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April 25, 2022

Is Bitcoin a Ponzi scheme?

Welcome to the cryptohunt jam where we spend one minute a day to explain crypto. In plain english.

Have you come across the claim that crypto is just a Ponzi scheme meant to make the creators rich? What is behind that and is it true?

A Ponzi scheme is a type of investment fraud where someone promises you certain returns, but instead of generating them through a legitimate strategy like stock trading, pays you with the money of future investors until the scheme collapses. 

Let’s take Bitcoin as an example and see if it is such a scheme. 

First, owning Bitcoin – like any other speculative asset – does not guarantee returns. There is no single authority controlling it and making promises. It’s volatility is high and many people have lost money. 

US authorities classify it as a commodity, similar to Gold. Bitcoin’s value can only rise further if more people buy into it and hold, like a savings account. Unlike other commodities such as oil, which powers engines, it functions mostly as a store of value because it has not reached mass adoption as a payments system. The investment assumption is that people hold on to it for savings.

Other blockchains, such as Ethereum, are a little more complex. They hope to provide massive utility in the future - replace today’s payment systems, or even the entire financial system. They are more like stock, where you speculate on the potential utility of your investment.

You probably see that legitimate crypto projects like Bitcoin don’t look like a ponzi scheme, they are simply not built to steal your money. Everything is transparent on the blockchain and determined by supply and demand. 

But just because hype around an investment is not fraud, you need to keep in mind that crypto is one of the riskiest investments you can make. It’s an unregulated market, big market participants can easily affect the price, and fraud is a real problem, especially with lesser known coins. So do your homework, everytime.

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