A popular Bitcoin smear is to label it a “Ponzi scheme”. And recently, someone on Reddit was asking how to counter this claim. We took a little time to offer a response, and thought it worth expanding upon here.
Claims that Bitcoin is a Ponzi scheme usually go something like this:
Bitcoin is like a Ponzi scheme because there are massive rewards for the first adopters.
The problem with this critique is that it can be levelled at virtually any form of investment; every investment rewards early-adopters more than late-comers. It doesn't matter whether it's equity in a company, another currency, or real estate.
Or, in the case of currency, people either buy it as a foreign currency in anticipation that its value will “go up” vis-a-vis their native currency, or they “buy” (i.e., work for) the currency with their labor, using it simply as a medium of exchange.
Someday, we hope, Bitcoin will be used primarily for that purpose — as a medium of exchange, a better medium of exchange than the national currencies prevalent today. But until then, it is to some degree a speculative “investment” (despite having many real-world use-cases today).
Early Adopters Makes Bitcoin Possible
In fact, Bitcoin could never work without this “early-adopter reward“. Without the incentive, there would have been very little reason for people to mine or purchase bitcoins in the early days, or even to this day; technological curiosity alone almost certainly would not have been sufficient to bootstrap the currency.
Speculators and early adopters are necessary to get “startups” off the ground. Bitcoin is like a startup currency. Speculators bring much-needed liquidity and market-share, both needed if Bitcoin is ever to compete with “real” currencies.
Bitcoin Has Real Value
Although a bitcoin is useless by itself, the same is true of dollars, pounds, yen, and every widely-used currency. Further, the phenomenon holds even for many non-money forms of technology — how useful would your phone be if no-one else had one?
A Ponzi scheme is a zero-sum game; value is only transferred, not added. Real, value-adding systems (or investments) are not zero-sum; the late-comers — even the last person to adopt — can benefit in addition to the early adopters (assuming they don't buy into a speculative frenzy/bubble and get burnt when the price corrects).
Compare to the historical and ongoing situation with mobile phones, for example: the early adopters — and especially the early investors in the technology — have benefited the most, but that doesn't take away from the value that latecomers have received. Indeed, even the last person on Earth to receive a mobile phone will reap benefits.
Bitcoin has a number of features that make it attractive versus traditional currencies and payment networks. Unlike Ponzi or “pyramid” schemes, Bitcoin is a useful, value-adding technology — nobody has to lose for others to gain (even though early adopters may, in the short run, benefit more).