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October 21, 2017 | Nonsensical Idea of the Day: “Bitcoin is a Ponzi Scheme”

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
It is absurd to label bitcoin a Ponzi scheme. Yet that is what Jim Rickards says. Ironically, Bitcoin is an anti-Ponzi setup, regardless of what it is used for, regardless of whether or not it’s in a bubble.

In a video interview with Hedgeye CEO Keith McCullough, not only did Rickards state that he agreed with Jamie Dimon, he made this claim “I call it a Ponzi with no one in charge. There’s no Madoff, but it’s working that way.”

Rickards points out that primary uses of Bitcoin are money laundering, capital flight, etc. But what does that have to do with being a Ponzi scheme?

“Bitcoin has not been combat tested in a business cycle. We have not had a recession or a financial crisis since 2009. I’ve seen all these other asset classes go through many business cycles. I know how they’ll behave. Bitcoin has not been tested in that arena,”says Rickards.

I agree. But what does that have to do with being a ponzi scheme?

Ponzi Definition

Ponzi Scheme is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading.

There is no revenue to speak of. When someone buys a bitcoin someone else gets a bitcoin. The number of coins slowly increases in time but the algorithm itself helps prevent fraud. It does not stop theft or someone losing their keys and thus their coins, but again that does not fit the definition.

Nor does the fact that criminals demand ransom in bitcoin. There are fraudulent activities in dollars, euros, silver, gold, and yes Bitcoin. If fraudulent activity makes a currency a Ponzi scheme, then gold is a Ponzi scheme as well.

There is no magic bullet that will stop fraudulent activity, but the key is the currency in and of itself is neither a fraud nor a Ponzi scheme.

Those looking for Ponzi schemes might wish to consider public union pension plans or preposterous amounts of interest on public and private debt that require ever-increasing amounts of debt to keep the system running.

Neither Bitcoin nor gold have anything in common with debt pyramids Ponzi schemes.

Rickards’ Game

Rickards has increasingly makes nonsensical statements of which I believe he has to know better.

Hype sells.

If Rickards is seeking publicity, well, he got it. Congratulations. I prefer other ways.

Mike “Mish” Shedlock

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October 21st, 2017

Posted In: Mish Talk

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