Monday, June 28, 2021

There are two kinds of people who label bitcoin a ponzi

There are two kinds of people who label bitcoin a ponzi. The first group is made up of salty nocoiners who launch the word ponzi as an insult. These people disliked bitcoin and/or bitcoiners pretty much from the get-go. They criticize it at every chance they get.

The second group uses the word ponzi in a neutral, or analytic sense. They aren't describing bitcoin as a ponzi in order to insult bitcoin, but in the same way that a biologist would describe a certain mosquito as belonging to the family Culiseta longiareolata rather than Culiseta minnesotae.

In philosophy, this distinction is captured by the contrast between descriptive and normative statements. A descriptive claim is one that describes a situation. "Brutus killed Caesar." A normative one is that makes some sort of value judgement about how things ought to be. "Killing is wrong."

Likewise, economists distinguish between positive and normative economics. (The economic distinction is the same as the philosophical distinction, so I won't rehash it, but here is a good article.)

So returning to our two kinds of people who label bitcoin a ponzi, the first is hurling normative statements about bitcoin. "Ponzis are frauds, which makes them bad. And bitcoin is a ponzi, so it too is a fraud." The second group is making descriptive or positive statements about what sort of thing bitcoin is in the universe of financial things.

Now, bitcoiners tend to bristle at all bitcoin is a ponzi statements. And that's because they perceive them to be attacks on their tribe. And the normative statements are, for the most part, designed to be attacks. And so bitcoiners raise their defences and engage in blustery counterattacks. These counterattacks are also composed of value-laden normative statements.

I find these flareups of normative versus normative statements to be unhelpful.

The positive/descriptive claim that bitcoin is a ponzi isn't an attack. And it can't be countered with ideological bluster. It deserves a much more nuanced critique.

And to clarify, the word ponzi is not an entirely accurate description of what bitcoin is. Back in 2017 Preston Byrne provided a more precise description of Bitcoin as a Nakamoto scheme. Give it a read. It's quite well-written. For my part I've been using the Bitcoin as a chain letter descriptor since 2018 and more recently here.

Byrne's and mine are essentially the same idea, that bitcoin is a ponzi. Except not quite. Bitcoin is a decentralized ponzi scheme, one without a schemer. I describe it as an honest chain letter. Byrne uses the word automated.

After all these years, I still haven't seen a convincing explanation for why bitcoin is neither a Nakamoto scheme nor an honest chain letter. That is, I haven't seen a good positive/descriptive response to the positive/descriptive statement that bitcoin is a decentralized ponzi. One of the best alternative theories, bitcoin-is-money, broke down long ago in the face of empirical evidence. And the bitcoin-is-gold description isn't panning out too well.

Bitcoiners haven't turned the perceived slight into a virtue. If someone is calling you names, then proudly adopt the slur. If the descriptive statement bitcoin is a ponzi is accurate and popular, then adopt it and make it your own. "Yep, of course bitcoin is a chain letter/Nakamoto scheme. And that's a good thing."

I mean, there are many ways to go about making bullish normative statements about bitcoin being a ponzi. For instance, a chain letter is managed in a decentralized manner. That make it almost impossible for authorities to suppress them. A creative bitcoin meme artist could rejig this descriptive statement into a celebration of bitcoin being impregnable.

Put differently, up till now all normative statements invoking bitcoin's ponzi nature have been used by critics to attack bitcoin. Where are the normative statements that embrace bitcoin's ponzi nature in order to defend bitcoin?


P.S. After publishing this post, someone sent me a perfect example of a meme that puts a positive slant on bitcoin's ponzi nature.

21 comments:

  1. And given Bitcoin's energy and resource consumption, you think this is a good label to put on it? I agree, it's heading for a perpetual half-life as the object of shady ventures sold in airport motel conference rooms, like gold or any other collectible whose only value is to be sold onwards. But this is not a good thing.

    ReplyDelete
  2. It is possible both to objectively describe bitcoin and other cryptocurrencies as decentralized or "crowdsourced" Ponzi schemes and to have a moral/ethical objection to them. But what arguments can we make that will be effective?

    I find that talking about energy consumption and the environment is unhelpful because the Venn diagram of bitcoin adherents and climate change deniers forms a significant overlap and they just lie about it anyway. Further, other cryptocurrencies exist and many of them use a lot less energy per transaction, so it's not a universal argument.

    Arguing that the economics of bitcoin are fundamentally flawed and even contradictory is fruitless because, for many of its adherents, these flaws are the very reason they got into it. To them, "there's no regulation" is a positive despite the obvious and continuous frauds committed within the crypto world. They see all finance as fraud, so they're just getting their own cut.

    The "store of value" and "debasement" arguments are ideological, based on corrupted Friedmanite economics and Austrian school ideology. These ideas have been damnably persistent in academic circles and are kept alive through social media. You can't "debunk" them because they aren't based on logic; they're essentially a cult.

    At this point I think that the only way to quash cryptocurrencies is to flat out ban them at both the national and global level.

    ReplyDelete
    Replies
    1. "is to flat out ban them."

      Dunno, not a big fan of a ban. I see bitcoin like casinos. I don't go to casinos. I don't think gambling is fun. It seems like a waste of money and resources. But on balance I wouldn't want to ban casinos or gambling. Putting some sort of Pigovian tax on it makes sense, to reduce usage and correct some of the undesirable side effects (in bitcoin's case the huge environmental cost of proof of work).

      Delete
    2. Wait if describing it as a ponzi is the correct position then doesn't banning it imply a fear of being proven wrong in the long term? I mean gold is shiny and not found in plenty but it's value is a social construct. What is the essential difference of Bitcoin and gold as an asset as such? That it requires run a grid of computers to validate the chain is similar to the manpower needed in banks and SWIFT transactions.

      Delete
    3. There are certainly some similarities between gold and bitcoin, but the big difference is that gold has value apart from what the next buyer will pay. (i.e. as jewellery, electronics).

      Delete
    4. The most important similarity between gold and bitcoin is that you can't have a stable economy with either. There's a reason that fiat became widely adopted in the 20th century. When central banks control the money supply, rather than miners and/or whoever has the bigger army, they can adjust it to fit demand.

      Gold and bitcoin are similar in other ways, too. With gold you get TV and radio ads encouraging people to buy them so that holders can pump and dump. With bitcoin you get Twitter spam for the same purpose.

      Delete
    5. "There are certainly some similarities between gold and bitcoin, but the big difference is that gold has value apart from what the next buyer will pay. (i.e. as jewellery, electronics)."

      I find that hard to sustain, as bitcoin may progressively evolve to adopt some smart contracts (taproot fork) and it may find some other uses as a blockchain.
      So... is gold a perpetual ponzi? lol

      Delete
  3. I buy stock and the company issues more and that devalues mine. I keep dollars in the bank and they pay me less in interest than inflation devalues it. Only crypto defines itself as finite and predictable as at least value store. What you define as Pomzi, chain letter, or Nakamotto, I called critical mass or forward inertia (bodies in motion tend to stay in motion).


    ReplyDelete
    Replies
    1. You forgot about fees that have to be paid. The mining industry is a billion dollar industry that has to be financed. The smaller the block reward, the higher the dilution of Bitcoin. Bitcoin holders are consumers that have pay to miners, if they don't, the security(hashrate) of Bitcoin collapses.

      Delete
    2. Bitcoin is not predictable. Its return is purely defined by what the next person will pay with it, just like a chain letter. A stock is different. It doesn't rely on what the next person will pay. The underlying business generates income which a stock owner can realize via dividends.

      Delete
  4. The parallelism of descriptive and normative is reversed from the first two paragraphs.

    ReplyDelete
    Replies
    1. Thanks. I blame my editor for all errors of fact and grammar.

      Delete
  5. I argue it’s a Ponzi scheme in the MLM sense. It only grows in value the more people you bring into it, but it doesn’t fully collapse because there will always be a legion of “true believers” who will keep it going.

    Every product that is sold via MLM can be found on a store shelf. If the MLM product would be sold on the store shelf, it just becomes a commodity and is therefore subject to the rules of commodity economics. But if you keep it separate - make it sold only via a special “club” - you can spin whatever narrative you want about how valuable it actually is and can therefore avoid following traditional economic laws.

    ReplyDelete
  6. BTC is a Ponzi. Understanding how BTC manipulated social media to steal the Bitcoin brand and continues to identify itself as related to a protocol it long ago abandoned clarifies how hard the selling has become to sustain the Ponzi. BTC itself has no utility other than as a scam vehicle.

    Bitcoin is not a Ponzi. Bitcoin as defined in the White Paper and by its author Satoshi / Craig Wright has tremendous utility and technical maturation with enterprise level transaction capacity for both micro transactions and data.

    Learn to ignore the nonsense and think for yourself...

    #BSV

    ReplyDelete
  7. Interesting point about "Nakamoto Schemes" having no central operator, and turning every victim into a principal. In the US, UK and Australia there's a legal doctrine called the undisclosed principal in contract. It could characterise every such "principal" instead as the agent of the "undisclosed principal"; the collective authority behind the scheme that each agent embodies.

    ReplyDelete
  8. Having Carl Menger's Theory of Commodity, I don't think it is necessary at all any ad-hoc explanation like "Nakamoto Scheme" or "Chain Letter".

    A commodity, as Carl Menger scientifically defined it, is a good that provides exchanges services due to its intrinsic properties (In his book Origins of Money he enumerated up to 17 properties, apart from prior demand).

    A commodity is useful and therefore valuable for the same reason than the NYSE: It provides exchange services.

    ReplyDelete
    Replies
    1. I've read Menger multiple times. I think he's great. Something that is already valuable for certain purposes gains a monetary premium as people deploy it in a secondary role as a medium of exchange.

      In bitcoin's case, it was already valuable as a chain letter. And yes, once it had this initial positive value some people started to repurpose it as a medium of exchange. But usage of bitcoin as money is quite small, and it hasn't grown over time. Unfortunately, bitcoin's underlying chain letter nature creates frictions that impede a Mengerian process from ever really gaining any momentum.

      Delete
    2. Similarly how fiat can gain value and demand based on what goods it gives access to, bitcoins inherent value comes from its property of being able to trade off the grid. The value is in the system itself, and owning Bitcoin let's you access this system. It's already more stabler store of value than several national fiat currencies.

      Delete
  9. https://www.lynalden.com/bitcoin-ponzi-scheme/

    ReplyDelete
  10. Regarding high valuation of Bitcoin - it's better to compare it with Pokemon/Baseball cards.

    Regarding technology behind it - it's better to compare it with Morse code.


    I did that in my blog:

    https://aleksandar-b.github.io/blog/posts/bitcoin

    ReplyDelete