Pyramid and ponzi schemes are based on false promises of income that require more and more entrants.
A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products. A ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Mathematically speaking, in pyramid/ponzi schemes some people need to lose money for other people to make money.
Bitcoin cannot be a pyramid or ponzi scheme. There is no central operator fraudulently misrepresenting the nature of a venture. Investment returns are not promised. It produces no cash flows. It has no employees. Its supply is finitely scarce. Its usefulness and value has grown over time as its network effect has grown, reaching more people and bigger pools of money, but a network effect is not a ponzi scheme in and of itself. Prospective investors can analyze the metrics of Bitcoin’s network effect, and determine for themselves the risk/reward of buying into it.
A bubble is an economic cycle that is characterized by the rapid escalation of market value, particularly in the price of assets. This fast inflation is followed by a quick decrease in value, or a contraction, that is sometimes referred to as a “crash” or a “bubble burst.” Typically, a bubble is created by a surge in asset prices that is driven by exuberant market behavior. During a bubble, assets typically trade at a price, or within a price range, that greatly exceeds the asset’s intrinsic value (the price does not align with the fundamentals of the asset).
An asset going through bubble phases doesn’t make it fraudulent. Bubbles can occur in all assets, including fiat currencies, commodities, real estate and equities.
Bitcoin has experienced four major cycles of massive 1000%+ appreciation, followed by deep drawdowns of more than 80%. Each cycle has started from a much higher price than the previous one. This is not a characteristic of one-time manias. Bitcoin’s price, as well as fundamental adoption numbers, are increasing dramatically over multi-year timeframes.
It is a common refrain from people ignorant of both bitcoin, as well the dutch tulip bubble, to refer to bitcoin as “tulips”. The tulip bubble was a one-time event, lasting a couple months at manic prices, and affecting relatively few people. Bitcoin, by sharp contrast, is exhibiting growth characteristics - both in price and adoption metrics - similar to an increasingly dominant tech company or protocol.
All value is subjective. Something is only ever worth what value someone else is willing to exchange for it.
Economic value is fundamentally derived from utility and scarcity. Simply put, everything that has both utility and scarcity has intrinsic value. Anything that has utility but lacks scarcity (is abundant) has no intrinsic value, and anything that is scarce but lacks utility has no intrinsic value. It must have both.
Bitcoin has the most predictable, mathematically-provable, strictest scarcity of any asset ever conceived. It has the potential to be the most useful form of money ever invented (it is already a far more useful means of storing and transferring value than a bank account for some). Every day that passes - with every new/added user of the network, developer, liquidity, applications - Bitcoin’s utility increases exponentially.
Bitcoin has intrinsic value because it holds both required properties of scarcity and utility, and with every passing day this intrinsic value grows.
Bitcoin is not backed by cash flows, industrial utility, or decree (many countries have experienced hyperinflation or large devaluations of their currencies, despite every one of them having guns and taxes).
It is backed by code and the consensus that exists among its key stakeholders. Distinctly, it is backed by code that is brought to life by the social contract that exists among its key stakeholders. These stakeholder groups exist in an equilibrium with no one group having outsized power:
Bitcoin’s stakeholders make the explicit choice to use and support the network, realizing Bitcoin’s unique attributes – the perfect scarcity of bitcoin, transaction irreversibility, and seizure and censorship resistance. The addition of every new stakeholder – in other words, Bitcoin’s network effect makes it more reliable and further hardens its properties, attracting more stakeholders to the asset, and so on. Bitcoin’s code presents the rules, but the execution of and agreement on the rules by stakeholders gives rise to the secure, open, and global value storage and transfer system that exists today.
Bitcoin has all the characteristics of money:
With these attributes, all that is required for a form of money to hold value is trust and adoption. In the case of Bitcoin, this can be measured by its growing base of users, merchants, and startups. As with all currency, bitcoin’s value comes only and directly from people willing to accept them as payment.
“Better” is subjective. Both fiat currency and bitcoin have their benefits and drawbacks, and the “better” currency depends largely on context (who’s using it, where they’re using it, when they’re using it, for what purpose, etc.).
However, it’s undeniable that bitcoin is more verifiable, divisible, scarce, censorship resistant, unforgeable, and decentralized than fiat currency.
Bitcoin’s decentralized nature makes it virtually impossible for anyone, even governments, to fully kill it. Bitcoin cannot be confiscated without permission. Bitcoin is pure information that can be stored in your head, spread between people, or moved instantly across the internet.
Given that it will always exist, the dynamic becomes one of “jurisdictional arbitrage,”; i.e., if one government makes owning bitcoin fully illegal with harsh penalties, other governments will embrace the opportunity to become home to bitcoin-related businesses, investors, etc.
Additionally, adoption of bitcoin continues to grow rapidly. The larger the portion of the electorate who has a stake in bitcoin, the more politically difficult it becomes to attack it.
We’ve seen a rapid broadening of bitcoin exposure, and positive bitcoin sentiments, coming from deep-pocketed backers with lobbying power. These include numerous multi-billion-dollar, and even mutli-trillion-dollar, fund managers taking BTC positions, corporates like MicroStrategy, Square, and Tesla putting BTC on their balance sheets, and major banks and financial services providers such as BNY Mellon, Fidelity, PayPal, Visa, and MasterCard offering bitcoin-related services. Bitcoin is rapidly embedding itself into both the financial plumbing, as well as corporate and major funds’ balance sheets, thus making it far more politically difficult to attack too aggressively, and this momentum shows no signs of slowing down.
Bitcoin’s energy spend is required to do three things:
As of February 2021, Cambridge researchers say it consumes around 121.36 terawatt-hours (TWh) a year, ranking it above Argentina (121 TWh). If Bitcoin were a country, it would currently be in the top-30 energy users worldwide.
That may seem like a lot, but Bitcoin also uses less energy than clothes dryers in the US. It uses less energy than just US households spend on “vampire energy draw”; ie, devices like TVs and cell phone chargers that are plugged in, but turned-off and not doing anything.
Regardless, it’s undeniable that bitcoin mining does consume energy. The real question is if it’s a worthwhile use of energy to secure the Bitcoin network and process transactions?
Financial systems require infrastructure and security one way or another. In the case of gold, enormous amounts of effort and energy are spent to both mine it and securely store it. For modern government currencies, the physical banking infrastructure, military expenditure, and human capital to make it all work and settle correctly is extremely costly.
With Bitcoin, the creation of the asset, as well the processing of transactions, and the assurances around bitcoin’s security are all bundled into the mining process which deliberately expends energy. The energy is spent as a “proof of work,” the sum of which assures that bitcoin’s transaction ledger cannot be changed. This is essential for bitcoin’s monetary policy certainty, as well as other key properties. With hundreds of billions of dollars in market cap and billions of dollars settled on the bitcoin network every day, there is clearly significant demand for the services bitcoin provides, and bitcoin mining expends energy to support those services. This energy spend is not wasted; the market explicitly demands it.
Additionally, bitcoin mining has strong reliance on renewable energy, and furthermore, the hyper competitive and global nature of bitcoin mining suggests that it may eventually rely almost completely on renewables, since they are likely to be one of the cheapest power sources long-term.
Those who appreciate the importance of the first and only provably scarce, decentralized, censorship and seizure resistant digital asset that offers irreversible settlement would argue that it is definitely worth it.
In the long-game, there may be no greater, more important use of energy than that which is deployed to secure the integrity of a monetary network and constructively, in this case, the bitcoin network.
- Parker Lewis, Unchained Capital
Bitcoin’s volatility is a trade-off it makes for perfect supply inelasticity and an intervention-free market. However, with greater adoption of bitcoin and the development of derivatives and investment products, bitcoin’s volatility may continue to decrease, as it has historically.
Ultimately, bitcoin’s lack of a price stability mandate and fixed supply will continue to result in near-term volatility but will drive long-term price stability. Bitcoin is antifragile; there are no bailouts and it’s a market devoid of moral hazard, which drives maximum accountability and long-term efficiency. Central banks manage currencies to mute short-term volatility, which creates the instability that leads to long-term volatility. Volatility in bitcoin is the natural function of monetary adoption and this volatility ultimately strengthens the resilience of the bitcoin network, driving long-term stability.
Poorly informed or disingenuous critics often point out to Bitcoin’s “slow” transaction validation time. Yet a truly decentralized and global currency needs to have a rigorous verification process which allows all nodes to validate and broadcast transactions.
The 10-minute block time is not just some cautious threshold that a concerned creator has added to an obsolete technology. It’s a reasonable amount of time which allows everybody to be in sync with the rest of the network - from the miners who harness solar energy in the middle of the desert to the metropolitan node operators, all participants should have the capacity to download and validate ~1 MB every ~10 minutes.
Bitcoin is secure enough to avoid double spends and guarantee that no hidden inflation occurs. The “slow” Bitcoin network is a lot faster if we consider security.
Bitcoin’s base layer today can indeed only support a theoretical throughput of 7-10 transactions per second. This is vastly less than the ~4000 tx/sec that the VISA network can hit at peak times.
But if we solve the problem of money through digital scarcity first, the technology advancements to scale transactions and ultimately solve payments are inevitable. It is not credible to think that human ingenuity can solve the former but then fail on the incremental derivatives. Permissionless innovation and the economic incentives inherent in bitcoin will coordinate and accelerate solutions to any number of future challenges. Market participants have an incentive to increase the value of the network and to innovate to scale the network.
One such example of an advancement to scale bitcoin within the network’s consensus is the lightning network. The lightning network builds on top of bitcoin as a trust-minimized layer to scale transaction capacity, which still remains fundamentally distinct from payments fulfillment. However, if successful, lightning will be used to create bitcoin payment channels that enable far greater transaction throughput at far lower cost, the scale and speed of which would rival Visa. While it may not be the ultimate solution, it is an example of the innovation that bitcoin is fostering. Lightning is also only one of many solutions that are actively being developed, and competition will drive us toward the best scaling solutions, of which there may be a combination of many.
The approach to scaling bitcoin is a slow and conservative process. Bitcoin is too important to follow the Silicon Valley mantra of move fast and break things. Instead, it’s move slowly and don’t break anything. If a global financial system is to be built on a decentralized monetary system, the foundation must be protected at all cost. Ensure the security of the base monetary layer (bitcoin) first and then allow network participants to innovate on top of it in a permissionless manner. Remember that bitcoin is only ten years old; we are in the very inception of bitcoin’s monetization event, and infrastructure is still being built to allow for the proliferation of this new technology.
Bitcoin is perhaps the most scrutinized codebase in the world. It has undoubtedly been constantly under attack for a decade. Yet It has never been hacked.
There are often misconceptions about Bitcoin thefts and security breaches; the news stories about “bitcoin” getting hacked refer to centralized services that use bitcoin getting hacked, not Bitcoin itself. Most famously, the notorious early bitcoin exchange, MtGox, got hacked and drained of 650,000 BTC ($362mm worth at the time). But a bank robbery doesn’t mean that the dollar is compromised.
Criticizing bitcoin for its use in criminal activity is akin to criticizing cash for its use in illicit activity or criticizing the internet for hosting the dark web and illegal marketplaces. Bitcoin (like cash or the internet) is neutral. Terrorists also use cars, cell phones, and bank accounts. Tools are only as good as the people who use them. Bitcoin offers novel characteristics that have a net positive impact on society; however, it may also be exploited by bad actors who take advantage of Bitcoin’s decentralized and censorship resistant characteristics.
It is important not to consider Bitcoin’s use in illicit activity in a vacuum. According to data from blockchain analytics firm, Elliptic, bitcoin’s use in illicit activities (e.g., dark markets, ransomware, fraudulent activity) has been on a downward trajectory and transactions connected to illicit activity made up less than 1% of total bitcoin transactions in recent years.
Bitcoin’s transparent nature allows us to establish a concrete estimate of bitcoin’s use for illicit activity in a way that we cannot for fiat currencies. Bitcoin is pseudonymous, not anonymous, and blockchain analytics firms have developed sophisticated techniques to trace criminal activity via Bitcoin to real world identities.