In today’s Exponential Investor…
- What a response!
- Ponzi it is not
- Keep your vagueness to yourself
Well, we’ve been getting a great response to our Search for the Next Bitcoin docuseries.
Seems like yesterday’s interview with Jason Schenker really stirred up some controversy!
In today’s episode release that you’ll see if you’ve signed up for the docuseries, I go into some detail with my presentation about all the signals and moves in the crypto world that are being made.
Most of these moves, the typical investor is oblivious to. Not because of ignorance, just because if you aren’t looking for these signs, these moves then when they happen, it’s hard to decipher the bigger outcome of it all.
But that’s why my session dives into – what are the real opportunities of this crypto revolution. What kind of mindset do you need to take when you step into this world?
When we look beyond bitcoin, what does this market really open up for investors?
Or is it, as many people still view it as, one giant Ponzi scheme – just a repeat of “tulip mania”?
That view, the “tulip mania” one, is fascinating to me.
Is it an ignorant view? In my view, yes.
But that’s okay because plenty of people think everything that isn’t the thing they’re doing is a scam.
I put it down to a gross misunderstanding of how these networks operate. To take a cursory look at it, play the “greater fool” and the “Ponzi” card and you immediately demonstrate a lack of understanding.
And here’s why…
Ponzi shows how much you really know
First off some of the feedback we’ve got about our crypto series:
Cryptocurrencies are essentially a gigantic Ponzi Scheme and promoting them does no credit to you or your colleagues. At least tulips are attractive.
Eventually, as with the Dutch tulip and other ‘bubbles’ it will collapse and be seen for what it is – worthless! But good luck to those who are making a fortune in this scam.
I like the fact that everyone has a view on this. Even if I disagree with them. But let me tackle a couple of things here.
First is this idea that in some way there’s some cohort of mischievous people that are collecting all the money from bitcoin purchases to somehow feed it back to manipulate the price of bitcoin.
The idea that it’s a Ponzi scheme is a popular one for the crypto-uneducated.
A Ponzi scheme rewards early backers by using new investor money to pay them. As more new investors come in, the returns are inflated as the early backers collect their rewards for promoted little or no risk.
Now some argue this is exactly what bitcoin does. Sounds a lot like Tesla stock too for what it’s worth.
Nonetheless, when you buy a bitcoin in fiat money you are purchasing that bitcoin from someone else the money doesn’t go into some kind of bitcoin “pool” from which its price is then inflated.
When you sell a bitcoin, you relinquish control of it. The buyer then has it to do as they please. They can sell it back to fiat money, they can sell it for another crypto – they can even buy stuff with it.
When you buy it, you’re buying it from another peer on the network, someone wanting to sell their bitcoin for money or another crypto.
That doesn’t inflate the price. It doesn’t pay early backers. If you had one bitcoin in 2009 and you still hold that one bitcoin today – here’s a surprise… it’s worth one bitcoin.
Buying and selling into fiat money is just a market where a buyer and seller agree on a price for the exchange of that bitcoin.
Hence in that sense it’s no different to a stockmarket.
When you buy a stock, are you paying back early backers? Or are you just buying it in a market which matches buyers and sellers? Explain the difference to me – because there is none.
The only way an early backer of bitcoin receives fiat money is when they sell that very bitcoin for fiat money. And the price they sell for, is solely dependent on the free market.
This is how every other asset class operates.
Bitcoin isn’t a “fund”, it isn’t a holding company. It doesn’t generate returns and doesn’t promote itself to generate returns. There’s no central controlling authority and the only thing that dictates how it operates is its code and the participants on the network.
The “returns” are generated in the same way that you generate returns when you buy a property. You buy it, you sell it later for another price because the market determines what that price may be and what someone else is willing to pay for it.
If everyone thinks your house is rubbish, they probably won’t pay much for it. Same with bitcoin. If there’s zero value derived by the market – and the market determines it to be worthless… it will be worthless.
However, there are plenty in this network that plan to never exit back to fiat money. That they will be able to freely operate their finances using bitcoin and that its purchasing power will be the return, not a conversion to increasingly worthless fiat money.
When your mindset is explicitly pinned to the idea that wealth and value can only exist in fiat-denominated money, then you fail a major core principle of bitcoin and cryptocurrency – you don’t have to be a slave to the existing fiat-money devaluation and broken global financial system.
Scammy? By who?
Also the idea that it’s a scam. A scam by who? When you own a bitcoin, and you have complete and utter control of it, who’s scamming you? The free market for bitcoin? The distributed, decentralised network? The millions of participants in the network?
At least with bitcoin there’s complete transparency with the bitcoin in existence, where they are held and where they move around the network from and to. Save for the numerous company frauds (see Wirecard for a good example of this) in the traditional market.
Scam it is not, because there is no one that can run the scam.
Having said that, there are scammers that operate using the enticement of bitcoin and cryptocurrency to run their scams. As there is in the traditional system as well – boiler room scams, actual Ponzi scams are good examples of this.
And then in the traditional system as well you’ll find lots of ways for you to lose your money because of someone else’s control – such as the Woodford fund debacle.
In bitcoin, if you own bitcoin, you own it. There’s no third party that control it. There’s no “bitcoin manager” that decides what’s best for you. The onus, the control, the power over that holding is on you and no one else.
Of course when the scam calls come, it also usually leads to the argument that there’s no underlying asset that supports bitcoin.
You’re correct in assuming bitcoin isn’t a company. But you’re wrong in your assumption that it doesn’t generate “income” either.
Let me ask you this, what is the underlying asset that underpins Uber?
Where’s the value there? Is it the cars? No, it doesn’t own the cars. It is the software? Yes, it’s its software, and its network that underpins that software. And then it’s the revenues and income it generates from that network that creates the value, right?
And the stock price? Is that 100% reflective of the exact profits that Uber makes? Or are there some intangibles in there, where investors buy the stock with the vision that one day they might be able to sell it for a higher price because the underlying company is worth more?
Bitcoin is a network. And no one owns it. But there are revenues flowing around bitcoin’s network all the time. When bitcoin moves, it generates transactions fees (revenues) for the network. But these don’t flow back to a central authority. They don’t flow into the coffers of a CEO, executive board, and shareholders.
They flow to the miners that continue to ensure the network is maintained, secured and continues as the blockchain that it is. They are numerous, anyone can become one (albeit there are a few caveats to that for another discussion).
Unlike Uber you can also use your bitcoin to pay for things. It can be used as a unit of exchange on the internet, or even in “real life” commerce. There are businesses, profitable operations like exchanges, that exist because of bitcoin.
Software by its definition is as much like bitcoin as anything else.
So I wonder if you think bitcoin is a scam, a Ponzi scheme, then do you share the same views of software companies? Do you think Uber is worthless? Is a company like Microsoft (built primarily on software) a scam because they were once just a software company?
How about that money in your wallet? You know the one that’s only fractionally backed by actual physical money that’s in a constant spiral of inflation and devaluation?
How much of a scam is or isn’t the monetary system we’re supposed to trust?
Frankly, I don’t really care if people still think bitcoin or cryptocurrency is a scam. It’s not for everyone. And not everyone always understands the nuances of all markets and assets.
Not everyone likes gold. Not everyone likes stocks. Not everyone like property. Not everyone likes bonds. Not everyone likes crypto.
It’s fine. But if you don’t believe in it, at least have some valid reasoning to underpin your vague, unsubstantiated complaints. Or just keep it to yourself and get on with whatever it is that you do like. And be successful at that.
Editor, Exponential Investor