Is Bitcoin a Ponzi Scheme? VR Founder Seems to Think So

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Oct. 18 2021, Published 3:29 p.m. ET

The market opinion has been divided on Bitcoin and other cryptocurrencies. While some people see them as the future of finance, many others think that they're worthless with no underlying fundamental value. Now, VR founder Jaron Lanier has thrown his hat into the ring and has termed Bitcoin as a Ponzi scheme. What is a Ponzi scheme and is Bitcoin one of them?

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The adoption and interest in cryptocurrencies have been growing. Retail traders are especially getting attracted to them, and at least some of them have been lured by stories of people becoming millionaires through crypto trading. To be fair, the cryptocurrency market cap has swelled over 15-fold from the March 2020 lows and many traders have become rich by trading in cryptocurrencies.

What is a Ponzi scheme?

A Ponzi scheme is basically a fraudulent investing scheme wherein the capital inflows from new investors are used to pay existing investors. A Ponzi scheme usually runs on until it's exposed by someone or the taps dry out for new funds.

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From the outside, a Ponzi scheme might appear to be a legit scheme generating returns from investments. In reality, it uses the flow of new money to pay off old investors.

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Biggest ponzi scheme in U.S. history

The Bernie Madoff scandal is believed to be the largest Ponzi scheme in U.S. history in absolute non-inflation adjusted terms. The once-popular fund manager was accused of conning investors to the tune of $20 billion. He was indicted and sentenced to 150 years in jail but died in April 2021.

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VR founder calls Bitcoin a ponzi

In an interview on the Lex Fridman podcast, Lanier termed Bitcoin as a Ponzi scheme. He isn't alone in seeing bitcoin as a Ponzi scheme. “Black Swan” author Nassim Nicholas Taleb also termed Bitcoin a “gimmick” and said that it resembles a Ponzi scheme.

Some of the other observers including Berkshire Hathaway chairman Warren Buffett and vice chairman Charlie Munger are also among Bitcoin haters. While Buffett has called Bitcoin a “rat poison squared,” Munger thinks that it's only good enough to pay for criminals and extortionists.

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Bank of England Governor Andrew Bailey is among crypto bears and believes that cryptoassets can fall to zero. He thinks that those investing in cryptos should be prepared to lose all of their capital.

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Is Bitcoin a ponzi scheme?

Now, bitcoin isn't a Ponzi scheme in the strict sense. The money from new investors isn't being passed off as returns to pay existing investors. However, in the bear case scenario, we can draw a parallel with “greater fool theory” where the game continues as long as you can find someone willing to buy the asset at a higher price.

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While the market opinion is very divergent on cryptocurrencies, it's an emerging asset class. These are still early days for cryptocurrencies, and sooner rather than later, we’ll see the market getting better regulated.

While many crypto bulls see them as a hedge against inflation, an asset with little correlation to equities and a portfolio diversifier, and an alternate currency—none of these seem to hold true. Cryptocurrencies are an alternate asset class to which aggressive investors can allocate some of the capital.

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