters the system through various channels and at unpredictable times.
The quantity and rate of change is unknown to most market participants. Instead, market participants react to price signals; that is how information is communicated. A price signal may be the cost of a good at the supermarket or it may be a salary an employer is willing to pay for a certain job. The change in the money supply creates a distortion of prices such that market participants cannot effectively understand whether changes in price are driven by changes in underlying supply and demand structures, or to what extent changes in price are merely a function of more or less money in the system.
Regardless, everyone reacts to distorted signals. Most people recall that prior to the financial crisis there was a housing bubble. By directly purchasing mortgages and by inflating the money supply, the Fed manipulated interest rates lower. Housing relies heavily on the supply of credit and ultimately on the cost of interest. With lower interest rates and more money available to lend, housing prices were manipulated higher.
As a result, distorted price signals were sent to both buyers and sellers. Developers of housing respond by building more homes increasing supply and buyers of homes believe they can take on more debt at lower rates to purchase homes.
More resources in the economy are devoted to the function of housing because of higher price levels. However, any increase in demand can only be sustained so long as the cost of credit is continually manipulated downward as a function of an increasing money supply. This is the manipulation of price levels on full display, and it happens as an intended function of central bank monetary policy.
The Fed increases the money supply, lowers interest rates, and inflates asset prices such that the amount of existing debt in the credit system can be sustained. Asset prices support existing debt levels. When everyone figures out that the price signals are unsustainable and unreliable, it causes a shock to the system.
This is what happened in and it is likely to happen again as the market signals have become even further distorted. But it is not some evil scheme; the Fed is not a purposively malicious actor. Hayek spoke on this subject in his Nobel Prize winning speech, the Pretense of Knowledge.
As a function of manipulated prices, more resources are devoted to a segment of the economy than could otherwise be sustained naturally; when the central bank changes the course of its monetary policy, prices begin to respond and the market corrects. Because price levels have been manipulated on a sustained basis, a demand shock becomes inevitable and everyone figures out imbalances exist.
In the case of the housing example, supply both of goods and labor significantly exceeds sustainable demand at current price levels. More broadly, imbalances are everywhere. It becomes apparent that supply and demand are significantly out of balance and unemployment increases rapidly. Then everyone in a rush bought tulip bulbs, inflating their prices to sky-high heights and thus creating a bubble.
Subsequently, this bubble burst predictably, bankrupting many who invested in it. However, BTC, unlike tulips, representsis a more fundamentally sound means of storing and transferring value. As mentioned earlier, in this sense, it is comparable to precious metals. Despite the speculation and volatility surrounding it, Bitcoin is unlikely to depreciate unless it is supplanted by some new, fundamentally superior asset.
Along with tulip mania, this is another popularaccusation against bitcoin. Financial pyramids attract investors, promising them fabulous profits. Meanwhile, in fact, the money that new investors bring in goes to payments to those who invested in the pyramid earlier. This creates an unsupported debt spiral. It simply represents one of the assets, whose value increases as interest in it grows. It can really deprive some investors of the money invested in it, but this is due to the strong volatility of the BTC rate.
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By all key metrics, Binance is the largest cryptocurrency exchange in the world. Especially for beginners, we have prepared a detailed guide: How to buy bitcoin on a crypto exchange for rubles? Skip to content December 3, Excessive energy consumption One of the most common complaints about the networkbitcoin is the high amount of electricity consumed to mine cryptocurrency. Bitcoin is mostly used criminals Another popular opinion is the thesis aboutthe fact that the anonymity of cryptocurrencies plays into the hands of criminals.
Bitcoin can be hacked Some BTC users have stated that they have losttheir funds as a result of network hacking. BTC has no intrinsic value Another common accusation againstbitcoin and other cryptocurrencies is a statement that they have no intrinsic value.
Bitcoin is the new tulip mania It is customary to compare Bitcoin with modernanalogous to the "tulip fever" that erupted in the 17th century. Bitcoin is a financial pyramid Along with tulip mania, this is another popularaccusation against bitcoin. Where is it more profitable to buy bitcoin? TOP-5 exchanges For a safe and convenient purchase of cryptocurrencies with a minimum commission, we have prepared a rating of the most reliable and popular cryptocurrency exchanges that support deposit and withdrawal of funds in rubles, hryvnias, dollars and euros.
Commissions - the size of the commission for trading operations within the site and the withdrawal of assets. Feedback and support - we analyze user reviews and the quality of technical support. Convenience of the interface - we evaluate the functionality and intuitiveness of the interface, possible errors and failures when working with the exchange. Platform features - availability of additional features - futures, options, staking, etc. Facebook Notice for EU! You need to login to view and post FB Comments!
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