We’ve had lots of questions about cryptocurrencies over the past year. We’ve also seen lots of new articles about people who have lost a big chunk of their life savings by investing in crypto. To many, it seems like a harmless way to dabble in the ‘new frontier’ of investing. If you don’t put too much of your overall nest egg that’s probably ok. That being said, we’re just going to come right out and say it …
Cryptocurrencies are decentralized Ponzi Schemes!
What is a Ponzi Scheme?
Ponzi Schemes get their name from Charles Ponzi, the early 20th Century swindler and con artist. A Ponzi scheme is a type of fraud that promises the potential for very high (potentially guaranteed) returns with little or no risk to the investors. The schemer pays high returns to earlier investors using money from later investors. Instead of engaging in a legitimate business opportunity, the schemer usually diverts clients funds for their own personal use. Ponzi schemes require a constant flow of new money to survive and once that ends, they will quickly collapse.
So how are cryptocurrencies Ponzi schemes?
A lot can be learned from how cryptocurrencies are created. If you have the knowledge for how to produce a new cryptocurrency, the barriers to creating it are very low. In other words, cryptocurrencies are an ‘asset’ that have been created out of nothing! At the time of this writing, it is estimated that there are 12,000+ cryptocurrencies worldwide and that number is growing. It’s growing because there is no barrier to entry. Anyone can create a new cryptocurrency out of nothing.
Intrinsic Value
Cryptocurrencies don’t create anything. We’ll explain. Intrinsic value is a measure of what an asset is worth. If we think about a house, it has intrinsic and extrinsic value. It’s extrinsic value lies in the fact that someday, someone might want to pay you more for it than you bought it for. Its intrinsic value is that you can: live in it (thereby saving you the cost of living somewhere else), you can rent it out and create a revenue stream. It produces! Ownership in a stock does the same thing. If you own a stock, you have ownership in a company that generates earnings and either reinvests them into the growth of the company or pays you a dividend.
So with cryptocurrency, someone has created the coin out of nothing and has accumulated billions of dollars selling it to other people. The asset doesn’t create anything so the only way for a purchaser to make any money is to convince someone else to buy it at a higher price. The only way someone is going to buy it at a higher price is because they think someone else is going to come along and buy it at an ever higher price. This is known as the greater fool theory. The last one holding the bag is the one that loses.
We’ve had lots of people tell us they don’t really understand cryptocurrency but they want to get a piece of the action anyway. The fact that you can’t understand it is a subconscious warning to you that it inherently doesn’t make sense. In other words, you can’t understand it ….. because it doesn’t make sense!
Conclusion
It is our opinion that eventually, the whole cryptocurrency house of cards will come crashing down. There’s an old axiom of investing that says, the markets can stay irrational longer than you can stay solvent. There are some elements that will remain. Blockchain technology, for instance, shows a lot of promise and will probably stick around. Don’t confuse the benefits of blockchain technology with being able to successfully invest in crypto. It doesn’t create anything and it looks an awful lot like a Ponzi scheme.