"Give me control of a nation's money, and I care not who makes its laws."
BITCOIN, VALUE, AND PONZI SCHEMES
BY ERIK VOORHEES / JANUARY 13, 2015 / UNCATEGORIZED
It appears that Gary North has used the falling Bitcoin price as an opportunity to reacquaint us with his condemnation of Bitcoin as a Ponzi Scheme. No doubt others will do the same in the coming days and weeks.
And while many casually-ignorant skeptics have called Bitcoin a ponzi scheme, Gary North is one of the only professionally-ignorant individuals to still hold this view. Sure, there are smart, professional people who think Bitcoin is doomed, or is inferior to fiat, or is flawed for one reason or another, but to perpetuate in the Ponzi position, well, that’s Gary North’s domain. Mr. North originally penned this article in late 2013, but it seems he persists in the fallacy.
But why take the bait and respond? Because Bitcoin is ultimately a battle of ideas. I don’t expect to change Mr. North’s mind, but I’m uncomfortable letting sophisms persist unchecked. Here we have a private, free-market monetary system standing ready to displace the coercive machinations of fiat money. And if the Ponzi scheme arguments need to be refuted over and over for this to unfold, then so be it.
Ponzi Because Volatility
To his credit, Gary North clearly points us to his main argument: “The coins will never be the money of the future. This is my main argument.” His justification for this position, carefully explained over several paragraphs, is simple as well, “The market value of one bitcoin has gone from about $2 to $1000 in a year. This is not money. This commodity is not being bought for its services as money. It is unpredictable to a fault.”
Here is what saddens me… Gary North generally subscribes to the notion that markets should be left alone. That people are unique individuals, and that central planning cannot hope to effectively manage something with so many complex actors and relationships as that of a marketplace. He’s right. Individuals are unique, and complex. So then why does Mr. North think that just because bitcoins’ price is too volatile for him to prefer it as a form of money, that perhaps other rational actors, with a higher tolerance for volatility (or perhaps methods of avoiding it altogether – see Coinapult Locks, etc.), may find Bitcoin’s other attributes desirable, and thus may prefer differently from him? Is that so far-fetched? Is Mr. North supposing that all humans are so intolerant of volatility that the only attribute of money they pay attention to is daily swings in market price?
To be sure, the US dollar is far more stable as a form of money than Bitcoin. That’s a great feature. But, Mr. North forgets the other features of Bitcoin. Take the most important: that one can transfer any amount of it anywhere instantly without anyone else being able to stop it, at almost zero cost. Is the economic utility of such a feature so hard to grasp?
Let me speak directly to Mr. North for a moment… while I respect your personal preference to avoid volatility and stick with precious metals or fiat as your choice of money, why can you not respect my personal preferences to avoid the unending headaches and invasions of the banking system? I recognize that you may be able to know with near-certainty what the value of your money will be tomorrow. But do you recognize that I can send money instantly, anywhere, to anyone? I’ve done it. Do you recognize that I can store the value of a house on a USB drive or email ten million dollars to myself in another country with nobody the wiser? Do you recognize that I can access my wealth unimpeded by any “authority” and transfer it with similar sovereignty wherever I wish? Do you deny the awesome power of such machinery? You may not choose to use it, but how can you not appreciate the desires of others to do so?
Perhaps you have never tried transferring $10,000 of “your own money” to another person? If you had, whether it’s fiat or physical bullion or paper bullion, I promise you can’t get that money anywhere you want it to go in any reasonable amount of time without someone else’s permission. How does that make you feel as a “free” human being? With fiat, it’s the banks’ and governments’ permission. With bullion, it’s the permission of the shipping company or the company in whose account you hold digital or paper certificates. And all of these parties are tracking and reporting on you, by law. You are at the behest and mercy of others when it comes to your money, but it seems you’re so accustomed to this serfdom that a liberating technology like Bitcoin comes along and you squint from behind your Stockholm-syndrome shackles and yell, “Ponzi Scheme because volatility!”
It’s too volatile for you, Mr. North. But you are not the market. Those of us using Bitcoin simply have different market preferences. The ownership and transfer of our money is up to nobody but us, and we suffer pangs of volatility as the cost of that freedom. Mr. North, we can differ in our monetary preferences, that’s fine. But for you to call Bitcoin a ponzi scheme merely because the volatility precludes it from your personal use, well, that is illegitimate.
The Bitcoin Payment Network, Ignored
And while it’s true that Bitcoin’s volatility makes it impractical for many people to use as money today (consider that assuming Bitcoin will always suffer crippling volatility is like assuming web browsers will only ever display text – it’s merely an economic and entrepreneurial problem to solve), it doesn’t follow that Bitcoin is “thus a ponzi scheme” due to this volatility.
Gary North refuses to see the value of Bitcoin as a decentralized ledger/payment system, and only focusing on its derivative role – that of a means of exchange, a money. By only looking at Bitcoin as a form of “money,” Mr. North can point to its volatility (which is clearly high) and claim that because it’s volatile, it’s not money. And because it’s not money, it doesn’t fulfill it’s initial promise, and thus was a ponzi scheme all along.
This is a fallacious line of reasoning, and sadly leads Gary and many other critics to discredit one of the most important and potent inventions of all time.
It’s fallacious because the ledger and payment system of Bitcoin is itself economically useful for many purposes. And it is not my burden to prove that every possible use-case of Bitcoin technology is legitimate and useful to convincingly reject the Ponzi Scheme argument. I need only show that the system provides any significant, real economic value. For if it can be demonstrated that it does, then there is some legitimate and necessary market price for a bitcoin unit, because bitcoin units are the only ledger entry units in this system, and they are scarce. And so long as some price is warranted, then Bitcoin must be considered a valuable digital commodity, and the Ponzi claim is without merit. The specific legitimate price can always be debated, but that it should command a price at all, cannot.
Stated differently, so long as the Bitcoin network has any practical, economic purpose whatsoever, bitcoins themselves must command a market price, be it $0.01 or $1,000,000, because they are the scarce resource which enables the Bitcoin network to function. And this is what people who have bought Bitcoin for investment purposes have all along seen: that the core invention of Satoshi Nakamoto, the distributed ledger system, was useful for something, and maybe many things, and thus because the unit of account within this system was scarce, it should have a price, and that price shall be legitimately higher to the degree of the utility of the system, which will be demonstrated with the time and work of entrepreneurs and engineers thereafter.
And so it is the same with other cryptocurrencies as well, of which there are now many. They offer different features and innovations, and thus are speculated upon. That many or most won’t exist in ten years doesn’t make them Ponzi schemes. It makes them failed ideas, or failed executions of valid ideas.
Those who have bought these digital tokens, then, rather than being victim to a clever Ponzi scheme, saw economic utility in the technology, and as a buyer of shares of stock in an innovative company, have profited from the realization of that value over time, as determined by the free and open market.
Satoshi Nakamoto, Ponzi Mastermind
Let’s not forget that to call something a Ponzi Scheme means to accuse its creator of fraud & deception, of engineering and initiating the Ponzi Scheme. Every Ponzi Scheme going back to Mr. Ponzi himself had a vile puppet-master orchestrating the ruin. If an enterprise has an honest and legitimate creator, but fails because the marketplace subsequently abandoned it for whatever reason, that cannot be called a Ponzi Scheme. A schemer is needed, so how does such an accusation hold up against Satoshi Nakamoto?
“The Ponzi aspect of [Bitcoin]”, explains North in the beginning of his article, “comes when we look at the justification for bitcoins. They were sold on the basis that bitcoins will be an alternative currency. In other words, this will be the money of the future.”
Mr. North so quickly veers into the sticky realm of misunderstanding. Ignoring Bitcoin’s formative beginnings as an academic white paper turned open-source software project (is that really a feasible genesis of a ponzi scheme?), by the time the coins actually started selling on the open market, their value justification wasn’t that “they will be the money of the future.” Rather, Bitcoin carried a much more humble claim from its creator: that a decentralized ledger could be built, and that such a tool might have application to the world of money. That was the claim of Bitcoin – that it might be the foundation for a better financial system. It might.
Importantly, Satoshi never made the vapid, wild-eyed promises endemic to Ponzi operators. He didn’t tell the first buyers of Bitcoin that “Bitcoin will replace fiat, buy now and make huge profits!” He never promised profits whatsoever. He didn’t promise anything, in fact. Instead he demonstrated, he built, through code and execution, a decentralized ledger system which may, he readily admitted, have profound applications. His simple claim was that his concept of a decentralized ledger was feasible. He built it, and it worked. He proved his claim. That is the behavior of an entrepreneur, a scientist, or an engineer, not a Ponzi operator.
A Ponzi operator promises something that is a lie, and behind its fallacious veneer builds nothing of real economic value. Satoshi Nakamoto, in contrast, theorized and then actually built a system which worked as advertised – a decentralized ledger which operated with no middle-man. He didn’t claim Bitcoin would make you rich, proceeding then to sell them upon you; he claimed rather that Bitcoin would work according to the specs of his whitepaper, and then demonstrated that to be true. That’s it. And this is a crucial reason why Bitcoin cannot be considered a Ponzi scheme. There was never a “scheme.” There was a scientific claim, proven conceptually by the whitepaper and then demonstrated functionally by the software.
“Working as advertised” is the opposite of fraud.
Real Utility is All That Matters
Now consider the ramifications of what Satoshi did. Upon that demonstration of a decentralized ledger, an entire industry has exploded into existence. People with good ideas. People with bad ideas. Honest entrepreneurs, developers, marketers, tinkerers, innovators, and certainly all manner of scammer, fraudster, and incompetent nitwit. Bitcoin has become an industry, full of virtue and vice, like any human enterprise.
Meanwhile, the digital asset at the core of this industry, Bitcoin proper, has soared in value from pennies to a few hundred dollars, with several dizzying bubbles and bursts in the interim (btw – has there ever been a Ponzi Scheme with two bubbles?). Fortunes have been made and lost. Things have broken, exploded, backfired, and collapsed. And yet the industry presses on, learning hard lessons over and over again, but learning inevitably. This, again, is not the fingerprint of a Ponzi scheme, but of a legitimate innovation and a community that is struggling to displace incumbent systems… and incumbent dogma.
And let’s be clear, the very idea of an “open-source Ponzi Scheme” is absurd. A Ponzi requires a secret deception, and a deceptive creator, neither of which can be sustained with open-source, collaborative architecture. The only way to have an open-source Ponzi Scheme would be for every participant to be completely blind. I am not blind. Please afford me more credit than that, Mr. North. No, I see. I see how my bank works. I see how fiat works. I see how Bitcoin works, and I choose the latter, despite its volatility.
All my prose can be ignored, however. All that is required for Bitcoin to be valid and for the Ponzi argument to be invalid is for the utility of Bitcoin to be demonstrated.
Well, Mr. North, kindly post your Bitcoin address in the comments and the utility will be demonstrated.
Near the end of his accusations, Mr. North writes, “Any time you buy an investment, you had better have an exit strategy. There is no exit strategy for bitcoins.” Well, Mr. North, this may sound strange to you, but we’ve already exited. We exited the banking system. We exited fiat. We’re out here in a new world, a wild experiment, to see if a private, decentralized monetary system can actually work. It’s messy. Some of us have gotten hurt. We’ve all been insulted and ridiculed and some of us persecuted for rejecting monetary scripture. I’ll admit, most of us are looking around at each other, wondering if we’re fools or geniuses. We suffer hacks, thefts, fraud, deceit, politicians, and the most frightening of all human endeavors – the great unknown.
We may all be out of our minds, and this whole experiment may certainly fail. Any honest Bitcoiner knows that. But if it fails it will be because experiments fail, not because it was a Ponzi Scheme. But right now, if you care to look, a hundred thousand transactions a day are happening outside of the fiat banking system, so, Mr. North, maybe you should check your premises.
In liberty,
Erik Voorhees
Erik Voorhees
Erik Voorhees is among the top-recognized serial Bitcoin advocates and entrepreneurs, understanding Bitcoin as one of the most important inventions ever created by humanity. Having been a featured guest on Bloomberg, Fox Business, CNBC, BBC Radio, The Peter Schiff Show, and numerous Bitcoin and industry conferences, Erik humbly suggests that there is no such thing as a “free market” when the institution of money itself is centrally planned and controlled. This blog is about the human struggle for the separation of money and state, and about Bitcoin as the instrument by which it will happen.
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