Nouriel Roubini: Bitcoin Is a ‘Ponzi Game’
blogs.wsj.com
blogs.wsj.com
http://en.wikipedia.org/wiki/Ponzi_scheme
"A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from existing capital or new capital paid by new investors, rather than from profit earned by the individual or organization running the operation. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent."
There is no controlling operator paying out investors and there is no claim that a bit coin is going to generate any sort of profits in the form of interest or capital appreciation. The short term returns have been unusually inconsistent.
You can say that bitcoin is in a bubble, you can criticize it as a currency, you can criticize its social goals, you can criticize its technical implementation, but to call it a ponzi scheme is blatantly incorrect.
That Roubini, one of the very few mainstream economists to predict the 2008 collapse, is so imprecise with his language gives some indication of the state of todays economics profession.
For example between Feb 2009 to Sept 2012 the price of Apple stock went from $100 to $700. Did the profits of Apple go to 7 times in this time? Not really.
But if you were to only see Apple's stock in this timeframe, AND don't understand Apple's business model, but merely heard that Apple's stock is rising and you should invest in it, then it would appear that older investors are being paid off at the expense of the newer investors.
Noriel Roubini could also very specifically perceive the question about bitcoin as "I heard a lot of my friends are getting rich through bitcoin, should I invest in bitcoin to profit from it?", and then he gives the answer that he gave.
I know you're not disagreeing with the grandparent post here, fundamentally, but this really irks me. A Ponzi scheme is a particular type of scam that is pretty well defined.
> ... it would appear that older investors are being paid off at the expense of the newer investors
I guess this is the core of it; the definition uses the passive voice and thus is open to this interpretation. I think it's clear, both historically and looking at examples, that the definition would be more clear as:
A Ponzi scheme is a fraudulent investment operation, where the operator
pays returns to its investors from existing capital or new capital paid
by new investors, rather than from profit earned by the operator.
Operators of Ponzi schemes usually entice new investors by offering higher
returns than other investments, in the form of short-term returns that are
either abnormally high or unusually consistent.
You can make the argument that Bitcoin (or Apple stock) is a scam of some sort; a "pump and dump" seems the most apt analogue. Calling it a Ponzi scheme seems an invitation to this exact kind of semantic tomfoolery that I'm posting here.
- It's false that it's not a medium of savings. It has reservation demand which is the only reason it has a price. It does not matter that it has "no assets in it", whatever that confused statement means. The dollar also no longer has any asset backing. The medium of savings role exists while people perceive there is value in holding a monetary good in the hope it will appreciate in the future. They perceive it will appreciate because it has comparative advantages to other goods which serve a similar purpose. Bitcoin has many comparative advantages to other monetary goods. In particular, it allows the transfer of value to anyone, anywhere in the world, near instantaneously, with low transaction fees, without the need for a trusted intermediary such as a bank. This has literally never been possible before in the entire history of civilization.
- It's true that bitcoin is not currently a unit of account. This mostly has to do with the fact that it's still nascent and needs to increase in liquidity. As it does more and more entrepreneurs who are primarily accepting bitcoin (it will start with the miners) will begin to calculate profit and loss in bitcoin terms
- It's true bitcoin is used for so-called criminal activities. But so too is the dollar. In fact, the dollar isn't just used for buying illegal drugs, the dollar is used to funnel gigantic sums of tax payer wealth to well connected bankers when their businesses fail. Which is the bigger crime, Nouriel?
- Bitcoin isn't susceptible to hacking - individual bitcoin businesses are susceptible to hacking such as the incredibly incompetent MtGox, which deserved to fail. Blaming Bitcoin for the incompetence of a particular business is like saying the dollar is a failure because Lehman Brothers collapsed. To me that is a much worse "hack" than anything that happened with Gox.
- And no, Bitcoin is NOT a ponzi scheme. Bitcoins are a monetary good whose price fluctuates with demand on the market just like any other monetary good, such as gold.
While I am a big fan of Bitcoin, this is a valid criticism. The degree to which hackers can steal money right now is very limited, because of the ability to unwind transactions, and the very long clearing time associated with larger transactions.
Two prime benefits of Bitcoin are the short clearing time and the inability to unwind transactions. The dark side of this is that hacking machines storing keys for Bitcoin addresses is the same thing as stealing the money held there; there's no need to have a bunch of bank accounts in shady countries lined up to try to move the money fast enough that you can step out into the tropical sun with a briefcase full of cash before the money gets clawed back.
But places that accept bitcoin aren't holding on to it. They transfer immediately to local currency (because their suppliers can't be paid in bitcoin). So currently* bitcoin is more a means of money transfer than it is a currency in itself.
* This might eventually change if suppliers are willing to accept bitcoin too.
That is correct, but the question which arises, why are companies introducing this level of complexity for no reason? Why are people hell bent on paying for goods through bitcoins?
Yes its true that currently its a means of money transfer but there is no reason why companies won't just start holding bitcoins. There is no added utility offered in USD which cannot be offered by bitcoins. Once enough market for bitcoin appears people will switch to holding in dollars.
Yes, that's also a fact. Bitcoins have revealed a really unprepared facet of technology. Information security. Bitcoin or not, the fact remains that we don't have a fool proof way(other than going offline) to keep the data secure for an average man. Sure smart people can keep their data secure, but common man(who wants to use bitcoins) is unable to do so.
Talking about bitcoin and regulation is like talking about anti-bullying regulations. If it may make you feel better that your kid is protected by anti-bullying regulations, or you could prevent things online by merely making a law against it, then you're delusional.
This weekend I played with altcoin mining. The goal of course to figure out how to turn those coins into money I can spend. Aside from maybe LTC, no one is taking altcoins for payment or exchanging for fiat; you convert to BTC on an exchange like Cryptsy, and then sell the BTC on Coinbase, etc.
At present, you can mine with the same hardware you could use for BTC 3 years ago, so it's attractive. Eventually, though, you'll run into the same issue as with Bitcoin: difficulty increases. If you use a Multipool, you get around this by shifting from altcoin to altcoin, based on profitability. (usually a direct product of coins with lower difficulty, which tend to be newer)
In general, all alts will increase in difficulty to the point where they're no longer profitable; the only way multipool mining can be profitable over any period of time is new coins coming out. That's pretty much the situation we see today. Eventually it'll collapse, as most Ponzi's do.
That doesn't make it a Ponzi scheme.
Altcoin mining for conversion to Bitcoin, however, has the marks of Ponzi: returns (altcoin:bitcoin exchange rate) that require a steady stream of new investment (new alts, as old alts become unprofitable) that provide little to no value other than providing the return.
If speculators are correct that it may go up in the future, it is in their best interest to bid the price up now and collect money in the future. That would make BTC not a speculative bubble, but merely an asset that speculators have properly valued.
If you want to argue BTC is or is not a bubble, do it right. Choose a theory of money, e.g. Baumol-Tobin. Then come up with predictions about future transaction costs, the size of the BTC NGDP, and the price level. Finally, use your theory of money to predict the value of BTC.
If that disagrees with the current speculative value, you've got a real argument.
(For those unfamiliar with the macroeconomics terms I used, I explain it all here: http://www.chrisstucchio.com/blog/2014/demand_for_bitcoins.h... )
I expect there will only ever be a few networks that have 'high' levels of participation and the rest will all be susceptible to computational attacks (high value networks will attract investment in mining capability and that investment will make it difficult to get people to risk value on smaller networks that use the same proof of work).
You raise valid concerns but there are counter arguments to them all so I don't think such a glib dismissal is warranted. From pg's essay[0]
The first time Peter Thiel spoke at YC he drew a Venn diagram that illustrates the situation perfectly. He drew two intersecting circles, one labelled "seems like a bad idea" and the other "is a good idea." The intersection is the sweet spot for startups.
Also, has anyone done a energy use per transaction comparison to other payment networks? I'd be surprised if bitcoin was really that bad in comparison to Visa or Paypal if you included all the energy costs that go into security enforcement.
http://en.wikipedia.org/wiki/Nouriel_Roubini
You can agree or disagree with his argument, but snidely dismissing him as someone without expertise who mistakenly thinks he is "super duper important" is silly.
As far as criticism of Bitcoin goes, this is about as superficial as it gets.
Judge what somebody says, not who he is.
EDIT: They are uneducated, in that any cursory research into the concept and history of Bitcoin would make it blatantly obvious that his remarks are wrong. There are two possibilities here; either he is being willfully ignorant, or he simply hasn't done his homework well enough. Given his reputation, I'm betting on the latter. The "uneducated" bit simply derives from him literally not having educated himself on the matter.
He is super duper important. But that doesn't validate his hasty shallow opinion on bitcoin in any way.
Worlds best zoologist said about first ever example of martian organism "It lame bacause it's not a frog." after thinking about it for an hour.
I am not looking for a precise answer, but a rough range of what it should be worth.
It should be possible to do this for any financial asset.
I would go on bitstamp and see what people are trading them for. That would be around ~$620 at the moment.
If you think this isn't a valid way of valuing something then tell me: How would you value a 2 bedroom flat in London? My guess is you would see how much similar flats nearby are selling for (and if you say you would get an expert valuation - how are they getting the value?)
No such exercise is possible with Bitcoin, the 'value' of which could be argued to be anything.
In the end, everything is worth what its purchaser will pay for it. It's no different for bitcoin as for anything else
property values ultimately determined by rents and yields.
this is not circular at all.
not possible to value Bitcoin in the same way.
And rents and yields are determined by what people are willing to pay to rent the property.
Just like bitcoin value is determined by what people are willing to pay for bitcoins.
You're right your argument wasn't circular, what I meant was you were just pushing it to another level. The sale value is based on the rent value, but what is the rent value based on?
You cannot value Bitcoin like this because it does not produce an income and is not linked to the value of any other asset.
Now, to further complicate things, you have to put a value on that piece of that puzzle that actually changes hands during these transactions. Realistically, the value of it doesn't even matter if I want to go CAD -> BTC -> BTC -> USD. As long as the value between CAD and USD makes sense, the transaction was a success and all parties are happy.
This is what most people, generally the investment folk, don't understand about our new little technology here. Bitcoin isn't just about the value of a Bitcoin and a Bitcoins buying power. Bitcoin is a network. The value of the fuel for that network will very as people need it and as the cost associated with generating that fuel change. This is irrelevant though as the price of Bitcoin is not the measure of its usefulness, or its success.
Which is the bigger Ponzi?
The huge growth of debt is a sign that inflation has been too low for too long in too many places. As long as the ECB and the Fed treat 2% as scary-high inflation, paying back debt becomes far more difficult.
To start solving the debt problem, the central banks should start targetting 4-5% inflation for a decade or so, and allow it to go a little above the target, rather than trying desperately to hold it down to less than 2%. This would reduce debt while encouraging investment and economic growth, which would bring down unemployment, which would help pay off debt. It's a virtuous cycle.
In contrast, Bitcoin is a deflationary currency. Deflationary regimes favor hoarding, make it impossible to invest, and ultimately benefit only the wealthy. Reasonable levels of inflation on the other hand favor economic growth, investment in real assets, and they favor the productive working class over the idle rich.
People are thinking in terms of the solution rather than in terms of the problem. You shouldn't think of Bitcoin as a thing, Litecoin as a thing, Dogecoin as a thing, and weigh each of these things on their own merits. Instead they're all just competing solutions to the same basic problem.
As problems with Bitcoin surface, the market will gravitate towards other currencies, and the infrastructure will gradually grow to accommodate them so as to provide the same level of services.
It's still a fantastic time to get into crypto-currency. Don't feel like you missed out just because you didn't buy thousands of BTC 2 years ago and saved it till today. The rough and rowdy prospectors are just now giving way to the frontier businessmen, but there's still lots of time and stuff to do until the big players emerge and start wrapping the markets up.
Wouldn't that just cause lenders to increase their interest rates?
> Deflationary regimes favor hoarding, make it impossible to invest,
Most sound investments yield returns way above inflation, and they would also yield returns way above deflation
> and ultimately benefit only the wealthy
Unlike the current system?
Yes it would. Only unexpected inflation will affect debt repayment rates (in theory).
This is IMHO the strongest argument against Bitcoin and the reason why a long-term economy could not depend on it. The problem with cryptocurrencies is the impossibility to control the monetary mass.
Not really. It is designed so that no individual can control the rate of inflations, however if it is in the vast majority[1] of miner's interests it can be changed.
[1] If a small majority of miners changed inflation it would cause a massive chain forkWho cares? It isn't a contest.
So, what are global assets worth, then? Why only talk about one side of the ledger? Debt doesn't exist in a vacuum.
It's supposed to be a currency, but no one's actually using it for currency. They're just gambling on it, hoping to take advantage of other people's mistakes to make their own money. It's a zero-sum game, and it's destructive. People are just playing around with the electronic version of Monopoly money.
The driving force behind currencies is a large organization or group of organizations that work to keep it reliable. The dollar is kept stable because the federal government is large, established, and pays in dollars. With more and more people using the dollar, it becomes even more stable, to the point that other countries can use it for transactions.
Bitcoin doesn't have that. People don't have any assets tied in with Bitcoin the way that they do with dollars or Euros or yen. And why would they, when it's so volatile that a bank account of Bitcoins will change its value by 50% in a day?
Proponents of Bitcoin say that its benefits are that it's decentralized, unregulated, and doesn't have to rely on a government to ensure that it's stable. I actually think that these are bad traits for a currency to have.
For fuck's sake: yes, the United States has a stable government and can guarantee the relative stability of the USD. But the world is not just the US.
We keep talking about how technology makes us more mobile, or digital nomads. I lived in 3 different continents in the past 5 years. My assets are not tied to Bitcoin, but the best way I found to transfer money between countries was by using BTC as an intermediary.
What do you think it's likely to happen faster: to have a monetary/transaction system that is more efficient than governments, or to have governments globally becoming stable? The Euro has been stable in terms of prices, but it has not shown yet that it is resilient enough. Who can be sure that Greece will still be using the euro 3 years from now? 5 years from now? What happens when Germany gets tired of bailing the fat cats on PIIGS?
Source for that? I regularly pay for things with BTC, and part of my salary is paid out in BTC.
Or are you perhaps mistaking a particular subset of Bitcoin "users" (speculators) for "the entire Bitcoin ecosystem"?
You can say there is no dependence on a single intermediary.
This is a quibble, but I think it's an important one, for example, a lot of the arguments about using bitcoin in Argentina or whatever ignore the part where Argentinians don't have a whole lot of bitcoin to start using.
Seems to me that the deciding factor is: what percentage of Bitcoin's transactions are actual transactions for actual goods and services vs. what percentage are transactions related to speculation on Bitcoin itself. That is very hard to measure, especially since at least a double-digit percentage of transactions belong to the illicit economy.
I'm talking about the trillions of derivatives market ..
Retail payments are now a little over 50% electronic: http://www.paymentscouncil.org.uk/media_centre/press_release... , so that's bank money rather than paper/metal currency.
Forex trading is huge: http://finance.yahoo.com/news/forex-market-size-traders-adva... : again, held on account rather than actual notes and coins changing hands. That's not even counting derivatives, but derivatives usually net out (for every put option there is a call option) and don't necessarily require settlement.
However, there's enough of a real market and taxation demand denominated in the US dollar that it's not going anywhere any time soon. The ECD made enough of a commitment to Euro liquidity that it's not going away any time soon.
Bitcoin's market cap is still tiny enough that it could be demolished by a single bored FX trader in an afternoon; but there's no real way to profit from that, as doing so would also demolish the fragile exchanges by which you might cash out.
Many merchants that accept Bitcoin are currently converting as you say via services like BitPay, but I certainly wouldn't go so far as to say that all transactions are being converted.
As for Bitcoin vs Paypal: one basic difference is that money in a Paypal account is denominated in terms of fiat, and as such can be considered fungible with fiat. Bitcoin is not inherently tied to the value of any another currency, so it clearly has a more independent role (not to mention the numerous [1]other advantages).
Would you mind sharing your source?
As mentioned in the link, Bitcoin certainly has tremendous value beyond simply making early adopters rich. If you don't believe it, I encourage you to listen to some of Andreas Antonopoulos' arguments about Bitcoin as a network vs Bitcoin as a currency. Bitcoin provides a vast number of benefits as a technology beyond simply being a "currency."
There may be theoretical technological benefits to crypto-currencies, but they don't practically exist for most people who want to legitimately spend their money today. The only useful application I've seen so far are the microtip dogecoins on reddit.
If value were judged purely on current implementation or common practice, then most of the startups mentioned on this site would never have the chance to become anything worthwhile. We invest in great ideas that hold promise because sooner or later, those ideas will take flight and become part of our lives. Bitcoin is no different.
I'm a big fan of bitcoin, but even I can see that they could potentially become worthless. However, the odds of that are incredibly small (it would need either a breakthrough in cryptography or a critical bug to be discovered)
Bitcoin's first "killer app" was clearly silk road which was doing ~$40m/yr (1) and the criminal economy for drugs alone is in excess of $320 billion (2).
If you were to model a future where BC's primary use is for criminal/illegal activities I wonder what the value would look like?
Of course providing the allowance that the Overstock's / pubs / merchants continue to provide the smokescreen to allow BC's to be socially / regulatory acceptable.
(1) http://www.dailydot.com/business/silk-road-monthly-sales-bla...
(2) https://www.unodc.org/toc/en/crimes/organized-crime.html
that said roubini is completely wrong about btc, just like krugman, and both need to change their thinking about what constitutes a currency.
Care to explain why, or is this just your self-affirmation mantra?
This idea that a currency needs all features of historical currencies to be considered a currency is ridiculous, and doesn't accommodate a "start-up" currency which is something we've never seen before - at least not globally. At the very least the definition of currency ought to change to something like: "A currency possesses at least 3 out of 5 of these qualities."
None of these qualities are permanent, unchanging qualities. That seems to be the other critical mistake economists are making - failing to see the forest for the trees. That comes from an institutional mindset where only governments (or government-connected organizations) can issue currency and so currency has the aura of permanence.
Actually, if you look at the definition of "currency" from various sources, you'll come across stuff like this:
"1. Money in any form when in actual use as a medium of exchange, especially circulating paper money."
(http://www.thefreedictionary.com/currency)
... and for "money":
"1. A medium that can be exchanged for goods and services and is used as a measure of their values on the market, including among its forms a commodity such as gold, an officially issued coin or note, or a deposit in a checking account or other readily liquefiable account."
(http://www.thefreedictionary.com/Money)
The problem doesn't seem to be that the definition is incorrect; the problem seems to be that people assume their own definition based on what they're used to, rather than adhering to something you'd find in a dictionary - commonly the motivation appears to be using "it's not a currency" as a (fallacious) reason to express their dislike of something like Bitcoin.
"Bitcoin supporters" are not a homogenous group.
On a more serious note, there might be a group of 'supporters' who are 'libertarians', but the reality is that their existence or notoriety really don't matter all that much.
If somebody seeks to generalize to discredit Bitcoin, then they will do so anyway - whether it's one libertarian or a million, and whether they're 'hardcore' or hardly noticeable.
As long as these people do not try to take an "official spokesperson" type of position with their personal ideology, they can be safely ignored if you do not agree with their point of view.
That's the beautiful thing about Bitcoin: it exists, whether you want it or not... and what somebody elses political views are does not change whether it exists or how it works :)
It is true that BitCoin can survive on its technological underpinnings alone. But I think we should change the way we are conversing about it so that we don't immediately make enemies of a large group that has an ideological stake in the govt being the only authority for any and all currency.
I think this becomes a real danger when we begin to legislate on something. The nature of politics is that it frequently conceals the truth. Otherwise intelligent people are completely unable to see the best qualities of something if they feel it goes against their political ideology.
Our current system is a Ponzi schemewhere you can help pay down the debt by printing money?
This shifts wealth up.
numbers don't lie.
http://en.wikipedia.org/wiki/Income_inequality_in_the_United...
http://www.bloomberg.com/news/2014-03-09/global-debt-exceeds...
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It would be great if economists started coming up with genuine criticism regarding Bitcoin, rather than obviously false statements, misunderstandings that have been corrected a million times before, and fallacious reasoning.
I mean, virtually everything he said is explicitly listed on https://en.bitcoin.it/wiki/Myths – that’s how often these things have been brought up and disproven.
- Bitcoin is not a unit of account as no price of goods and services is set in Bitcoin unit nor it ever will.
- Bitcoin isn’t means of payment as few transactions in Bitcoin. And given its volatility all who accept it convert it right back into $/€/¥
- Bitcoin isn’t a store of value as little wealth is in Bitcoin and no assets in it
Am I missing something?
In absence of an accurate description on the wiki, here goes:
"- Bitcoin is not a unit of account as no price of goods and services is set in Bitcoin unit nor it ever will."
When Bitcoin first started out, virtually everything sold for it was denominated in BTC. Some places still do this, but due to the volatility of Bitcoin right now (which is really just a result of a small market gaining traction, and is unavoidable for a new non-government-backed currency) it is more practical to denominate in USD - either visibly or behind-the-scenes.
This was not the case when Bitcoin started out, and will almost certainly not be the case in the future - as the transactional market for Bitcoin continues growing, it will eventually stabilize in terms of value, and things will be widely priced directly in BTC again. See also next answer.
"- Bitcoin isn’t means of payment as few transactions in Bitcoin. And given its volatility all who accept it convert it right back into $/€/¥"
No requirement exists that a means of payment must exceed a certain arbitrary transaction volume, so that argument is invalid right off the bat. Whether it's a common means of payment has nothing to do with whether it's a means of payment at all.
BTC are currently commonly exchanged back into other currencies after receipt - and again, the claim is false, it is definitely not "all" - to cope with the aforementioned volatility of a "young currency" BitPay, Coinbase etc. serve as "stabilizers" - they allow for adoption to increase during a volatile period, thereby solving the chicken-egg problem of volatility and adoption; over time volatility will decrease (as it has already been doing) as the adoption grows.
TL;DR direct-exchange services such as Coinbase and BitPay are really just temporary coping mechanisms that are absolutely necessary for Bitcoin to grow through its first adoption period.
"- Bitcoin isn’t a store of value as little wealth is in Bitcoin and no assets in it"
"Young currency" applies, again. And again, whether it is a reliable store of value right now, has nothing to do with whether it's a store of value at all.
If I had to summarize the arguments made, these are the big mistakes that are being made:
- "It's not a reliable/useful $concept, so it's not a $concept at all." (obviously incorrect; unable to separate opinion and definition)
- "Very few people use it, so it's useless" (self-fulfilling prophecy, basically, and classic social adoption issue)
- "People don't denominate things in BTC, so BTC is not a currency" (irrelevant, that is not what the definition of "currency" is)
- "The news said that it got hacked / is only used by criminals, so surely that is true" (appeal to... not even sure what to call it, authority? biased source?)
We call it a currency because there's no other good name for it.
How about instead of telling us everything it isn't, they just tell us what it is? I'm guessing the reason they don't, is because they don't know either.
Bitcoin, or some other digital currency, will enable the selling of wisdom (different than information) in a free market as Ted Nelson originally envisioned when he coined the term "Hypertext", which isn't what the current web is, btw.
We desperately need a digital currency, it's the future... How could we solve this issue ?
As far as I can tell, the only ones who benefit from the "money has to be in constant circulation" adage, is those who gain a profit off every transaction made. Money is meant to be a representative token to make trading easier; I fail to see how it makes any sense to "encourage spending" in itself.
Businesses are also disinclined to lower their prices (this isn't a rule, sure businesses lower prices, it's a description of long term aggregate behavior).
Both of those things are things that must happen for an economy to function with a deflationary currency.
I doubt whether that is still the case in a (hypothetical) economy that is largely deflationary. In the current context, sure - but to me that seems largely a result of people being used to inflation, and I doubt that that association lasts if inflation is no longer the standard situation.
> Businesses are also disinclined to lower their prices (this isn't a rule, sure businesses lower prices, it's a description of long term aggregate behavior).
Can you elaborate on that?