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Ask HN: Isn't Bitcoin similar to a Ponzi scheme?

5 points by machilin ↗ HN
I would hate to say this but either it is one, or looks just like one. There will be losers and winners in this case. People who bought them early cash out and earn a huge profit. So where does the profits come from? Thin air? From people who buy them at a higher price. And how do they cash out without making a loss? By cashing out at a higher prices when other people are buying.

It's almost like a never ending cycle until maybe bitcoin prices reaches infinity and beyond. Someone has to win and someone will lose. You can't have everyone becoming bitcoin millionaires. Big issue now is bitcoin prices are dropping fast. So good luck to those still holding on to those hot potatoes. Cheers.

10 comments

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machilin
Sure you may buy stuffs with your coins but with the current outlook, it looks like a bomb that may explode in your face. the value of bitcoin is almost predictable as you rolling a dice. You won't want to be holding any.
blacksqr
There must be some sort of financial equivalent to Godwin's Law that requires everything eventually to be compared to a Ponzi scheme.

A Ponzi scheme involves someone guaranteeing a return, then using new deposits to satisfy older guarantees when the return doesn't materialize.

Nobody's guaranteeing any valuations in the Bitcoin market. People are simply speculating and creating an old-fashioned bubble.

machilin
Not that I'm saying bitcoin in general is bad, but speculators are making it look bad by diving in hoping to make a quick buck. And the limelight of these so-called bitcoin millionaires give everyone the impression of making a quick return on bitcoins. You are definitely right in saying no one is guaranteeing a return, but almost everyone is expecting to make some quick returns on it. That itself can't be good.
blacksqr
The bottom line is the answer to your original post is "no", because speculation != Ponzi scheme.
6thSigma
That's pretty much how all financial markets work.
trevelyan
No it isn't. I use bitcoin for currency exchange and it saves me about a hundred dollars each month by lowering my transaction costs. Rather than pay a percentage to the banks and often another percentage to VISA, I pay a flat fee to transfer assets into bitcoin, and then another flat fee to transfer them out. Total costs end up being something like 1 percent instead of 3-5 percent. And the exchange rate typically ends up being better too.

So I am bullish on bitcoin, although I think it will be less a currency than an asset store for many early adopters. The way to deal with volatility if you are worried about market fluctuations is simply to buy and sell on multiple exchanges simultaneously, ideally holding a small float so the exchanges are near-simultaneous and you aren't exposed to downside risk.

On a side note, I pay for server hosting using a credit card now and am interested in saving the 3 percent VISA fee, since that adds up to almost a thousand dollars a year at this point. So if anyone can recommend a professional server colocation and leasing company that accepts bitcoin and is based in California (ideally the Wilshire facility) I would be interested in hearing about your experiences. Please note that I'm not looking for shared hosting or VPS provision -- I need to lease actual hardware.

machilin
Agreed on how it helps lowers transaction fees. Can be a real life-saver. Good to know that it's always good to diversify. But I really wish people could focus more on it be an actual currency for transactions rather than as an 'assest'. Thank you.
lifeisstillgood
Bit coin has a cryptographically limited supply - there are only so many coins possible, and only so many can be made at a time per unit of computing power

In theory you would have a clear relationship between real world production (CPU, power) and a stable exchange rate.

This is not happening because either a speculative bubble (likely) or the real level of pricing is not yet priced in (not sure, that should be a known number)

Anyway, in theory there is a clear fixed relationship between electrical power costs and bitcoins - and as there is transparent accounting of transactions, it's either impossible or really hard to commit the central fraud of a ponzi scheme.

Edit: actually bit coin could be the new gold standard. http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyscheme...

machilin
Great read. Bitcoin can be a new gold standard. Probable. But that means someone has got to regulate it. To keep the prices stable so that it can be a standard for other currency. But bitcoin is unregulated and that's the main advantage of it. So either it can be a gold standard by being regulated, which defeats its whole purpose or remain as it is. You can't have your cake and eat it too.

Edit: I highly doubt it can be stable. With so many people holding significant shares of bitcoins, any actions take by them can affect the prices significantly, since the market cap is so small. Plus someone has to step in to make sure prices don't go out of hand. If all it takes is for mtgox to have a few DOOS to drop prices by more than half, I don't see how bitcoin can be a gold standard without regulation.

lifeisstillgood
It is regulated - the number of coins is a function of computing power on the problem. That makes it similar to gold - there is a finite amount on earth and we can mine more or less as our efforts dictate

The fact that coins are allocated to miners is no different than good allocated to miners

I am not saying now is a good time to peg the dollar to the bitcoin. I doubt it would ever be - but the concept is viable I think - and that makes it feasible - a government could set its own algorithms, and peg to its own mathematically deflationary currency. That would be an interesting step forward