Is crypto just one big Ponzi scheme? | Hacker News Reader

Is crypto just one big Ponzi scheme?

unherd.com

47 pointsdkobia78 comments

Technically not a Ponzi scheme but still a scam and/or a con.

The fact that some people profit from a con doesn't negate the fundamental nature of this zero sum game. Everyone can't win. For every winner, there must be losers of an equal or greater amount.

Finding more/bigger fools can be fun and profitable but it is not building or creating any sort of substantial real world *value*. The only *value* in this game is that which was created from nothing or obtained from other misguided players. Common sense should tell you that to nothing it will eventually return. Eventually, lots of people will have to be informed that the only *value* they hold is a few electrons and a broken dream. The tricky part is figuring out *when* this will occur.

So in short, it's built on the solid foundation of stupid people.

Yes.

Life is hard --- harder if you're stupid

--- John Wayne

I think Bankman-Fried is a realist. He understands that a lot of token economics don't make sense. Having a non-yielding asset pay some kind of yield is the crypto equivalent of a perpetual motion machine. It can work short term but long term its impossible unless the token has some other means of creating wealth (e.g. fee for some gambling scheme)

But I think what he is doing is still valuable. He's creating financial products for this space and an important financial product is the ability to bet against something. This exerts a downward pressure on the asset and incentivizes people to find the most fraudulent projects and bet against them.

Most of these shitcoins are trading in decentralized exchanges. What's the alternative? Ban certain types of math? Regulate what websites we can list? Try to dox the dex operators?

I think Bankman-Fried is a realist.

Sure --- and a profiteer.

I appreciate his candor. He obviously understands full well that the game makes no sense --- but he is perfectly willing to profit from those who don't.

I think he's providing a valuable service by creating products that exert a downward pressure on some coins. I don't see whats wrong with this. The default state allows for number to only go up until a rug pull.

I think "providing a valuable service" is secondary to the fact that he stands to profit from it.

Why is profit bad? Nearly every service I use is administered by someone profiting from it

Profit can be either good or bad. The difference is often in *how* it is earned.

The host from the article summarized it pretty well, "I’m in the Ponzi business and it’s pretty good”.

Offering a service to rubes in a Ponzi scheme may not be illegal ... but it is not without ethical concerns either.

Have you ever wondered why every corporation on the planet hasn't jumped into this highly profitable scheme of creating your own currency? They have the resources and the technical expertise to do it --- but they haven't. Ever wonder why?

Ah yes, the 'substantial real world value'. Nothing better for HN upovte crowd than the self-sure idiot calling a whole industry scam, because it isn't something that he personally wants.

Nothing better for HN than name calling when you can't logically refute an argument.

https://en.wikipedia.org/wiki/Subjective_theory_of_value

>The subjective theory of value is an economic theory which advances the idea that the value of a good is not determined by any inherent property, nor by the amount of labor necessary to produce it, but instead is determined by the importance an acting individual places on a good for the achievement of his desired ends.

> The subjective theory of value is an economic theory which advances the idea that the value of a good is not determined by any inherent property, nor by the amount of labor necessary to produce it, but instead is determined by the importance an acting individual places on a good for the achievement of his desired ends.

In short: "Stonk_price_bruh!"

Elvis-mania, Bealte-mania, Backstreet boys-mania...they all end at some point.

Positive strong emotions are strong but they burn fast, or can even turn into negative strong emotions.

Unlike Elvis nobody became hysterical or collapsed to the ground when they saw a young Warren Buffett, people to this day think he's old, boring, doesn't get it.

Then they look at the scoreboard. 40 years in the Forbes 400, and not only that, in the top 5.

Let's see where Satoshi, Buterin , Brian Armstrong, Binance guy are in 40 years.

The one who is best positioned financially to be still there is Elon but he's inherently unstable mentally.

Which if I am reading your comment correctly, would be better described as a criticism of bubbles. A bubble is distinct from a scam or ponzi. It is also unrelated to the quote I posted.

Individuals who wish to transact in cryptocurrency or any other asset you do not value are not involved in a scam, simply because you do not value that asset. They have their own ends which we may not appreciate.

Bubbles and scams both thrive on delusion and irrational exhuberance. They are very similar.

The only difference is that with bubbles everybody buys into the delusion, whereas with scams at least those at the top are sane enough not to believe their own hype.

> Individuals who wish to transact in cryptocurrency

Excepts nobody transacts, everybody trades for capital appreciation purposes

The subjective theory of value --- where worth is only determined by what someone will pay. A theory fully embraced by every con artist --- and crypto fan.

In other words, the title you bought to the Golden Gate Bridge is worth whatever you can con some other like-minded fool into paying you for it.

The obvious problem here being that worth and value is based on foolishness more so than reality. Which may be fine --- until reality intrudes --- which it always does --- eventually.

>A theory fully embraced by every con artist --- and crypto fan.

There are some BTC maximalists who demand that the energy consumption of BTC and the sunk costs give it value. This is the input cost theory of value which is distinctly different. Similar to the labor theory of value.

I'm sure the title to a the Golden Gate Bridge is at least worth the paper it is printed on. Perhaps if there is significant novelty value, someone may buy it for those benefits alone. It is impossible to say how individuals would value it, but again false and fraudulent claims are a distinct and separate matter. Attempting to conflate the issue is somewhat dishonest in itself.

but again false and fraudulent claims are a distinct and separate matter.

Kinda like the claim that electrons are money as long as some other fools accept it? No "conflation" required.

By the same token it's impossible to say what goes on in the mind of an individual who goes through a sudden change in their personal evaluation of the asset they just bought.

If they buy the title to the Golden Gate Bridge from you and then try to cash in and suddenly realize they have been had....well it's only fair game if they come looking for you with the intention of making themselves whole (and then some)

Or if they are civilized they'd go to the police and they'd be the ones coming for you.

As you see the subjective theory of value can be extended to everything and anything. It doesn't stop working once the transaction is settled. Per the subjective theory of value the transaction can always be reversed: judicially, politically or violently.

That's the reason why scammers who are smart try to put as much geographical and jurisdictional distance between themselves and those who were scammed

It doesn't matter what theory of value we believe in, none of them would support op.

What argument? You're calling things millions of people use useless, you're calling things that have actual value that you can trade for other vlauable things valueless. Where is the argument? As far as I understand it you're just making things up.

I bet you know the famous phrase : "Nobody ever got fired for buying IBM"

One thing I also bet you don't know is that it doesn't refer to IBM stock, it refers to the mainframes.

Crypto people should stop looking at marketcap as a confirmation that what they are building or are excited about is something of value. Xiaomi is a company incorporated 3 years after BTC whitepaper and it's ubiquitous in millions of people's lives.

At the end of the day people want a tangible product or a service, the model which has people trying to build a sociopolitical movement (and use marketcap as a gauge of its health instead of votes) is flawed because Power Law in a sociopolitical movement is even more skewed than wealth distribution in a company.

Just look at the US: only a handful of political roles really matter:

1) POTUS

2) Speaker of the House

3) Majority leader

4) Supreme Court Justices

5) Chair of the Fed

6) Secretary of Treasury

7) Secretary of Defense

8) Secretary of State

9) Joint Chiefs

10) Mayor of NYC

In crypto it's even worse. You have Satoshi, Buterin and Musk

There is a big difference between crypto and classical ponzi schemes, that doesn't seem big at first sight but actually is big. To use ETF terminology, the classical ponzi scheme distributes by default, while crypto accumulates by default. As in, classically a ponzi scheme is a deal where someone convinces you to "invest" into their scheme and you get (usually high) dividends in return regularly. On the other hand, crypto is an speculative investment where you bet on price increases.

The difference might seem little because it's just a detail in how you get your payout, right? And indeed, if the two were legitimate investments, there would not be much of a difference (outside of details like taxation).

However, the default dividend based payment puts the classical ponzi scheme into a challenging situation compared to crypto. The person running the scheme has to serve the payments otherwise their scheme collapses, which means they have to grow, and find new people to invest in. As the dividends are usually high to motivate people to invest, you usually have really fast exponential growth. With simple calculations you can obtain a date limit at which the scheme has to have collapsed.

Compare this to crypto where the (group of) people running the NFT/token/etc. only have to keep enough people to HODL. This is a much easier task, as people who own crypto for investment purposes already believe that it's a good investment so why not keep the "dividends" inside. Thus, there is no requirement for crypto to grow indefinitely in terms of real revenue. At the exchanges, you can in fact have the same revenue in terms of dollars for years but for decreasing numbers of your cryptocurrency and arrive at a positive story for your token. Ultimately, there is no law that the fake currency has to collapse, and in fact if people continue believing in it, it won't.

However, as there is no "real" value behind it, its value is 100% made up of speculation, which makes it extremely dangerous for investors (speculators/gamblers is probably a better word to describe them). It's a giant bubble and one day it will pop. Hopefully it won't take large parts of the economy down, but the total size of the bubble is already larger than the one that caused the 2007/2008 crash.

Err, good point about the dynamics of the difference between accumulative vs distributive ponzi schemes.

But "accumulative" ponzi schemes have been around and labeled as ponzis long before crypto and there's nothing unique about the "crypto ponzi" version besides the sheen of hightech.

Bernie Madoff for example didn't have to payout all the earnings/dividends either, he just had to convince people they should HODL too.

As a database guy, I appreciate an immutable distributed ledger but the energy/climate/resource waste of running so many hash functions as your base primitive just makes me recoil in horror.

And proof of stake is just capitalism redux. The one with the gold makes the rules.

I'm not a fan of the ponzi accusation against speculation. There are always other factors to subjective valuation which are perhaps deliberately ignored by detractors. This is contentious here for whatever reason. Even the idea of subjective value, different strokes for different folks, live and let live and "if you don't like it, don't buy it" seems controversial at times.

For the sake of discussion, even if we assume that cryptocurrency is purely a speculative endeavor with no other utility - cryptocurrency is still not a ponzi. A ponzi scheme has a specific definition. It is a form of fraud. The promoter deliberately misrepresents the source of income. Typically he will attribute the gains he pays to his marks to a market based investment scheme.

If we take the alternate view, that anything where the asset must be sold to recoup a return, and thus that new entrants must pay the existing holders before they exit, which markets are not ponzis? Is the used car market now a ponzi according to this definition? You cannot sell your used car until someone else buys it! Collectibles like coins, stamps or 'trading' cards?

Words matter. Defining our terms is important to understanding what we are talking about.

It would be interesting to see a research on how pyramid schemes participants, political/religious extremists and cult participants show some really common traits.

They are always blind to the facts, rationalize and deflect everything. Always repeating the same arguments that were served to them "What about gold?", "What about financial market in general?", "What about Hillary?", "What about Islam?".... There is a strong sense of community, superiority and being enlightened. Always entrenched in their position, defending their situation and never ever admitting the most evident facts of the situation....

> They are always blind to the facts, rationalize and deflect everything. Always repeating the same arguments that were served to them.

That's true of most people about most things. It's not exclusive to extremists or cultists.

In fact, all of the above is. I didn't used to notice when I was younger because I was always on the winning team by default.

So people who ask "What about Hillary?" are extremists, but people who ask “What about Trump” aren’t ? ( it’s very obvious what your leanings are )

You’re projecting a strong sense of community, superiority and being enlightened.

Since you place an importance on facts, explain why a wide range of ethnic minorities shifted their vote in favor of Trump from 2016 to 2022, while white voters swayed the other way.

Looking forward to the rationalization and deflection

It isn't worth it to get into the weeds with the specifics of political movements.

Agree that "cult like" devotion isn't seen as such when it is aligned towards the dominant narrative of a community. That is seen as normative. The reasoning or lack thereof can be equivalent in all aspects as long as it suits the bias of the viewer.

Getting back to the topic at hand, the intense hatred, the half-baked misapplication of the word ponzi, could be described as cult like. I'm not sure "cult like" is especially meaningful as a criticism given this. It reads as more of a signal of affiliation to one tribe rather than a insightful critique.

You've unfortunately been breaking the site guidelines a ton lately. We ban accounts that do that. If you'd please review https://news.ycombinator.com/newsguidelines.html and stick to the rules when posting here, we'd appreciate it. That means no more personal attacks, not using the site primarily for ideological/political battle, and more.

Quod erat demonstrandum.

There is a large body of research around this phenomenon. I think looking up "conspiratorial thinking" will get you started in the right direction. A major part of the "scientific skepticism" community is studying this kind of thinking, and trying to discover how to treat or prevent people from falling into that kind of trap.

Crypto is an industry covering thousands of different projects. The nobel tech behind crypto certainly is not a scam, its revolutionary.

Out of the thousand of projects many are indeed scammy. Likewise, many are serious projects, and a few like BTC are paradigm changing. Maybe not to you, the majority western (very) well off reader with a stable and sorta not corrupt governance, but to the millions in this planet where they are forced into never leaving poverty by dictators, oligarchs and crony politicians hyperinflating their life savings or seizing assets due to religious/racial/class lines (much of South and Central America, Africa, the middle east, etc) its a godsend.

Hacker news really should know better than these blanket statement smears. Its either bitterness, ignorance/privilege or paid shilling propaganda. A much more serious problem in the world than some exit scams by fly by night crypto scammers.

Crypto is an industry covering thousands of different projects.

Bernard L. Madoff Investment Securities was once the 6th largest market maker in S&P 500 stocks --- run by a former chairman of the NASDAQ stock exchange with thousands of wealthy, famous clients.

Having a good back story only helped him proliferate his con.

The nobel tech behind crypto certainly is not a scam, its revolutionary.

Tech isn't nobel. Tech serves bad purposes just as easily and faithfully as good.

Assigning altruistic characteristics to tech smacks of religion more than reality and really discredits your argument.

I suspect "nobel tech" may have been a typo for "novel tech", rather than "noble...".

Taken within the context of the overall post, I think "noble tech" was the intent.

It's financial engineering.

The human history is basically one big arms race to get the maximum profit with the minimum effort.

Up until the invention of BTC bankers and capital allocators like Buffett were leading this arms race. Making tons of money doing very little physical work (or even domain specific intellectual work).

Now enter BTC circa 2009.

BTC leverages people's deep fear of inflation and turns it on its head using deflationary financial engineering.

Deflation attracts people because it's a hugely attractive proposition to increase one's net worth while doing nothing during the day and partying with likeminded people at night. Almost too good to be true.

BTC skyrocketed because people don't understand that if something is too good to be true, it probably is. At the end of the day Power Law is undefeated and only one person benefits from the too good to be true scheme, much like only one person wins the lottery. For sure it can't be too good to be true for what amounts to hundreds of millions of people who bought into the scheme.

Something gotta give

everyone talks about investment but I do use crypto quite often as an actual payment. its great: secure from government overreach, no taxes, quasi instant transaction, low fees, anonymous.

What do you use for payment? The debit cards?

Are there any good discussions of how in the past new currencies have historically been received by the public?

Crypto is a little unusual compared to other Ponzi targets in its nature as a putative currency. It "makes its own value" in a certain sense.

There are a lot of problems that decentralization do not solve. For instance decentralizing currency exchange systems don’t solve anything that the centralized systems haven’t already solved and solved much better.

But one thing decentralization does solve is that it avoids legal repercussions.

If you run a Ponzi scheme you end up in jail. If you launch a system that facilitates a diatributed ponzu scheme operated by thousands, then neither you nor them end up in jail.

I think of more like a combination between russian roulette and a ponzi. Assuming you refuse to sell at a loss you mainly risk being stuck.

Price never recovers to a profitable point for you (you took the bullet, those who sold to you won).

I think everyone knows that at some point, the party ends, and it's mostly about how far you're willing to take it, who will end up with the bullet in their head.

This party will never end. At the end you will all be part of it.

Not necessarily, but it has attracted the best schemers and con artists in the world in one big party over the last couple years.

I’m very interested to see what happens with these nations that have adopted bitcoin as a currency, as it seems like they are destined to relearn the pain that having a deflationary currency brings.

> I’m very interested to see what happens with these nations that have adopted bitcoin as a currency

I know relatively little about economy at large scale, but crypto use as nation's currency is a disaster at many levels. Country not being able to control (and manipulate) its money is a recipe for a disaster as you cannot steer your ship. Devaluing or strengthening currency allows you to affect import/export ratios.

Deflationary nature of BTC means that future generations will be progressively more and more at disadvantage. Because wealth accumulation favors the early winners, making entry barrier harder and harder. It de-incentivizes spending - ie the thing that makes economy go.

I am not sure if those two thing could be upsided with anything that crypto provides.

Is there no value to incentivizing saving?

This is ironic from my perspective.

If we believe that crypto is a bubble, then it is worth asking what are the forces driving this? Could it be an atmosphere of negative real interest rates, driven by artificially cheap credit? Isn't this the way central bankers have been steering the economy? Yet in your comment, you suggest that this same central planning is virtuous. It appears as a contradiction in logic from where I stand.

>If Bitcoin’s ecosystem collapses, funds can’t be returned to holders because its price going to zero means there’s nothing to recover.

To be more precise, if Bitcoin's price goes to zero, there's no reward for mining so the blockchain will literally stop.

The fine art world also falls under these various categories; zero-sum, greater-fool theory. Why pay $100m for a Basquiat? Because "number go up" of course; Yet no one is predicting its imminent demise.

Art has the immense advantage that, if everyone is in on the game, and prices keep rising, then someone can acquire a work at 2 million, value it 6 years later at 15 million, and donate it to a non-profit/foundation/etc for the 15 million value, to get a massive tax write-off. The chump in this case is the US Gov. No other Art player is hurt, only the taxpayer.

Crypto schemes tends more towards short term, immediate scenarios than a Ponzi scheme: your broker sells but doesn't buy (maybe with excuses related to technical problems), this is the price and good luck selling to someone else, your "funds" now belong to some colluding parties and it must be true because they wrote it in the blockchain, the deleted records of a gone pseudobank would prove that you "bought" and "own" something that doesn't quite exists...

It’s difficult to understand exactly what you’re trying to say here but it sounds like you’ve been ripped off by a shoddy crypto exchange.

I doesn’t sound like you totally understand how a blockchain works.

As with any investment, the onus is on you to understand what you’re buying.

Speculation isn't a poniz because you don't like the asset. Crypto is more accurately rife with fraud, wash trading, pump and dumps and so on

In this thread: people bitter for not having purchased bitcoin in 2013 and feeling reverse schadenfreude.

Framing all of crypto as a single thing is inaccurate

Crypto is the idea that *anyone* with a little technical know-how can create their own currency. There are currently over 20,000 different crypto currencies in circulation and more are being created all the time.

What is inaccurate about this statement?

What do you think is stopping every major corporation from jumping on this get rich quick scheme?

It would be as much a Ponzi scheme as gold would be.

Not really. People don't invest in gold thinking it will go to the moon. They invest in it thinking it will be a stable value to protect from currency / inflation / recession risks.

Not to mention Gold also has actual industrial and other uses!

Well now you can argue that crypto also has actual industrial and other uses, they just shadow the most of the trading volume which is all about speculation and money laundering

You can argue that, fallaciously. What's a bitcoin good for? You can't make it into anything else.

Cryptography is useful, yes, as an abstract framework. That's not what's under discussion. Buying bitcoin is not the same as investing in cryptography research.

What is investing in cryptography research? Paying to some guy having some interesting whitepapers and that is it?

I don't know, I guess. "The academic field of cryptography" is much more abstract than "a lump of gold". My point was more about what bitcoin isn't - specifically, it isn't a natural resource like gold is.

One useful distinguisher: when someone invents a new use for gold, the value of gold increases. When the field of cryptography progresses, bitcoin becomes more obsolete.

> My point was more about what bitcoin isn't - specifically, it isn't a natural resource like gold is.

I can understand that point, btw my opinion is that Bitcoin is a natural resource of saving some bits of data forever. No any alternative with same props in no-Blockchain world.

> One useful distinguisher: when someone invents a new use for gold, the value of gold increases. When the field of cryptography progresses, bitcoin becomes more obsolete.

Not even close to truth. When someone invents a new metal alloy with some properties of gold, the value of gold may decrease. When the field of cryptography progresses, the value of some cryptocurrencies may increase, for example Litecoin skyrocketed from $4 to $400 in one day after Lightning network has appeared on Litecoin several years ago (there were more examples not only for LTC, I just took a peace of data which I am confident in).

>What's a bitcoin good for?

Transacting, for those who choose to. There are other means of transacting and arguably better blockchains for doing so. The point remains. We all have our preferences and subjective personal valuations. Another individual might not see that value for himself, but the value remains for other parties. Claiming it is useless is a reaching generalization.

Name one industrial use for cryptocurrencies that isn't some form of grifting.

It is too hard for me to chose only one:

1. Honest lottery where result is derived from some bits considered to be random.

2. Abuse-proof selling of (controversial) digital goods like vpn or porn with not enough old actresses for your jurisdiction.

3. Storing some bits of data forever (this is the most important feature of so-called cryptocurrencies from my point of view).

4. Donates if you don't want to deal with third-parties like please allow me to support the guys you have considered as terrorists without any legal consequences for me.

5. Taking my money with me if going abroad (if you are both not going to pay tax for taking too much cash and not allowed to make some transactions using bank accounts).

So money laundering, tax evasion, funding terrorism, child porn and gambling?

Feels like all that's missing here is a cackling Skeletor.

Try different angles to see at these cases.

Tax evasion is good if your government happened to be terrorist regiment (maybe not a case for citizen of first-world). Money laundering is not from my list, I don't know is it possible to convert crypto to cash enough safely. Gambling is not any bad, to be honest, and instead of child porn case you may consider something less controversial like buying a vpn if your govt really don't want you to; or buying weed with less contact than using a contactless card in those countries who offers legal way for buying that.

And seems nobody is noticing the most beautiful part of cryptocurrency's nature - storing some bits of data if you really don't want that to be deleted. Any flash card might became unreadable, any manuscript might became destroyed and any judge might commit a wrong decision about your property. But any enough popular blockchain ought run forever with all the data guaranteed to be untouched.

The blockchain requires the energy consumption of a small country to maintain your eternal bits. You think that will go on forever, especially in a future where energy prices keep rising as fossil fuels are phased out?

> The blockchain requires the energy consumption of a small country.

This is a lie, so the question of yours just does not exist.

https://digiconomist.net/bitcoin-energy-consumption/

This site puts Bitcoin about on par with Thailand.

https://digiconomist.net/ethereum-energy-consumption

Ethereum is about a Khazakstan.

That data you have mentioned is not about requirements.

For example, world military spendings for 2021 is $2113 billion (just googled it, if you need a source of data). But that number is not a requirement, it is kind of a measure of world's imperfection. Crypto's energy consuming might be reduced drastically as well as the number I have mentioned.

I can tell some more of scary stories: if that military spendings will not be reduced, the meaning of "forever" word may be not as much time as you expect. In another words, the digits I have mentioned are killing us way faster then the digits you have mentioned. So I don't see any problem for using "forever" word in that case.

> most beautiful part ...

> ... any enough popular blockchain ought run forever

Really? And how do you decide which of all the thousands of blockchains to store your bits on? Just because one chain seems popular today doesn't guarantee it'll be popular next year or next century; most likely some other shinier blockchain-successor will eventually supplant it, and it'll fade away.

So to preserve your data "forever", you'll need to constantly monitor the blockchain ecosystem, and make sure you copy your data to another blockchain if the one you picked first shows signs of decline.

Or just use a few copies of normal storage media, copying them to fresh media at intervals. This is a solved problem. Blockchain offers nothing here.

> And how do you decide which of all the thousands of blockchains to store your bits on?

Bitcoin's one, because Bitcoin is a flagman of all cryptocurrency movement. If somebody invents better blockchain than current Bitcoin's blockchain, that improvement will be implemented to Bitcoin for the sake of trust to the cryptocurrency with the longest history.

> So to preserve your data "forever", you'll need to constantly monitor the blockchain ecosystem, and make sure you copy your data to another blockchain if the one you picked first shows signs of decline.

I disagree with you. All you need is make sure your tx is not orphan. Abandoning Bitcoin for the sake of new Bitcoin-like cryptocurrency is against the promice of Bitcoin.

> Or just use a few copies of normal storage media, copying them to fresh media at intervals. This is a solved problem. Blockchain offers nothing here.

You miss the point of storing some bits forever. Forever is 100% uptime, period.

Yes they do, every time gold spikes up Europe is FOMO buying and Turkey is selling. It's the same with every speculative asset, so every asset being traded.

Do you think people buy stablecoins thinking it will go to the moon?

99% yes.

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