March 29, 2024

Bitcoin: a pyramid or not?

Bitcoin: pyramid or not?

Nine years have passed since January 2009, when the first genesis block of the bitcoin network was generated, but stillall kinds of “experts” break spearsin the debate: whether cryptocurrencies are a financial pyramid or not. The rapid growth of bitcoin profitability and the profits of those who previously became participants in this system is frighteningly similar to the pyramids of the 90s.

First, let's define what financialpyramid. The US Securities and Exchange Commission (SEC) defines the terms "pyramid" and "Ponzi scheme" as a type of fraud. “The organizers persuade 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 to make payments to previous participants, creating the false impression that  profit from legitimate business,” the 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 terms. If this company disappears, investors are left with nothing. 

Bitcoin – it's built on a peer-to-peer basiscomputer network, distributed accounting system for financial transactions (transactions). The system does not have a single center and is not centrally managed, but is distributed among all participants. This means that every computer that mines bitcoins is a participant in the system. This electronic transaction ledger, which cannot be changed, is called a blockchain. Technically, the number of network participants storing a complete copy of this book exceeds ten thousand nodes.

 •Profitability.

Pyramid: High incomes are 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 the attraction of new investors and their funds. Moreover, the money invested in the pyramids is not sent as investment in some business projects, but is simply distributed among the participants. At the same time, the organizers of the pyramids always receive the lion's share. 

Bitcoin:The profitability of bitcoin is regulated exclusively by the market mechanism - supply and demand in the cryptocurrency market. The supply on the crypto market is limited, and demand is constantly growing, which ensures an increase in the market value of bitcoin. The mechanism is similar to a securities exchange, bitcoin is a digital asset that grows in value, just as the price of shares of successful companies grows. Moreover, bitcoin was not initially positioned and is not positioned by its developers as an investment instrument. Users themselves began to use it in this capacity.

 •Investors

Pyramid:It is sustainable only due to the constant influx of new clients and the deposit of their money, from which payments are then made 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:There are no such concepts as investors and dividends at all. 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 who ensure the operation of the system 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 the blockchain on their computer, or are engaged in mining, increase the value of the bitcoin network as a whole. 

 •Product.

Pyramid:The classic pyramid does not create a useful product or service. If such a product exists, it is not limited in volume or has no market value outside the pyramid. 

Bitcoin:The system generates its own product – bitcoin – during mining. The final number of bitcoins will be about 21 million, and, for example, litecoins - 84 million. The emission of bitcoins is limited by the system: the number of mined coins is halved approximately every four years. All new Bitcoins mined by miners are 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 bitcoins to other network users as payment for services and goods, or convert them into fiat money. As a result, bitcoins are redistributed across the network among many participants. In addition, the system’s product is in demand on cryptocurrency trading platforms and numerous BTC/Fiat currency pairs operating on a daily basis. Cryptocurrency has entered the global financial markets, claiming its high demand along with traditional currency. The global capitalization of the cryptocurrency market as of January 1, 2018 exceeded $800 billion. 

 •System reliability

Pyramid:Collapses when the base  investors are no longer replenished. 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 usually occurs quickly and it is not always possible to predict it. One day, some investors are left without anything due to the termination of payments. 

Bitcoin:The concept of Blockchain, which represents the underlying infrastructure for almost any cryptocurrency, will survive even in the most dire situations. This technology will continue to develop and can be applied to any business area around the world. It's essentially a public ledger 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 to speak of seriously. What appears to be pyramidal is that the value increases too sharply. In other words, the value of network effects. But the bitcoin rate is completely determined by the market, that is, the balance between supply and demand.  

If a certain cryptocurrency systemwill cease to be replenished with new participants, it will not collapse. Its rate will simply stop growing. Holders of digital coins will be able to lose exactly the same amount as regular fiat holders lose due to devaluation. 

Some are critical“researchers” history and development of bitcoin, they like to argue their belief that it 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.