Bitcoin: Ponzi Scheme or Paradigm Shift?

The hoopla on Bitcoin this week! Jeez…you’d think they’ve come up with a cure for currency debasement or something!

Well, it appears there are plenty who think that Bitcoin is exactly that. And, as expected, there are no shortage of those who say that Bitcoin is just another currency, albeit one with a mathematic and decentralized method for quantitative determination.

So which is it? Should we all be rushing out and converting our savings into Bitcoins? Or will Bitcoin collapse amidst a wholesale abdication of the the faith required to support it?

Leap of Faith

While there is a growing crowd of Bitcoin supporters who say that this is the currency of the future, the only users of Bitcoin as a currency right now are primarily drug dealers on a “dark net” called the Silk Road. And right there is the key to Bitcoin’s upcoming status in history as Flash in the Pan.

Does anybody really believe that governments are going to embrace, never mind permit, a global transfer medium that is anonymous? Why not just make it the official currency of Al Quaida?

There are certain pesky realities in the world that not only will ensure that Bitcoin never gains traction outside the world of drugs and contraband, but that it will soon be shut down and its purveyors sought for conviction.

Bitcoin peaked at $237 this week and has collapsed in value to $83, vaporizing the investment of speculators.
Bitcoin peaked at $237 this week and has collapsed in value to $83, vaporizing the investment of speculators.

Lets take the current situation. Bitcoins have risen in value due to media-fuelled demand, and recently crested $237 each. Today they’re trading at $83.85. That means there are some very angry shareholders out there who have lost a lot of money. Therefore, the creators of Bitcoin (and don’t believe for one second that “nobody controls it”. By originating the algorithm, along with the text that defines it, the originators have created a Ponzi scheme), have issued securities (and algorithmically continue to do so) without proper registration, and have seen the prices rise on what the SEC and the FBI would both view as “misleading statements”.

So right now, one could argue that the founders of Bitcoin are subject to prosecution for securities fraud.

Not only that, but the originators of Bitcoin, by positioning it as a currency, have violated laws by coining currency, which is the exclusive domain of sovereign entities, according to each sovereign entity’s constitution. So the perpetrators of Bitcoin are also guilty of counterfeiting, which poses a problem for would be adopters of Bitcoins as an acceptable form of payment.

Lack of Confidence

And most importantly, the acceptance of a currency as a form of payment revolves around the idea of confidence. I will accept Bitcoins as a form of payment because I can use them to buy…hmmm…drugs and stolen merchandise. As attractive as that sounds, will Bitcoins ever be accepted as a form of payment at the grocery store, or in a restaurant, or at a gas station?

Not likely. Apart from the borderline geek mentality required to actually and thoroughly understand their process of creation, or “mining” as they call it, there is a widespread lack of confidence in Bitcoin. Without a tangible representation in physical form, for the vast majority of people, Bitcoin simply does not exist. Its an algorithimic fabrication. If all of the electricity in the world was removed for 24 hours, Bitcoin would not exist in any way shape or form in those 24 hours.

Even USD, which is arguably another form of currency completely underserving of any confidence in its viability as a form of payment, would exist without electricity and servers. And the only real money – gold and silver – would certainly continue to exist.

Calling it ‘Mining’ is Disingenuous

Even Bitcoin’s own web site refers to the algorithmic creation of Bitcoin as ‘mining’. Yet nothing could be farther from reality. Mining, as anyone who has been anywhere near a mining operation, is a capital-intensive, massively labour intensive enterprise. Bitcoin disingenuously adopts such a connotation, because it is arguably the opposite of mining: creation of value for no more effort than that expended by the microprocessors of the machines on which it exists, and of the mental expense of dreaming up such a scheme.

Winklevoss Weenies

While it is certain that an individual might make money from speculating on Bitcoin, it is just as likely that you could lose your entire investment. The famous Winklevoss Twins – famous for claiming that Mark Zuckerberg stole their idea for Facebook – are now publicly out there as owning $11 million worth of Bitcoin. Apparently, they style themselves as “venture capitalists” now. (It should probably be ‘mis-adventure capitalists’).

VIDEO: The Winklevoss twins have been duped into the Bitcoin ponzi scheme to the tune of $11 million.

This just demonstrates the very real danger that Bitcoin poses to the investing public. When boobs like these two put their faith in another misguided approach (Mark Zuckerberg took their defective idea and made it Facebook), you know its all going to end in tears.

At the end of the day, Bitcoin is nothing more than an interesting experiment. But one that will likely be remembered right up there with Air Conditioned Rocking Chairs and Telekinesis. Buyer beware – this is just another Ponzi scheme.

Keep abreast of other Ponzi schemes around the world as they emerge by subscribing to the Midas Letter Free Edition.

Learn more about Bitcoin:
Bitcoin Official Website
Meet the Bitcoin Billionaires – Bloomberg
The Real Significance of the Bitcoin Boom (and Bust) –
Inside the Bitcoin Economy – The Economist
How Does Bitcoin Work? – The Economist
Bitcoin is Ludicrous, but it Tells us Something Important about the Nature of Money – Washington Post

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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