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9 Apr 2021

Bitcoin Is Not A Ponzi Scheme – 5 Reasons Why

Nisha Ramesh

To address the central accusation here that Bitcoin is a Ponzi scheme or the question is cryptocurrency a Ponzi scheme, let’s first ask: 

What is a Ponzi scheme?

In the late summer of 1920, Charles Ponzi was charged with 86 counts of mail fraud. His crime – running an “extremely profitable” investment scheme for investors where he promised 50% returns over a few months. What he did was simple – he used money raised by later investors to give “returns” to earlier investors. 

In other words, there was no investing happening. Even though he wasn’t the first to come up with such a scheme, his shenanigans were the most successful, and such methods came to be known as Ponzi schemes

Success in these cases is always up to a point. After this comes the crash, jail time, and, in the case of Charles Ponzi, dying penniless at a charity hospital in Brazil.

Now, let’s address the accusation, is crypto a Ponzi scheme, or is Bitcoin mining a Ponzi scheme.

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Is crypto a Ponzi Scheme?

Bitcoin and other legitimate cryptocurrencies use blockchain, which is a digital ledger of transactions recorded using a cryptographic signature called a hash. Each block in a blockchain is a set of transactions. Every time a new transaction happens on the blockchain, it is recorded in every participant’s ledger.

Think of it like this – a block has 10 transactions on it. A new transaction is added to this block. The record of this new transaction is added to every participant and the entire chain of blocks, i.e., the blockchain.

What does this mean?

It means that with every transaction added, the blockchain becomes more and more secure. If someone with bad intent wanted to mess with one entry, they would have to do it across the entire blockchain; otherwise, the blockchain will not accept the action.

Five reasons why Bitcoin is not a Ponzi scheme

    1. Ponzi schemes emphasize recruiting new investors because they need new investors’ money to pay off older ones. Bitcoin, on the other hand, does not recruit at all. Bitcoin mining, whereby miners earn Bitcoin by verifying blockchain transactions, is voluntary and is extremely expensive to do.
    2. No Ponzi scheme has an underlying genuine product or service. Bitcoin is hard-won. The blockchain is where you mine, and you earn.
    3. Ponzi schemes promise high returns because they have to. Only this carrot can attract new investors. Bitcoin does not guarantee high returns; it follows the basic demand-supply dynamic of the market. It could be that your Bitcoin will be worth a lot in a short time period, but there is no promise or guarantee. The market decides its value, pure and simple.
    4. Passive income is a great attraction touted by Ponzi schemes. All you have to do is bring in three to six investors, and you start earning when those people earn. You sit back and rake in the moolah. With Bitcoin, there is no such thing as passive income. You may hold on to your Bitcoin and watch it grow in value as per market movements, but you have no control over its value.
    5. If you have been part of a Ponzi scheme, you will know this: the commission structure is never clear to you. It is not a bug but a feature of the scheme. It is made purposefully dense so that you either give up explaining it to your friends or you bring in the “expert,” i.e., the Ponzi artist, who will use a lot of fancy words to say precisely nothing. But, Bitcoin doesn’t do commissions. It is a peer-to-peer electronic cash system that gets more and more secure as more and more transactions happen on the blockchain.

Has there been any cryptocurrency that has actually been a Ponzi scheme?

Unfortunately, the answer is yes. 

OneCoin, a supposed cryptocurrency founded in 2014, was indeed a Ponzi scheme. It promised investors tokens that could be used to mine OneCoin from a supposed total of 120 billion.

Investors won these tokens selling educational products (most of which were heavily plagiarized) to other investors, and so on. But, little did they know that OneCoin was not on any blockchain.

Bottom Line

Bitcoin and blockchain technology promise to be a huge part of commerce and economics in the coming years. Cryptocurrencies like Bitcoin and the Ethereum blockchain-based Ether are taking on the role of wealth storage. Thus, supplanting currencies like the US dollar. Convert BTC to INR at the best rate here. 

Bitcoin is very attractive to high-value purchases like art or real estate as a secure form of currency. Its blockchain foundation provides for ownership rights and clarity. We are looking at just the start of the crypto revolution. And if you want to know where to buy Bitcoin, just click on the link. 

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.


Nisha Ramesh

Content Writer

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