Is this a $1.3 trillion Ponzi scheme, or are bitcoin investors finally moon-bound?

At US$67?000,00 per coin, Bitcoin (BTC) is once again the talk of the town, having briefly topped its previous all-time high by trading at US$69?210,00.

Last night, sitting at the dinner table, my family grilled me on ‘what the hell investors were getting in exchange for over R1.25?million per coin’ while my LinkedIn stream served up a survey that simply required a 'yes' or 'no' response to the question: “Is Bitcoin a Ponzi?”

Neither question is easy to answer, so let us begin with the easier of the two. But before we do, please note that:

this article is provided for educational and entertainment purposes only and should not be considered financial advice; please consult a qualified advisor before making any investment decisions.

Surely not a Ponzi?!

Wikipedia.org defines a Ponzi scheme as “a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors”. Upon reading this definition, the writer’s heart screamed “Bitcoin is not a Ponzi” because of the clear absence of fraudulent interest.

Chat GPT answered the question with far more authority than your writer could muster, concluding: by the Wikipedia definition, Bitcoin does not fit the characteristics of a Ponzi scheme. There is plenty of validation for Chat GPT's answer, and for the writer’s “no” response to the aforementioned LinkedIn poll.

The primary argument is that the crypto asset’s value fluctuates based on market demand and supply and does not promise returns to investors based on the investment prowess of a third party, or anyone else. Nor is there some dodgy ‘bad actor’ hiding in the wings to divert said funds to his or her own pocket.

“Bitcoin operates on a decentralised network where transactions are recorded on a public ledger called the blockchain, and its value is determined by supply and demand dynamics, similar to other commodities or currencies,” the artificial intelligence (AI) language model declared.

If one holds that Bitcoin is a Ponzi, then similar arguments would render gold or the US dollar as a Ponzi too.

Insane price action worth exploring

It is necessary to reflect on recent price movements in the cryptocurrency to further this discussion.

The previous all-time high was set in November?2021 at USD68?982,00 per coin. Over the next half-year, Bitcoin fell to around USD35?000,00 per coin, in May 2022, touched a low of around USD15?000,00 in November of that year, and then took another 12-months to re-visit the USD35?000,00 level, in November 2023. And then, in true BTC fashion, boom - to the moon?

At the time of writing, the world’s dominant crypto asset by market capitalisation was suddenly up 207% over one-year, and 56% up year-to-date early-March 2024. But before you begin your rant about ludicrous triple-digit-returns being instantly scam-worthy, consider that NASDAQ-listed Nvidia Corp, a very respectable company, is up 283% and 92% respectively, over the same time frames.

The entire basket of Magnificent Seven technology stocks delivered an aggregate 110% over 2023.

There are two drivers that explain bitcoin’s turnaround.

?The first, is that the United States securities exchange recently started approving so-called ‘spot’ Bitcoin exchange traded funds (ETFs). These ETFs allow investors to gain direct exposure to Bitcoin without having to hold it in a digital wallet.

Reuters.com reported a staggering USD4.6?billion in volume on the first day of trading in these ETFs. And by the end of February?2024, Bloomberg was reporting that Blackrock had seen net cash inflows to its Bitcoin ETF for 32 straight days, including USD520?million in a single day. Retail investor-funded buying action by Grayscale, Blackrock, Fidelity and others are sending the digital coin’s price ever-higher.

Do not discount (sic) the ‘halving’

The second price-driver is the so-called Bitcoin ‘halving’ event that occurs approximately every four years, and is next predicted for 20?April?2024. This halving is hard-coded into Bitcoin’s protocol to restrict the total life-time issuance of the cryptocurrency to just (sic) 21?million coins, and consequently support its price.

In simple terms, the fee that bitcoin miners receiving for successfully mining a new block of coins reduces by half on the halving date. These miners get rewarded in Bitcoin for providing the computing power required to validate transactions on the distributed ledger that the cryptocurrency operates on.

Michael Saylor, arguably the world’s biggest Bitcoin ‘bull’ offers at least four reasons why the cryptocurrency is worth holding. He rates the crypto asset because it is a store of value due to its fixed supply and decentralised nature; it offers investors a predictable and transparent monetary policy governed by code and consensus and independent from central banks; it benefits from network effects thanks to its growing adoption and increasing acceptance globally, and it delivers security via blockchain technology and robust security features.

Lay investors love his “it either goes to zero or USD1?million per coin” nonchalance.

This writer warns, however, that Saylor’s bullishness is at least in part due to his massive exposure to the asset class. Even Chat GPT agrees: “Yes, it is possible that his personal holdings influence his bullish enthusiasm to some extent,” it said, though any self-respecting attorney would have countered with a ‘leading the witness’ objection based on how the writer prompted this response.

The AI language model conceded, however, that Saylor’s bullish outlook was supported by his assessment of the cryptocurrency’s fundamental properties, technological innovation and potential long-term impact on the financial landscape.

If you speculate, be prepared to lose your shirt

There is fine line between investing and speculating, nicely explained by Investopedia.com. “The primary difference between investing and speculating is the amount of risk undertaken,” they note. “High-risk speculation is akin to gambling whereas lower-risk investing uses a basis of fundamentals and analysis”.

It is up to you, dear reader, to decide which category the emerging crypto asset class falls.

To conclude this piece, the writer reminds readers that the gambling, get-rich-quick, or Ponzi scheme-worthiness of an opportunity usually derives from a human actor rather than an asset.

So, when a cryptocurrency-based scheme such as Mirror Trading International (MTI) goes to the wall, one should not blame the crypto asset, but the men and women who dreamed up the opportunity aka con or scam. Greedy, unscrupulous individuals or groups could just as easily fleece investors (sic) by offering massive returns from gold or platinum group metals (PGMs) or a venture capital opportunity or a new and innovative method of cultivating milk cultures.

The Kubus scheme, an unfortunate SA export

Just Google ‘Kubus scheme’ for a 1980s home grown scam that conned many a South African investor out of his or her savings. Finally, if you do have concerns over a financial product or opportunity, take a few moments to telephone your trusted financial adviser.

As this writer lamented to one of his publishers recently:

Why do so many otherwise-savvy South Africans only ask questions after their money leaves their bank account?

You should always ask the hard questions first, and only part with your hard-earned money once you are 100% sure that the opportunity you are investing in is above board.