Bitcoin is no different. I claim the economic structure of the bitcoin movement can be most aptly described as a postmodern Ponzi1. In Bernie Madoff’s twenty year scheme many investors absolutely made money, and investing in Ponzi schemes at the right time can indeed make you very rich. Investing in bitcoin shares many of the same characteristics but instead of convincing your friends to become distributors of nutritional supplements, it depends on software developers perpetuating a narrative that some perpetually just-over-the-horizon disruptive software that will generate vast wealth for early buyers through unspecified means. It is difficult to get a man to understand something when his paper wealth depends upon him sustaining the illusion of that wealth. This is the essence of why we call this fraud a ‘postmodern’ scheme, sophisticated investors completely understand mechanism of the fraud and all operations are done in public, but the fraud depends on the collective ignorance and/or overconfidence that individuals will be able to time their market exit properly while others will not. This is the essence of why Ponzi schemes are illegal and considered a form of fraud, they are a form of gambling that depends on information asymmetry and collusion where the rest of society bears the costs and negative externalities of cleaning up the mess to right the victims when the music inevitably stops and there are no more chairs.
It’s value is purely from a form of recursive speculation, a delusion that more victims will come to speculate in the speculation thus perpetuating the scam and driving the speculated “value” higher. Reality has a way of asserting itself and at some point this scheme will exhaust the pool of fools who will be left hodling a pathetic share in the collective delusion of a non-currency that is completely useless in the real world. Einstein once said “Two things are infinite: the universe and human stupidity; and I’m not sure about the universe” and in today’s the strange upside-down world you can now invest in Einstein’s thesis and it’s called bitcoin. We can take solace in knowing that any postmodern Ponzi scheme is just as unstable as its classical forms, these houses of cards will collapse just like all others that have come before it. There is no escaping the base economic reality that more money leaves the ecosystem in the pockets of insiders than can ever be paid out to even a tiny fraction of the fools who buy in. A classical Ponzi scheme is a financial fraud run out of smoke-filled rooms of old men shuffling money around bank accounts and manipulating accounting statements to continuously pay out new investors from old investors while maintaining the illusion of returns.
This new class of scam diverges from that classical Ponzi in a significant and legally important way. There is a negative expected return from engaging in this class of activity. Like many people I’ve written a bit about fintech and the influences the new right-wing populism is having on financial markets, and there are some truly unprecedented things occurring that are going to reverberate through the next decade in technology. Nevertheless, multi-level marketing schemes are a scam; there is a fundamental economic problem at the heart of the business model. Let it be said that our system does allow many equally dubious schemes to function within the law, many of which are a net drain on civilization. Every leftist think piece for the four years has beaten to death the notion that narrative and reality have become divorced and that the modern condition is that we’re adrift in a world in which sense making and power are indistinguishable. The world is an increasingly strange place and one of my favourite quotes about the times we’re living through is that we’re all all in a superposition of being both overwhelmed and underwhelmed. It is an unsustainable bubble that will pop leaving us with some profound questions to ask about the ethics of digital assets and will likely create much needed 21st century version of the Blue Sky Laws.
It’s hard to even communicate about the intellectual center of cryptocurrency, because so much discussion is framed in terms that have no meaning (i.e. “decentralized”, “blockchain”, etc) and the technical obscurantism and mystique is an inescapable and intrinsic part of the investment thesis. The distinction between bitcoin and other tokens is inconsequential so long as they share the same underlying economic structure of peddling a get rich quick investment based on technical obscurantism. Instead of the smoke-filled rooms we have the haze of post-truth obscurantism induced by our new media landscape that feeds on illusion, distrust in experts and confusion as a means to obscure the underlying mechanism of the wealth redistribution scheme. Negative-sum games do not, in aggregate, generate wealth or utility and instead simply redistribute input funds to different participants. The old guard is changing in technology and if you think liberalism dominates decision-making in our industry then you’re fairly disconnected from the reality on the ground. If we choose to make short-term decisions based on indifference and greed then history will not judge us kindly. However today cryptocurrency is nothing more than an ecosystem of thinly veiled gambling products that is preying on the vulnerable, perpetuating economic inequality and deepening the existing problems in our society.