Is Bitcoin a financial pyramid?
For last weeks, I see that Bitcoin, its ‘suspicious’ success and risks connected with it are becoming a widely discussed subject.
Most of respected government and national institutions, as well as media all around the world have been running intense, informative campaigns in regards to Bitcoin and cryptocurrency.
On one side, these campaigns are very good, because they highlight authentic risks that are connected with investing in crypto (the risk of loss is always present, whatever you do), but on the other hand they are often misleading people, suggesting that Bitcoin is financial pyramid, that you can only earn if you’re one of the first to have it and that it also feeds on naive people who dream of a quick fortune. They say that Bitcoin will steal people’s money and lie to them…
Listening to what is presented in media gives me the impression that it is some mass attack on Bitcoin, or some desperate attempt to protect citizens from losing their money. But if we put our emotions aside, because I wouldn’t want to write about the risks that are present in any other investment which we have on the market, and about regular banks leading us to financial crises, not some Bitcoin. Nobody was warning us so intensely about those crazy loan re-payments in Franks, which could have happened (and they did). And no one says that in fact, we all have the right to do whatever on Earth we want with our money, as long as we’re AWARE about risks and we don’t hurt anybody else.
But let’s focus on details.
Is Bitcoin a financial pyramid?
I’ll try to explain it step by step and you decide how it is.
Typical element of financial pyramid (Ponzi Scheme) vs Bitcoin.
1. The funds paid by new investors provide money for previous investors. Withdrawals made by ‘older’ members of a system come from what new users pay in, not from a company’s profits.
That is not what happens in Bitcoin.
Out here, we see the same rule as on traditional currency exchanges: someone buys Bitcoin and someone else sells it. Example: one person would buy dollars, and the other person would sell them. Buyer decides himself at what point he wants to buy and at what point he wants to sell it. Profits for Bitcoin users come from the most typical buy/sell transactions.
2. At the start, organizer of financial pyramid would pay out profits for users, but then, when there is more old users than the new ones – there is no funds for him to pay people, so they lose their money and receive nothing.
In Bitcoin, there is no organizer and no owner.
It is a cryptocurrency which you may buy or sell whenever you want. And it is you who chooses at what value to make your transaction and what exchange to use. There is no ‘membership’. You lose your money if you buy it when it’s expensive and sell it when it’s cheap. And you decide what’s best.
3. Pyramid pays for its losses using funds from new investors.
As I said before: Bitcoin is not a company, so it is impossible for it to experience a loss. The value of Bitcoin can change same as value of dollar, frank, or any other currency. If the value goes down and investor decided to sell this currency/ cryptocurrency, then he’ll lose. If the value rises and investor decides to sell his currency/cryptocurrency, then he’ll gain.
The value of currency, cryptocurrency and stock is subject to speculation of big players and may change.
4. Financial pyramid goes down when its owner runs away with money or the flow of new investors stops.
Bitcoin cannot ‘run away’ with your funds, because there is no owner who could do it.
Bitcoin is a network, in which various players might e.g. decide they had enough and for example exchange their Bitcoin to USD and stop using it any more.
– If a lot of people decide that they don’t what to buy Bitcoin any more, they stop believing in its future, then yes, the flow of new investors will decrease and the value of Bitcoin would go down, because no one would need it (possibly to 0).
– The same would happen if everyone stops buying and using dollars, or stop buying particular stock. Then their value would fall too (possibly to 0).
5. In financial pyramid, they would often guarantee a certain percentage of profit, for example 5% a month.
In Bitcoin, there is not guarantee of profit at all.
If you buy cheap and sell when it’s high – you earn.
If you buy when the price is high, and sell when it’s low – you lose.
Simple rules of buy/sell.
6. Pyramid’s organizer persuades new people to join his system and encourages them to invite others too, rewarding them with commissions. Every user can earn by recommending the program to others.
Bitcoin does not have any organizer and can be bought on various exchanges, in online wallets, etc. Same as you could buy dollars on exchange too.
If you recommend Bitcoin to someone else you are NOT getting any commission for that, because Bitcoin itself is not able to reward you with it – it is not a company, it is a cryptocurrency.
Same goes for dollar. You suggest to your friend to buy dollars – nobody can reward you for that, can they?
– Of course, you can buy Bitcoin on exchanges that have their own affiliate program and give you commission for inviting new clients, but IT IS NOT Bitcoin that pays out commission, it is an exchange or a company that wants to have more users.
– It looks similar with affiliate programs of traditional currency exchanges. And in this case it is also a currency exchange that pays out commissions, not a dollar or euro.
7. Pyramids are often based on multilevel marketing (mlm)
Bitcoin IS NOT BASED on any multilevel marketing. There is no commissions, no reflinks, no extra profits from multilevel marketing, etc.
8. In financial pyramid, prices and payments are set by a program owner.
– Once again, Bitcoin does not have any owner, any CEO, any organizer.
– The price and value of Bitcoin depends on people’s interest in it (how much they buy and sell), and is not set by anybody.
– The price and value of Bitcoin are subject to speculation – same as the value of traditional currencies or stocks.
9. In financial pyramid, the owner often offers high dividends, percentages or bonuses for a purchases.
Nobody would give you any dividends or commissions for purchase or holding of Bitcoin.
– The only thing you can do with Bitcoin is either hold it or sell it. Or, you can use it as a form of payment in places that accept it.
– Just to compare: The only thing you can do with dollar is either hold it, sell it, or pay with it, in places that accept it.
In conclusion: The value of Bitcoin depends on the trust of how much it will cost in the future, not on it’s actual inside value.
– If people lose their trust in Bitcoin, or they just simply get bored with it, its value would drop, and its price in the future might equal nothing. But if people’s put more trust in Bitcoin ideology, so something that bypasses the banking system, which we’re used to – its value would continue rising.
I am sure that Bitcoin and other cryptocurrencies are genius experiment, that attracted hundreds of thousands people around the world. However, we have to remember, that investing in Bitcoin, we’re investing in the idea: which might come to fulfillment, or might not.
One thing I know for sure: Bitcoin is not a financial pyramid.
And it is entirely up to you whether you buy it or not.
It is you who are the one responsible for your decisions.
There are risks everywhere.
Same like possibilities.