A funny kind of Ponzi scheme

Bitcoin has oftened been likened to a Ponzi scheme. This is an investment vehicle, made infamous but not invented by Charles Ponzi in the 1920s, where returns are paid to early entrants of the scheme by the contributions of later entrants.  This works until there is no new money to support the structure and it implodes.

A popular post has been doing the rounds by Gary North likening Bitcoin to a Ponzi scheme. I don’t want to get into a point by point rebuttal and thankfully this has already been written by John Mather. To be honest, I find his rebuttal a little too long and tedious to read, but I want to compare two aspects of the most recent & notorious Ponzi Scheme by Bernard Madoff.

  • Steady growth. Madoff managed to keep his Ponzi scheme returning a steady 10.5% with 1% variability for over 17.5 years. A feat which is nigh on impossible for even the best asset managers .
  • Market cap. This steady return allowed Madoff to reach a market cap for his clients estimated by court proceedings of around $64 billion. To be sure, some of that was fake profits that clients felt compelled to leave in the investment to capitalize on. However given that $5 billion has been returned to Madoff’s victims, at a significant loss to the majority, it’s not difficult to imagine that the amount of money lost is somewhere in that range.

Now let’s compare this to Bitcoin…

Bitcoin’s market cap, at it’s current price of $896, weighs in at $10.9 billion.

It has achieved this price enduring incredible daily volatility that puts any comparable asset classes to shame.  I think that one has to be amazed that a vehicle with such volatility could reach such highs funded by the public at large.

Further, this is still significantly less than Madoff’s fictitious marketcap (if you believe that Bitcoin’s marketcap is fictitious)… suggesting even if one is swayed by the Ponzi comparable, that we may still have a ways to go. If Bitcoin is legitimately sustainable, then I’d imagine the price would go significantly higher as compared to Madoff.

It is fundamentally true with all investments that increase in value, that getting in early is better than getting in late. It is also equally true for any investment, even Ponzi schemes, that value is determined by what new buyers and sellers are prepared to pay and receive. That’s how a market is made, the rest is merely history.

Will new buyers value Bitcoin higher than it has already been valued? Only time will tell.

Happy investing.