had an interesting conversation with an activist short-seller yesterday. He’s taken down more than a dozen corrupt companies, exposing billions of dollars of fraud, literally saving lives, sending criminals to prison, and personally reaping millions in his efforts to make the world a more ethical place. I asked him if there were any similarities between all of the fraudulent companies, and his answer was immediate:
“Oh, that’s easy. At the end of the day, they were all a variant of a Ponzi scheme.”
The Ponzi scheme was the brainchild of an Italian thief with the grandiosely magnificent name of Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi.
Ponzi guaranteed his investors he could double their money within 90 days, telling them he was an expert in IRC coupon arbitrage. In reality, Ponzi simply paid his earlier investors with the investments of later investors.
Such schemes obviously cannot last forever — doubling your profit every quarter forever is mathematically absurd. For a while, Ponzi lived like a king, buying himself a mansion, honeymooning in Italy, opening a winery, even buying a macaroni factory on the side. When one reporter grew suspicious of Ponzi’s rapid rise, the con man sued for libel and won $500,000.
In the end, Ponzi’s scheme ran for just over a year before collapsing, shuttering six banks and costing thousands of investors the equivalent of $250 million in today’s money.
Ponzi went bankrupt in the court cases that followed and was sentenced to more than a decade in prison. Upon release, he set up a Florida swampland scheme that also eventually failed. After serving another seven years in prison he was deported back to Italy, before eventually dying in poverty in Brazil.
How All Ponzi Schemes End
According to my new activist short-seller friend, giant financial frauds typically end in one of three ways:
- The company eventually gets shut down and the CEO goes to jail.
- The company gets bought out by a bigger company — either a sucker company or a larger fraudulent firm.
- The company uses a Black Swan event — like a pandemic or a housing crash — as an excuse to “naturally” go bankrupt, which allows the founder to save face… and then start a new company. After all, who could’ve predicted a recession? Let’s give the guy another chance. (Following 9/11, Bernie Madoff was gleeful that a giant war would give him enough cover to collapse his Ponzi scheme, but when the markets quickly rebounded, he had to keep the charade going.)
Does this sound in any way familiar?
Right now, Bitcoin is a textbook Ponzi scheme:
- It has no intrinsic value. You can’t eat it, wear it, or heat your house with it. Unlike gold — which at least feels nice and looks shiny on your spouse’s ring finger — you can’t even see Bitcoin.
- It is not a productive asset. It’s not a factory that produces an item. It’s not a field that produces cucumbers. It’s not a firm that offers a service. It contributes nothing to society.
- It has zero underlying value. None. It’s not backed by land or commodities or — as with national currencies like USD or GBP — the threat of violence (in the form of wage garnishment, asset seizure, and imprisonment.)
- It has minimal utility. Because the price fluctuates so wildly (what healthy currency doubles in a month?), it’s virtually ineffective as a safe representation of value or means of trade.
- Its value is solely derived from the trust that the price will continue to rise indefinitely. That there will always be new investors to buy out the old ones.
The evidence is crystal clear, and don’t trust any online Bitboy who tells you otherwise:
Bitcoin is a Ponzi scheme… for now.
How Does It End for Bitcoin?
Certainly not like your usual Ponzi scheme.
- Bitcoin’s “CEO” Satoshi Nakamoto — whoever he/she/the team might be — might already be dead or imprisoned in Guantanamo. (Heck, Bitcoin might be an invention of the NSA or advanced artificial intelligence for all we know.) Either way, Bitcoin isn’t a company, so it won’t be shut down.
- It’s unlikely that anyone will ever “acquire the company” by cornering the market on Bitcoin. (And to do so would make the currency completely worthless because you’d have no one to trade with.)
- And since it’s mathematically impossible for Bitcoin to grow forever, that leaves us with option three: A Black Swan event causes its demise as an investment. This is the only likely outcome. Perhaps a wildly superior cryptocurrency makes Bitcoin as irrelevant as the Model T versus a Tesla. Perhaps nations or groups of nations make a concerted effort to destroy Bitcoin, or more likely, Bitcoin owners. Or maybe Bitcoin simply levels out when it reaches max coinage, shedding its identity as an investment and becoming a stable trust-based currency. In doing so, it will drive away all the exuberant speculators who are currently propping up its inflated price. No matter how it happens, at some point, millions of Bitcoin investors are going to lose billions of dollars.
Don’t get me wrong, I am NOT a Bitcoin hater.
Cryptocurrency is a revolutionary technology. Bitcoin is downright brilliant. And there’s the outside chance that Bitcoin might eventually become THE global currency of the Internet. And I really, really hope it does.
But as nations start to roll out their own digital surveillance currencies — China just launched theirs last month — expect governments to do absolutely everything in their power to wage war on trust-based currencies like Bitcoin.
The major problem here is that most unsophisticated investors currently view Bitcoin as an investment. It’s not — it’s a currency, a vehicle of trade, a means to an end. Currency is the oil that keeps the engine running smoothly, but it’s not the engine itself.
The reality is that the majority of current Bitcoin holders see themselves as investors, not users, and have fallen prey to investment bias, sunk cost fallacy, money illusion, escalation of commitment, and a host of other cognitive biases. Not many of us say we’re “invested” in USD or CAD or GBP, because we understand that’s not a national currency’s primary purpose.
As a currency, Bitcoin is an extremely intriguing innovation.
As an investment, it is the biggest Ponzi scheme ever invented.
Bitcoin can only be considered an investment if you treat it like a Ponzi scheme. Which millions of people are currently very happy to do — because the price keeps going up, buoyed by market hysteria akin to the Dutch Tulip Mania.
It’s a story stock, a legal fiction, a collective fantasy.
But at some point, the Ponzi scheme will need to implode in order for Bitcoin to become what it was meant to become: a truly useful and profoundly accountable global currency.
Fraudulent investment, or a useable means of trust-based trade.
We can’t have it both ways.
The Problem is Trust
There are essentially three forms of currency in the world today:
- Violence-based currencies (national government currencies)
- Trust-based currencies (private and distributed cryptocurrencies)
- Asset-based currencies (the future)
Governments like America and China do not have the moral right — nor the permission of the people — to create the violence-backed currencies of today or the digital surveillance currencies of tomorrow.
Private enterprises like Facebook and JP Morgan have not earned the trust to create corporate currencies like Libra.
Both forms of currency must die.
Money was invented to facilitate trade: I have bread, Michelle has cheese, and Andrew has wine. Humans invented money to represent the contrasting value between bread, wine, and cheese, not to say that money is bread, wine, and cheese.
People treat today’s money as though the physical paper (or digital line of code) is the actual thing of value, and not the underlying asset it supposedly represents. No one gets full on francs, drunk on dollars, and fat on colóns.
(In the case of Bitcoin, it’s even worse: almost no one truly trusts it because it isn’t asset-backed, and it has no way to enforce value the way countries can.)
It’s time to eliminate violence and trust from currency.
The reality is that our global family desperately needs an international, accountable, distributed, non-violent, non-surveilled, non-trust-based, enforceable, verifiable-asset-backed currency to serve as a means of facilitating global trade.
Bitcoin isn’t that currency. Not yet, anyway.
Is Bitcoin’s current price grossly overvalued in relation to its actual present intrinsic worth? 100% absolutely.
Could the price still rise by 5X, 20X, 100X? Absolutely.
Could the price eventually drop to mere pennies on the dollar? Absolutely.
And will a real value-backed currency eventually crush BTC and ETH? Hopefully.
This isn’t an article about whether or not Bitcoin will continue to grow or crash and burn. That will depend on the public’s irrational exuberance versus the iron will of hundreds of governments who want to continue to oppress and control their citizens with a monopolistic currency stranglehold. It will be one of the most violent battles of our time. I hope crypto wins.
All I’m saying is that it’s time for both sides to be honest:
- The haters need to admit that Bitcoin is a brilliant trust-based currency.
- The lovers need to admit that Bitcoin is currently being treated as a Ponzi scheme. Because it’s quite simple: The only way to turn a profit on Bitcoin is to sell it to someone else for more than you paid. That’s a Ponzi scheme.
- Both sides need to take rapid steps toward creating a blockchain-based asset-backed cryptocurrency that actually functions as a currency and not as a speculative investment.
Don’t put your trust in money of any form. Avoid hysteria in all its disguises. Don’t believe the absurd hype on one side, nor the doom-and-gloom on the other. Especially don’t trust people with conflicts of interest. Always ask “who profits?”
Stay safe out there.