August 9, 2020

Bitcoin: a pyramid or not?

Bitcoin: a pyramid or not?

Since January 2009, when the first genesis block of the bitcoin network was generated, nine years have passed, but so far all kinds of “experts” break spears in disputes: Are cryptocurrencies a financial pyramid or not. The rapid growth in bitcoin profitability and the profits of those who previously became a member of this system is frightening in its similarity with the pyramids of the 90s.

First, decide what financialpyramid. The US Securities and Exchange Commission (SEC) defines the concepts of “pyramid” and “Ponzi scheme” as a form of fraud. “The organizers are encouraging new investors to participate in the business, promising to invest their money in profitable projects with minimal or no risks. Fraudsters seek to attract new resources in order to make payments to previous participants, creating the false impression that they are making profit from a legitimate business, ”SEC explains.

For analysis, we compare the basic characteristics of a pyramid and bitcoin:

Control.

Pyramid: Has a single control center - the top. This is a certain company that laid the foundation of the pyramid and now dictates the conditions. With the disappearance of this company, investors are left with nothing.

Bitcoin is peer-to-peercomputer network, distributed accounting system for financial transactions (transactions). The system does not have a single center and is not controlled centrally, but is distributed to all participants. This means that every computer that produces bitcoins is a member of the system. This e-book of transaction accounting, which cannot be modified, is called a blockchain. Technically, the number of network members storing a full copy of this book exceeds ten thousand nodes.

Profitability.

Pyramid: High incomes promised. Profitability in financial pyramids is provided exclusively by the money of new investors. In order to receive payments, the laws of the functioning of the pyramid require attracting new investors and their funds. Moreover, the money invested in the pyramids are not sent as investments in some business projects, but are trivially distributed among the participants. At the same time, the organizers of the pyramids always get the lion's share.

Bitcoin: Bitcoin profitability is regulated exclusively by the market mechanism - supply and demand in the cryptocurrency market. The supply in the cryptocurrency market is limited, and demand is constantly growing, this ensures the growth of the market value of bitcoin. The mechanism is similar to a stock exchange, bitcoin is a digital asset that grows in price, as well as the stock price of successful companies. Moreover, bitcoin was not initially positioned and is not positioned by developers as an investment tool. As such, users began to use it.

Investors.

Pyramid: It is stable only thanks to the constant influx of new customers and the contribution of their money, from which they then make payments to previous participants, creating the false impression that they are making a profit. Attracting new investors with their cash injections is the main condition for the existence of the pyramid.

Bitcoin: Concepts such as investors and dividends are generally absent. The platforms are based on open source code, which is available to users who make money transfers between their addresses / accounts, as well as to miners that ensure the system is working for a fee from the same system (programmatically, without the participation of third parties). For bitcoin, as an innovative monetary system, it is important to attract new participants, but not their fiat money. New participants, especially those who support the full current version of blockchain on their computer, or are engaged in mining, increase the value of the bitcoin network as a whole.

Product.

Pyramid: A classic pyramid does not create a useful product or service. In the case when such a product exists, it is not limited in volume or does not have market value outside the pyramid.

Bitcoin: Own product –bitcoin - the system generates itself during mining. The total number of bitcoins will be about 21 million, and, for example, lightcoins - 84 million. Bitcoin emission is limited by the system: the number of coins mined is halved approximately every four years. All new Bitcoin mined by miners is used as a financial incentive for members of the system, miners, who provide control and recording of new transactions in the blockchain. Subsequently, miners can transfer part of their bitcoin to other network users as payment for services and goods, or convert it into fiat money. As a result, bitcoin is redistributed in the network between many participants. In addition, the system product is in demand on cryptocurrency trading platforms and numerous BTC / Fiat currency pairs operating on a daily basis. Cryptocurrency entered the global financial markets, claiming its rights to its high demand along with the traditional currency. The global cryptocurrency market capitalization as of January 1, 2018 exceeded $ 800 billion.

System reliability

Pyramid: Collapses when the investor base stops replenishing. Pyramids are created with the main goal of generating income from attracting investments. All profits are divided between the organizers and the first (large) investors. Collapse occurs, as a rule, quickly and it is not always possible to predict it. In one day, some investors are left without anything due to the cessation of payments.

Bitcoin: The Blockchain concept, which is the basic infrastructure for almost any cryptocurrency, will survive even in the most difficult situations. This technology will continue its development and can be applied in any business area around the world. This is essentially a publicly accessible public book that offers disintegrated, verifiable instant translations at virtually zero cost. And new startups will solve this development problem.

As you can see, financial pyramids and cryptocurrencieshave fundamental differences. Bitcoin does not have a pyramid structure that can be talked about seriously. What seems pyramidal is a too sharp increase in value. In other words, the value of network effects. But the exchange rate of bitcoin is completely determined by the market, that is, the balance between supply and demand.

If a specific cryptocurrency systemwill cease to replenish with new participants, it will not collapse. Her course will simply stop growing. Holders of digital coins will be able to lose exactly as much as ordinary fiat holders lose on devaluation.

Some critically-minded “researchers” in the history and development of bitcoin like to argue their belief that this is a pyramid, by the fact that the creator of the system, Satoshi Nakomato, is unknown.

Yes, the anonymity of the creators of the financial pyramids takes place. However, nothing completely prevented Mavrodi from building one of the most successful pyramids in the history of the post-Soviet space.

Therefore, we tend to consider anonymity / non-anonymity as a secondary element for analysis.