Is Bitcoin a Ponzi scheme?
🔸 Plus: 50 million people stopped buying designer brands 🔸 Meet the first ISA millionaire 🔸 How rare is it for stocks to rise 30% in one year? 🔸
Your 2-minute guide to demystifying money and making you richer
The markets, year-to-date
S&P 500: 5,870.62 ⬆️ 23.78%
FTSE 100: 8,063.61 ⬆️ 4.43%
Bitcoin: $90,147.52 ⬆️ 103.93%
GBP to USD: $1.26 ⬇️ 0.77%
GBP to EUR: €1.19 ⬆️ 3.94%
(As of Friday market close.)
Bitcoin hit an all-time high: Is it a Ponzi scheme?
A while ago Moneyin2 recommended you stay away from Bitcoin as an investment because it is too volatile.
Of course, Bitcoin recently hit a new all-time high, at just over $92,000 per coin. It looks as if Bitcoin may even go over $100,000.
So it is certainly tempting to think, maybe I should get in on this thing?
One way to think about Bitcoin is to remember the story of Boston’s Charles Ponzi, who ran an infamous investment scheme in 1920 that made a lot of people very rich — until it collapsed, leaving an even larger number of people very poor.
There is a fierce academic debate as to whether Bitcoin is a type of Ponzi scheme
Ponzi’s idea was to offer people stock in a company that used local currency to buy cheap postal coupons in foreign countries and redeem them in America for U.S. dollars, taking advantage of the difference in the value of the currencies and making a profit. He promised to double your investment in 90 days.
His early investors did well. Word quickly got out that investing with Ponzi was a sure thing.
Unfortunately, Ponzi was not actually buying and selling postal coupons to pay his investors. Rather, he was simply taking new investors’ money and paying off the older investors with it. In fact, his postal scheme was impossible — he would have needed a ship larger than the Titanic, filled entirely with coupons, in order to satisfy the demand of his investors.
But as long as there was a supply of new investors, the older investors continued to get rich.
The problem with a pyramid scheme is that it works just fine until you run out of new investors. Most people do not understand how quickly a Ponzi scheme runs out of new people. The maths are brutal: If the first investor needs to find two other investors to make money, then the second pair of investors need to find four more people. Those four need to convince eight others … and so on.
At the ninth level of the pyramid the investors need 256 more people to join the club — you can easily see how difficult the mere act of recruitment becomes.
After two more rounds of investment you need thousands more people to join, and the scheme faces collapse.
This, by the way, is why no one gets rich from “multi-level marketing” schemes
Sure, you can probably find two friends to buy makeup from you. But to keep making money, can you find four, eight, sixteen, or thirty-two? No. This is why you don’t know anyone who got rich this way.
Just like Ponzi’s non-existent postal coupons, Bitcoin isn’t attached to an underlying real-life asset. All Bitcoin represents is the price of Bitcoin, which goes up and down based on supply and demand. You can’t do anything with Bitcoin, other than buy it or sell it to someone else.
There is one major difference between Bitcoin and Ponzi
The supply of Bitcoin is finite. Only 21 million Bitcoins will ever be minted, and many of those will be lost or destroyed. The implication is that, eventually, demand will exceed supply and that’s why the price of Bitcoin tends to go up.
But there is also one major similarity to Ponzi: In order to make money on Bitcoin you have to buy in and then hope that some latecomer will want to buy your cryptocurrency from you. You are waiting for a greater fool than you to come along, basically.
On that basis, Bitcoin is more like gambling than investing
You can make a lot of money gambling in crypto!
But it is at times like this — when Bitcoin is breaking records — that people forget you can also lose a lot of money gambling in crypto.
At its low in 2022, Bitcoin lost 75% of its value from its previous all-time high.
After it hit a high in 2017, Bitcoin lost 83% of its value.
The savings you need to secure your financial future should NOT be in an asset that can periodically wipe you out.
Even professional money managers recommend only 1-3% of your savings should be in Bitcoin — again, because it is so volatile.
So yes, you might be feeling a little FOMO regarding Bitcoin right now. But the smart move is not to put any money into crypto that you wouldn’t be comfortable losing at a casino.
Because that’s what you’re really betting on.
Want to know more about stocks?
The Moneyin2 Guide to Wealth
The Moneyin2 Guide to Wealth will get you the biggest return on your savings by maximising cash matches from your employer, free cash from the government, and shielding your investment gains from tax. It takes you step-by-step through the world of pensions, SIPPs, ISAs and ETFs — all in plain English.
And for dessert …
50 million people have stopped buying luxury designer brands. Salaries have not kept pace with prices.
Telegram founder Pavel Durov is offering to pay you to have his baby. He has fathered more than 100 children this way.
The first person to save £1 million in an ISA — where investments are limited to £20,000 a year — describes how he did it.
How rare is it for stocks to rise 30% in one year? Not very rare, according to Ben Carlson.
Investment platforms that charge fees on a monthly basis will cost you a lot more than those that charge you annually, according to Joachim Klement.
5,000 people are suing Hargreaves Lansdown because it kept recommending Neil Woodford’s equity income fund even though Woodford was putting their money into non-liquid private investments.
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