Is Bitcoin a Ponzi Scheme?

In the summer of 1920, people stood in line outside an office in Boston to hand their savings to an Italian immigrant named Charles Ponzi. He had an idea that sounded clever. International reply coupons, slips of paper sold in one country that could be swapped for postage stamps in another, cost less in some countries than the stamps they could buy in others. Buy the coupons cheap abroad, redeem them in America, and pocket the difference. Ponzi organized the Securities Exchange Company and sold notes promising a 50 percent return within 90 days.¹

The money poured in, as much as $250,000 in a single day and more than $15 million in a matter of months. The coupons were real. The profits were not. Ponzi was paying his early investors with money from newer ones. In July 1920 a Boston newspaper began publishing articles that asked where the returns were coming from, and within weeks the whole thing fell apart. Ponzi pleaded guilty to a federal charge and was sentenced to five years in prison.¹ His name became the word for the fraud.

A century later, "Ponzi scheme" is one of the most common things people say about Bitcoin. It is worth taking seriously, because some of what has been sold under Bitcoin's name really was one.

What Every Ponzi Needs

Strip Ponzi's scheme down and it has three working parts. The first is a promoter who holds the money: investors handed their cash to the Securities Exchange Company, and from then on it was his to move. The second is a promise: a fixed return on a fixed schedule, which is what brought people to the door. The third is a secret: nobody outside could see how few coupons he had bought, so nobody could check whether the returns were real until a reporter started asking.

Take away any one of those parts and the scheme stops working. Without the promoter, there is nobody to collect new money and route it to old investors. Without the promise, nobody lines up. Without the secret, the first person who checks the books ends it.

Holding Bitcoin Up to the Light

Bitcoin has no promoter holding anyone's money. When you buy bitcoin, you buy it from someone who is selling it, and once it is yours, it is recorded on the ledger under keys that you or your custodian control. There is no company in the middle collecting deposits.

It makes no promise. Bitcoin's software pays holders nothing: no interest, no dividend, no return of any kind. Its price floats on an open market, and it has gone down as dramatically as it has gone up.

And it has no secret. Every transaction since January 3, 2009 sits on a public ledger. Anyone can run the software, download that ledger, and check the total supply for themselves, which thousands of people do every day. If a Ponzi scheme is a machine for passing new investors' money to old ones, Bitcoin has no place in it for the money to pass through.

The Ponzi That Borrowed Bitcoin's Name

That does not mean the fear comes from nowhere. Plenty of real schemes have used Bitcoin's name, and the largest of them shows exactly what the difference looks like.

BitConnect promoted what it called a "Lending Program." Investors handed over their money, and the company claimed that its "Trading Bot" and "Volatility Software" would produce substantial profits and guaranteed returns. In February 2022 a federal grand jury indicted its founder, Satish Kumbhani. Prosecutors said BitConnect "operated as a Ponzi scheme by paying earlier BitConnect investors with money from later investors," and that it took in about $2.4 billion.²

BitConnect had all three of Ponzi's parts. A company held the money. It promised returns. And its trading software was a secret nobody could inspect. Bitcoin was simply the bait. The practical rule that follows is a simple one: anyone who promises you a guaranteed return on your bitcoin is selling you something other than bitcoin.

The Better Version of the Question

Some critics mean something different when they call Bitcoin a Ponzi. They mean that it is worth only what the next buyer will pay, so the people who bought early can only profit if people who buy later pay more. That version deserves an honest answer, because part of it is true.

Bitcoin's price is set by supply and demand, and bitcoin pays nothing while you hold it. In that respect it resembles gold, which also pays no dividend and is worth what people will pay for it. When demand falls, the price falls, and Bitcoin's has fallen hard. After its peaks in 2013, 2017, and 2021, it lost more than three quarters of its dollar value each time: about 83 percent, 79 percent, and 76 percent.³ People who bought near a top and sold near the bottom that followed lost most of their money.

But a falling price is a risk, not a fraud. Nobody promised those buyers anything. Nobody took their money and moved it to someone else. Their coins were still theirs, and the network kept running exactly as described the whole time. Early buyers do benefit if the price rises, the same way early buyers of land or of a young company do. What separates a risky asset from a Ponzi scheme is not whether the price can fall. It is whether someone is lying to you about where your returns come from.

Little by Little

"Wealth gained hastily will dwindle, but whoever gathers little by little will increase it."

Proverbs 13:11

Ponzi sold haste. So did BitConnect. Both offered a way to get rich in a season, and both left their investors poorer. The proverb is worth applying to Bitcoin too, because haste is what turned its crashes into ruin for some people: those who bought with money they would need soon, or with money they had borrowed. A fixed supply does not guarantee anyone a profit, and nobody honest will promise you one.

Lesson 8 of the course works through this question point by point, along with the related worry that bitcoin "isn't backed by anything." What gives any money its value in the first place is where the free first lesson begins.