Bitcoin - a financial pyramid: truth or myth?

Bitcoin – financial pyramid: truth or myth?

There are a lot of skeptical conversations about cryptocurrency in general and Bitcoin in particular. There are situations that under the news about the success of Bitcoin, someone writes an angry comment that Bitcoin is a financial pyramid and you have to be a fool to invest your money there. They say that the bitter experience of MMM and others like it didn’t teach anyone anything and the trusting contributors once again are godlessly profiting.

“The financial pyramid (Ponzi scheme) is a form of investment fraud, which includes the payment of estimated profits to existing investors from funds raised from new investors. Ponzi planners often attract new investors with promises to invest the funds raised in projects with a high return on investment and minimal risk. Fraudsters are busy raising new funds in many Ponzi schemes, with the help of which they will make the promised payments to early investors and will allocate part of these funds for personal use. ”

From this definition it follows that an important factor for the pyramid is that past participants do not receive money from objective growth of value, but simply money from new participants. In addition, there is a central link in the pyramid – the beneficiary of the scam, who ultimately derives maximum benefit for themselves.

Take as an example the same MMM. New people come in and they are promised that they will receive some millions in interest on their deposits – accordingly, the total number of obligations of this pyramid to the participants is growing. The value of MMM is zero, because the money is not multiplied there, but only redistributed among the participants within the system. The value does not grow and the imbalance between liabilities and value becomes more and more, as the obligations are constantly growing and in order to cover them, it is necessary to attract more and more new participants.

As a result, the moment comes when the pyramid collapses because it becomes unfavorable to the beneficiary. Judge for yourself he has access to the money supply using which he can escape. This money supply becomes more and more and then the influx of users ends and the money supply starts to become smaller. At this point, the organizer does not make sense to continue to play the pyramid, because his money disappears. Therefore, he simply collapses it and runs away with money, and 99% of depositors, in general, are left with nothing. Here all the factors converge, the mass of obligations has grown to enormous size, no value has appeared and the beneficiary is interested in escaping.

So, no one can not deny the fact that many ICOs on alternative cryptocurrency today are forms of financial pyramids. The cryptocurrency market is still almost unregulated, and there are many scammers who profit from the popular theme, building financial pyramids or fraudulent schemes under the face of new revolutionary companies that are developing the fantastic technologies of the future. Most often, the price of such cryptocurrency is based solely on speculation and deception.

However, this does not mean that absolutely all alternative cryptocurrencies are a fraud. Some altcoins have an understandable and transparent pricing model. However, such cryptocurrencies as Ether, Dash, Ripple, Litecoin, NEM, Monero, really create value, and their price is based not only on pure speculation.

As for Bitcoin – a fantastic increase in its value lately, of course, does not cease to excite the minds of critics, but in fact, everything is just pretty simple.

The first and most obvious difference between Bitcoin and the financial pyramid is that there is no central beneficiary. Theoretically, of course, there are very old wallets with a very large number of bitcoins, which in some sense can be considered such a beneficiary. However, the official central beneficiary initially was not and is not, and without his presence, the pyramid does not make sense.

The second important difference is that with Bitcoin, with the growth of the user base and with the growth of the uploaded money, the value grows, because in any economic system this value is directly related to the number of participants in this system. Moreover, taking into account the fact that the volume of the economy is always proportional to the square of the number of participants and not to the number itself, the value of Bitcoin grows much faster than the user base grows and there is no reason to inflate a bubble.

Finally, another factor is that Bitcoin has no obligation to anyone. Bitcoin never promised anything to anyone, so Bitcoin as a pyramid can not, in general, collapse. Bitcoin is only a financial protocol for making, validating and storing transaction information among network members. Bitcoin code is in the public domain, each participant can explore the logic of the entire network and some participants can not just assign themselves to the Bitcoins of other participants.

Given all the above, we can conclude that Bitcoin does not fall under the definition of a financial pyramid. This is a form of digital currency that is used by network members and the number of virtual wallets to store it today already exceeds 11 million worldwide. There are many factors that shape the price of a currency, but one of the main factors is the volume of demand for a currency and the number of users is a currency. Therefore, it is quite natural that with the expansion of the network of users, the price of Bitcoin continues to grow. This is natural for any currency and Bitcoin should not be considered as a particularly suspicious anomaly.