Monday, August 14, 2023

Why bitcoiners should learn to accept bitcoin's ponzi nature as a good thing

When I describe bitcoin as a type of ponzi or pyramid, idealistic bitcoiners usually view this as an attack on the nobility of the bitcoin project. But they shouldn't. Bitcoin's ponzi nature is one of its greatest strength.

Imagine that you are trying to bootstrap an unorthodox and potentially illegal asset, one that you are marketing (or mis-marketing) to the world as a new monetary system. The standard way to get your asset to have a positive price is to have some funds in a vault somewhere and then link that new asset to whatever is held in the vault. Examples include failures like e-Gold and Liberty Reserve. Neal Stephenson's gold-backed currency in Cryptonomicon is another that followed this script.

It is this underlying intrinsic anchor that imbues the overlying novel asset that you are trying to kickstart with its original positive price.

The problem with this approach is that if the asset is illegal-ish, then to shut it down the authorities need only locate the underlying source of value and confiscate it. With the backing gone, it's game over.

Instead of relying on the tangible world of vaults and backing, bitcoin's creators got their asset to have a positive value by taking a non-tangible route through people's mindscapes. The original two dozen or so adopters began to play a self-referential mind game which went a bit like this: "If I think Joe will buy bitcoin at a higher price in the future because he thinks Susan will buy at an even higher price, for the reason that she thinks that I will buy even higher up, then I'll buy some bitcoin now."

This circular process, a ponzi game, worked. Very early on, bitcoin was imbued with a positive value. The mind game has since grown from a few dozen players to hundreds to thousands to millions, but the self-referential logic of a ponzi continues to be the basis for bitcoin's price.

It's easy to confiscate gold or shut down a bank account. These things are tangible and have actual physical locations with addresses. But it's tough to shut down a million imaginations participating in a collective illusion. First, there's a million of them. And second, imagination isn't something that authorities can fine or confiscate. People's dreams and delusions, their mental gymnastics and schemes, are all locked safely in their skulls.

And so the authorities very quickly gave up and let the bitcoin ponzi game play out, which probably wouldn't have been the case if bitcoin's creators had gone the non-ponzi route and tried to establish an anchor to real world assets.
In sum, bitcoin is resilient because its source of value is ponzi logic playing out in millions of people's heads. Bitcoin idealists may bristle at the idea of being associated with a ponzi, but they should embrace it as a strength.


  1. ok, but you're describing a "greater fool" asset, not a Ponzi. Bitcoin can't be a Ponzi because it doesn't pretend to earn returns.

    1. I'm not sure there's a huge distinction to be made here. A ponzi is a greater fool asset, just like a bubble stock is a greater fool asset, since by definition there's always a sucker left holding the basket who gets nothing, or at least less than they originally contributed.

    2. but then the response to "bitcoin is a Ponzi" is "so is the US dollar, so are Nvidia shares ... everything's a Ponzi." It makes "Ponzi" meaningless, which is unfortunate because there are real Ponzis in crypto, like Hex.

    3. The US dollar and Nvidia are certainly not ponzis/greater fool assets.

      Rather than get bogged down in the semantics, I'd be willing just to restate my post for your sake: bitcoin is a greater-fool-asset, and that's one of its greatest strengths, since the basis for its value is a greater fool game playing out in people's minds rather than assets-in-a-vault, and mental games can't easily be stopped.

  2. or perhaps you are wrong from the beginning to think that bitcoin is ponzi. perhaps there is a real value proposition behind it.

    1. "...perhaps there is a real value proposition behind it. "

      There are no assets backing bitcoin, or an issuer that makes a profit/ extracts taxes, or industrial properties as is the case with a commodity like copper.

      And that's a good thing! Adversaries can attack all these "real" things, whereas it's very hard to damage people's collective illusions.

  3. There is more to it than semantics. We should drop "ponzi" and "greater fool" and adopt Satoshi's authentic words: "It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value."

    Why not Ponzi? It implies bad intent on Satoshi's side, and apparently the loop was a mere consequence of him getting stuck: "I don't know a way for software to know the real world value of things."

    Why not Greater Fool? It implies that Joe, Susan, etc. reasonably believed that the ultimate value of Bitcoin would be lower than the early value for which they sold. In those early days it was more a poking for its true value, tatonnement.

    I think that Joe and Susan are still correct today, although not with the silly NGU meme, not "to the moon". If Bitcoin became world's monetary base asset M0 then it will acquire monetary and significant (non-ponzi) value.

    As Satoshi suspected, this path needs the issuance of Bitcoin credit money M1 which builds up a credit superstructure to dampen volatility and reach purchase power stability. The time is ripe, there may now be a way for software to know the real world value of things.

    So, can we agree on "positive feedback loop"?

    1. As I said to a previous commenter, this seems like semantics to me. Greater fool, ponzi, and positive feedback loop are all the same thing.

      Bitcoin is a pure ponzi, or if you prefer a pure positive feedback loop. It doesn't rely on an external anchor, but gets its value entirely based on a mental game, or loop, in which expectations of expectations of expectations feed back on each other.

      But bitcoin's nature as a pure ponzi, or pure feedback loop, is a key strength, as I suggested in my post, because it allows bitcoin to avoid having any sort of confiscatable link to real world assets as a basis for its value.

    2. 1. Alright, let's leave semantics out. I'll use the neutral term.
      2. We are in complete agreement that a purely virtual asset reduces the risk of government confiscation. (Draconian measures excepted.)
      3. Where we seem to differ is intrinsic utility in bitcoin, thus value due to scarcity.
      4. There is two distinct types of utility in bitcoin: monetary utility and inscription utility. Satoshi himself communicated this utility in the very genesis block, referring to Chancellor's bailout.
      5. The former must be multiplied with the likelihood of Bitcoin ascending to general money but subjectively for Joe and Sue was greater than zero.
      6. Inscription is really interesting. What is the utility of unalterable general inscriptions in an ever more powerful blockchain, i.e. another positive feedback loop? Inscribing birth attestations? The will of a rich man?
      Ergo: Given that Bitcoin shows two types of utility, it is not an empty ("pure") feedback loop. There is a feedback loop but its bedrock is real value.

    3. Another important utility is un-censorable payments.

    4. Again, semantics. What you call "monetary utility" is really just a cousin of ponziness, greater fool, and positive feedback loop. They are all driven by a recursive mental game where Jim accepts x because he thinks Sue will accept x, because Jim accepts x.

      And so my same point arises. Bitcoin is a pure ponzi, or if you prefer a pure positive feedback loop, or a pure ball of monetary utility, (or as I said 10 years ago, pure moneyness). It doesn't rely on an external source of value, but gets its value entirely from a reflexive set of expectations about future acceptability nested in expectations about future acceptability nested in expectations about future acceptability.

      As before, though, this ponziness is its greatest strength.

  4. Would that "collective illusion" be possible if Bitcoin did not solve the double spend problem? would the value of Bitcoin be the same if it were very expensive to store or transmit?.

    The argument that a medium of exchange is valued just because you expect others will value it was refuted by Menger back in 1909, because you could say exatcly the same for any good held for sale. What makes a medium of exchange valuable is its saleability (i.e. its intrinsic properties to facilitate exchange).

    Here I explain Menger's argument:

    1. No, the collective illusion only works because a number of technical challenges were solved. If double spending was a problem, it would neutered the process whereby Jim buys bitcoin with the expectations of reselling it to Sue at a higher price, who in turn accepts it because she expects to sell it to Jim at a higher price.

    2. It would be even more useful it is expected value is positive and dead constant. But anyway, I think we agree that the thing works if it has the properties to intermediate exchanges. So it is a tool who fulfills a need.

      For any other tool no one claims its value is a "collective illuision" why a tool who facilitates exchange is different?

    3. I´ll paste Menger's refutation about "nested expectatcions" or "confidence" regarding money value:

      “What is overlooked here is that this is no peculiarity of money. The merchant, the speculator, etc. also acquire the goods that they subsequently offer for sale only in ‘confidence’ that they will be able to sell them again, and — as to the critical point here! — it is a matter of complete indifference to them whether the eventual buyers of the goods intend to consume them or sell them, in their turn. The same is true for money, which we acquire (regularly, but not without exception!) just as the merchant does with his goods: only with a view to its exchange value, i.e. to dispose of it again.” (Money, 1909, p. 92–93)

    4. "For any other tool no one claims its value is a 'collective illuision' why a tool who facilitates exchange is different? "

      What makes a ponzi token like bitcoin different from another valuable object, say shoes, is that its value *is solely* a function of a reflexive game, or collective illusion, in which Jim guesses what Sue guesses Jim will pay for it. A merchant's goods are *not solely* a product of a reflexive game. Sure, they are partly a product of a guessing game. If Jim is a shoe manufacturer he needs to guess what Sue, a wholesaler, will pay for it, and Sue must guess what consumers will pay, so shoes are money-like from Jim and Sue's perspective, as Menger suggests.

      But in the end this guessing game gets resolved by a consumer buying the shoes, putting them on, and thus using them in a way that doesn't rely on passing them pack to Jim or Sue. Ponzi tokens, by contrast, never exit this circular process. Their value is perpetually sustained by a reflexive game in which Jim buys based on his guess what Sue will repurchase them for, in turn a function of what Sue thinks Jim will pay for them.

    5. Monetary goods are more like a telephone, a tool to facilitate communication, than like something that you end up consuming/destroying. Jim's expectation that the telephone can be useful to communicate with Sue is based on the properties of the telephone, I don't think it is an illusion. And the fact that the telephone could objectively facilitate communication with Sue does not imply that Sue will use it to communicate with Jim, so the telephone can end up being useless.

      In more general terms. The fact that a good is consumed is uncertain. Very often goods are never consumed and thrown away. Also most new inventions (like Bitcoin) that are held for sale for some time by their inventor end up dumped when he realizes no one wants his invention.

      This is what Menger described as the commodity character of a good (when a good is consumed, it ceases to be a commodity). And that a good could never leave its commodity status because it has the properties to facilitate exchange (i.e. durable, divisible, limited quantity, fungible, etc). Indeed Menger claims “money is vested with the character of a commodity permanently, the other goods only temporarily” (Money, 1909, p. 37)

    6. No, a ponzi token or a bitcoin is *not* like a telephone, for the simple reason that Jim doesn't value his telephone because he can sell that phone on to Sue at a higher price. In the case of bitcoin, by contrast, it is Jim's ability to sell his bitcoins to Sue and Sue's ability to resell them back to Jim that is the sole determinant of their value.

    7. Commodities (as Menger defined them, "a thing held for sale") are network goods, like the telephone. A telephone needs more than one person in order to provide a service. If Jim is the inventor of the telephone, he needs to sell it to Sue, it is useless if if he is the only one that has telephones.

      I am fully aware that the analogy is not perfect (like most analogies). My point is that the telephone is a network good, like commodities or Bitcoin, and network goods by definition need the participation of at least two persons. And that Bitcoin is useful as an intermediary of exchanges the same way the telephone is useful as an intermediary of communication.

    8. Sorry, it's just not a convincing analogy. Bitcoin are valuable solely because you can sell them on. Phones are valuable for reasons other than the fact that you can sell them on.

    9. That's why I wrote the second paragraph, if you forget that telephones can be sold (let's say that they cannot), a telephone would be valuable solely because it intermetiates communication due to its properties, and Bitcoin is valuable solely because it intermediates exchanges due to its properties (limited quantity, durable, divisible, fungible, cheap to store, etc).

      Let's take durability as an example. If you are planning a very long term exchange you want to make sure that the thing that intermediates the exchange is durable. So ceteris paribus, you will demand it over a non-durable thing to perform that same function. The assessment of durability is by no means a "collective illusion".

      Menger's point is that the demand of a thing as an intermediary of exchanges depends on its marketability and not in a "hollow" willingness to accept the thing by others, and the marketability depends on the assessment of the specific properties of the thing (he describes up to 18 in Origins of Money). In the quote I mentioned above he continues: "The distinctiveness of money, as compared with other goods, rests not on any special "confidence" manifesting itself, as it were, only with money but in truth on the relatively wide marketability"

      What you call "ponzi" is what Menger and the economists of his time called "commodity character" of a good which pure MoEs never abandon. I find it amusing as your provocation gives room for monetary nerd debates like this which I love. But the concept you are trying to introduce with the provocative term "ponzi" is not new at all.

    10. "and Bitcoin is valuable solely because it intermediates exchanges"

      Right, that's my point. Bitcoin is only valuable because Jim thinks he can pawn it off on Susan at a higher price, who thinks she can do the same with Tom, who in turn believes he can get Jim to buy it.

    11. An intermediary, whether it is a person or a thing, renders a useful service due to its skills/properties. Your point is not that, your point is that Bitcoin is a totally worthless thing that has a positive price *solely* because a collective illusion. And you know that is false, otherwise you would not have acknowledged that the properties of the thing do matter.

      The *moneyness* of a thing is by no means arbitrary nor an illusion, it depends on its properties.

    12. The properties of bitcoin do matter, but unfortunately its properties limit its usefulness as a medium of exchange. It would be a better medium of exchange were it inexpensive to store and transmit, but its volatility adds risk, which is an expense. Storing bitcoin risks its price plummeting, and transmitting it risks its price soaring, both of which make it less liquid/salable and thus a worse medium of exchange. Further, the imagined use case of bitcoin as a replacement for USD has not happened; it also suffers from the network effect because USD already exists and the bitcoin network is limited to enthusiasts and speculators.

      Yes, bitcoin mediates exchanges. That said, its weaknesses as a medium of exchange mean that the overwhelming majority of exchanges it mediates are speculation games of the kind Koning describes. Yes, bitcoin provides value by mediating speculation games, but that is exactly what Koning is arguing here: the price of bitcoin is driven by the expectation of users that bitcoin will continue to mediate speculation games in the future, for more users or fewer.

    13. I understand you mean it limits its properties as Commonly Accepted Medium of Exchange (CAMoE). The term CAMoE exists to differentiate it from a MoE. I fully agree that its deterministic supply most probably prevent that Bitcoin will ever become CAMoE, and I don't think it competes with the USD. Bitcoin competes with other long term volatile investments.

      Bitcoin excels at trust minimization, that´s probably its most notable property. And that's not a collective illusion, it is a design feature. A trust minimized asset may have a fully substantiated market role (not a "ponzi" or "collective illusion"), and therefore demand, specially in an environment of highly indebted governments.

      Regarding speculation "games", well.... focusing on the exchange value of things (specualtion) is a plain normal economic activity. I don't see why in the case of Bitcoin the term "game" describes it better.