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Why bitcoin is worse than a Madoff-style Ponzi scheme

Ponzi Scheme

Why bitcoin is worse than a Madoff-style Ponzi scheme

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This is a guest post by Robert McCauley, a non-resident senior fellow at Boston University’s Global Development Policy Center and associate member of the Faculty of History at the University of Oxford. In this post McCauley argues that comparing bitcoin to a Ponzi scheme is unfair to Ponzi schemes.

Bitcoin is off its all-time high of $69,000 set on November 9, 2021. It suffered a wrenching $12,000 flash crash over the first weekend in December, amid accounts of leveraged positions being closed out. And yet, even at the current price of $49,000, guests on financial TV news continue to tout it as the best-performing asset of the last N years, where N can be just about any number from one to ten. They also increasingly judge it as a credible investment in its own right.

This contradicts the longstanding sceptical view by many economists and others that what bitcoin really is, in effect, is a Ponzi scheme. Brazilian computer scientist Jorge Stolfi is one voice who has contended this. His view is based on the following observations:

  1. Investors buy in the expectation of profits.

  2. That expectation is sustained by the profits of those that cash out.

  3. But there is no external source for those profits; they come entirely from new investments.

  4. And the operators take away a large portion of the money.

All of this rings true true. But in calling bitcoin a Ponzi scheme, critics are arguably being too kind on two counts. First, bitcoin doesn’t have the same endgame as a Ponzi…

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