When bitcoin inevitably crashes, inexperienced investors who believed the hype could lose everything.
 

 

Originally published by Vivek Wadhwa on LinkedIn: “Why Bitcoin Is the Largest Ponzi Scheme in Human History”

During the late ’90s, Silicon Valley venture capitalists and New York City investment bankers used phrases such as “monetizing eyeballs,” “stickiness,” and “B2C” to justify the ridiculous valuations of internet companies. They claimed conventional methods were inapplicable in valuing the dot-com companies — which had no revenue — because we were entering an entirely new economy.

Believing these people, and afraid to miss out on the gold rush, small-time investors, grandma and grandpa, and barbers and taxi drivers invested their life savings in companies such as Pets.com, Webvan, and eToys. The bubble burst, and they lost everything. Through a transfer of wealth in the billions of dollars from Main Street to Wall Street, VCs, unscrupulous CEOs, and bankers had effectively enriched themselves at the expense of hundreds of thousands of ordinary investors, leaving them to despair about their futures.

History is repeating itself now with bitcoin. This time, it isn’t just Main Street USA that is about to lose its shirt; it is also the developing world. Technology has made it possible for hypesters in Silicon Valley, China, and New York City to fleece anyone, anywhere, who has a bank account and an internet connection.

The story that bitcoin victims are being sold is that, because we cannot trust government-issued currencies, bitcoin is the future of money. One investor calls bitcoin “a gift from God to help humanity sort out the mess it has made with its money.” A PayPal director predicts that bitcoin’s price will reach $1 million in the next five to 10 years; asset managers say it is the new gold.

This is complete nonsense. Yes, the price of bitcoin may yet double or even quadruple — because its price is based on pure speculation, and these stories are feeding such speculation. But bitcoin’s market price is almost certain at some point to crash and burn, just as the dot-coms’ did, and for the same reason: because it is all hype. And there will be no one to turn to when it does, because no government or bank is backing bitcoin up; and the people who are hyping bitcoin will have cashed out and be long gone.

Bitcoin’s price is not a reflection of its growing usage as currency; it reflects merely demand for the mirage of its speculative value. Its price is rising only because people all over the world are hearing stories of how others doubled or tripled their money in a short period — and they don’t want to miss out. Unsophisticated investors are taking out loans to buy bitcoins. Those who have spent the currency feel remorseful when they see its price subsequently increase, so they hoard it.

Bitcoin was invented by an unknown person or group to be a digital currency. It allows money to be transferred directly between individuals using cryptography. The bank ledger is distributed to all users, and complex mathematical transactions ensure transaction integrity. Such a system makes it difficult for governments to know the identities of people exchanging money, so it has become a haven for money laundering, drug dealing, and corruption.

Beyond its usability for crime, bitcoin has major design flaws:

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