I think we need to adopt "Bitcoin Derangement Syndrome" as a new term for these kinds of bizarre bad faith analyses of the crypto ecosystem. You are obviously a quite intelligent person, but this is a post mostly about the Ladies' Deposit company with a couple of terrible analogies to bitcoin.
Like a normal Ponzi, Bitcoin holders can only make money if more people buy into the money-making scheme.
It's trivially true that the spot price of stocks, fiat currencies, bonds, and cryptocurrencies goes up if more people buy what's available. But the primary value of holding, say, US dollars is not the fact that US dollars sometimes appreciate against the pound, it's that there are other people out there who will accept your dollars in exchange for goods and services. Similarly, you fail to address the obvious point that what people might be speculating on is the potential for monero/bitcoin/ethereum to become a common medium for transacting value, because of interesting properties, rather than speculating on greater fools entering the ecosystem.
The dynamic you're actually more closely describing, and the term you want to use but can't because of its non-neutral predictions about the future, is called a "bubble". But people understand what's supposed to happen if everyone is actually buying bitcoin merely in anticipation of others doing so - bitcoin should eventually crash. So you call it a ponzi instead, which (I guess) is the closest negatively charged word you can use without making the natural conclusion apparent.
Like many old-school Ponzi schemes, Bitcoin does not produce any surplus; it is a fundamentally unproductive asset (in fact, Bitcoin produces negative value because proof of work consumes substantial hardware and energy).
Clearly untrue; the bitcoin, monero, and ethereum networks provide platforms for anonymous and pseudonymous financial transactions. People use them to send redeemable tokens to each other, which is valuable work. The work these networks can perform increases superlinearly with user adoption, hence the deep speculation - but that doesn't make them "ponzi schemes" (bubbles), unless your next post is going to be about how Paypal is actually a grand social ill.
Like Sarah Howe's Ladies' Deposit Company, Bitcoin can only make some people rich at the expense of others.
No, not if it enables people to send money to each other, such as via Polymarket, or the Silk Road, etc., etc.
If Bitcoin's primary value was the belief of its holders that it could one day serve as a replacement for the US dollar (or any other international currency for that matter), there would have been a substantial push by holders and miners towards upgrading the transaction limits of the clients and reducing the time between blocks.
We have seen no such developments. Instead, daily transaction volume has remained basically flat since early 2017 despite two huge spikes in late 2017 and early 2021. This is not surprising: most of the technological optimists have moved on to other projects, so those that remain in Bitcoin are mostly interested in the currency's value as digital gold.
I see almost no evidence to indicate that Bitcoin (or even Ethereum for that matter) will replace any major fiat currency as a means of transaction. For actual transactions, stablecoins capture nearly all the upsides of Bitcoin or other speculative tokens while maintaining relatively consistent purchasing power.
This idea that Bitcoin ITSELF is the future of money is simply a meme with almost no empirical evidence to back it up.
As for calling Bitcoin a bubble instead of a Ponzi...
I suppose one could make the argument that Bitcoin's value is derived from transactions of illicit goods and services and that a network effect around its use gives it a stable price floor. Under that framework, the deviation we've seen from that base is a bubble, but we'd still expect the fundamental value to appreciate in proportion to the growth of its use within black markets, and the growth of black markets overall.
I guess I don't see Bitcoin's fundamental technological edge being all that strong. Currencies like Zcash or Monero offer better transaction privacy and the barrier to adoption doesn't seem particularly high.
But even if Bitcoin's hold on the market ends up being stronger than alternatives, cryptocurrency doesn't provide a particularly strong way for its holders to capture dividends. With proof of work, most of the transaction fees are used to pay for the cost of upgrading ASICs and paying for electricity. Even if Bitcoin switched to proof of stake, it's long-term value growth is capped at the rate of growth of illicit trade (which I suspect would essentially be the rate of economic growth).
Assuming Bitcoin has 1% fees and captured all $500 billion of the annual worldwide drug trade, and assuming we gave it a 15x multiple in line with an average stock, the true value would be... $75 billion. So even given those optimistic assumptions, it still looks to be about 5x overvalued.
My overall assessment is that while you're correct that Bitcoin is not a typical Ponzi (which is what I stated in the post), a very optimistic price floor w price floor, and nearly the entire current valuation is derived from completely baseless speculation and constant shilling of its mostly fictitious virtues.
there would have been a substantial push by holders and miners towards upgrading the transaction limits of the clients and reducing the time between blocks.
If you want it to be a currency, yes. If you want it to be a store of value, like gold, much less so. I think most of Bitcoin's actions so far have indicated that it wants to be a secure store of value like gold, rather than a liquid and commonly exchanged currency like the US dollar.
If Bitcoin's primary value was the belief of its holders that it could one day serve as a replacement for the US dollar (or any other international currency for that matter), there would have been a substantial push by holders and miners towards upgrading the transaction limits of the clients and reducing the time between blocks...
This assumes that miners or holders would have a personal incentive to effectively contribute to the protocol rather than riding on the coattails of others. But Hal Finney has been dead for nearly a decade, and so Bitcoin has not had any cofounders for a while, just investors who individually hold a very small percentage of all coins in circulation. The result is that protocols like Bitcoin are developed instead by charitable volunteers who have to design things by committee. That's obviously inefficient, and I wish the Bitcoin community had a better ability to improve the currency and adopt obviously good changes, just like I wish that of the IETF. Alas, we live in an imperfect world, which is different than saying HTTP is a Ponzi scheme.
We have seen no such developments. Instead, daily transaction volume has remained basically flat since early 2017 despite two huge spikes in late 2017 and early 2021.
No, people figured out the throughput of the Bitcoin network was going to remain basically the same long term, so they built things on top of the network like cryptocurrency exchanges and begun to use those to transact Bitcoin as well. The volumes on those exchanges and layer 2 networks has not remained the same since early 2017, not even close.
This idea that Bitcoin ITSELF is the future of money is simply a meme with almost no empirical evidence to back it up.
That's fine because "Bitcoin is the future of money" is not the actually reasonable bull position you have to "debunk", here. Things don't have to be "the future of money" to be worth a trillion dollars.
Assuming Bitcoin has 1% fees and captured all $500 billion of the annual worldwide drug trade, and assuming we gave it a 15x multiple in line with an average stock, the true value would be... $75 billion. So even given those optimistic assumptions, it still looks to be about 5x overvalued.
This is like looking at the amount people spend moving cash in armored cars, then comparing that to the amount of dollars in circulation, and going "see, the dollar can't possibly be valued as a medium of exchange or store of value, it must be an elaborate scam". The (spot price * circulation of Bitcoin) is not a fixed multiple of the amount of transaction fees captured on the mannet by miners, nor ought it be even if its current price is a function of its utility for moving capital around.
This assumes that miners or holders have a natural interest in effectively contributing to the protocol rather than riding on the coattails of others.
Crypto communities have created effective methods of coordinating in the past. Hell, a bunch of people got together and raised $47 million to buy a copy of the constitution. It seems trivial to make a smart contract where people can contribute funds will only be released if some minimum threshold of money is raised.
It seems to me like the problem is most Bitcoiners do not WANT any change, because most of them don't see Bitcoin as anything other than digital gold.
No, people figured out the throughput of the Bitcoin network was going to remain basically the same long term, so they built things on top of the network like cryptocurrency exchanges and begun to use those to transact Bitcoin as well. The volumes on those exchanges and layer 2 networks has not remained the same since early 2017, not even close.
Ok, this is an area where I am actually pretty uneducated, so forgive me if this is a stupid question, but what has the actual increase in Bitcoin L2 throughput been? The only one I know about is Lightning, but last time I checked they had only done about 700 transactions total in over a year. Unless there has been a massive change since then, I don't see L2s solving the problem. For a variety of reasons (some technical, some regulatory), it doesn't seem like these solutions will solve the problem in any but a narrow set of use cases. It seems like you have to create at minimum two transactions (one to fund an L2 smart contract and one to distribute money afterwards). I can see this making sense for like a revolving line of credit, but not that much else.
It also seems like it negates most of the actual benefits of blockchain (guaranteed security, decentralization, immutability and transparency)
That's fine because "Bitcoin is not the actually reasonable bull position you have to "debunk", here. Things don't have to be "the future of money" to be worth a trillion dollars.
Yes, I agree. That's the point I was trying to make in the first place: Bitcoin's value is not based on the belief that it will be the future of money. It's based entirely on the faith of its holders that other buyers will come in and drive up the price in the future.
This analysis assumes that the market cap of Bitcoin as a currency ought to be a fixed multiple by the amount of transaction fees captured on the mannet by miners. I really don't understand why it assumes that, and it's wrong. This is like looking at the amount people spend moving cash in armored cars, then comparing that to the amount of dollars in circulation, and going "see, the dollar can't possibly be valued as a medium of exchange or store of value, it must be an elaborate scam".
Very few people hold dollars as a store of value. They're too vulnerable to inflation. Most people buy real estate, stock, bonds, or gold to store wealth in. The value of dollars is determined by their ability to facilitate commerce, which as I established above, Bitcoin seems unlikely to do at scale.
My central thesis is simply that Bitcoin is a more robust type of ponzi scheme, and that is why it has reached a trillion dollars in value. I don't think my thesis really even undermines the case for owning it that much (hence the title of the article; Ponzi schemes can be highly profitable if your timing is good).
Sick of people calling everything in crypto a Ponzi scheme. Some crypto projects are pump and dump schemes, while others are pyramid schemes. Others are just standard issue fraud. Others are just middlemen skimming of the top. Stop glossing over the diversity in the industry.
-- random internet meme, no clue who originated it
More importantly, when you say
Bitcoin did not become a trillion-dollar asset because it was better at facilitating online purchases of drugs.
How sure are you of that? It seems very likely that, like all fiat currencies, it was the transactional use which gave a base of it's value. And it snowballed from there, but always with that foundation. Also, how sure are you that it's a trillion-dollar asset? It seems likely that $1T was not put into it, nor that $1T will come out of it. $Trillions may move through it, but that's flow not stock.
More importantly, when you say
Bitcoin did not become a trillion-dollar asset because it was better at facilitating online purchases of drugs.
How sure are you of that? It seems very likely that, like all fiat currencies, it was the transactional use which gave a base of it's value.
This is a good point. I suppose I should have said that Bitcoin would not have reached a $1 trillion dollar valuation if purchasing drugs were the only thing it was useful for.
Also, how sure are you that it's a trillion-dollar asset?
At one point the spot price times the total Bitcoin available was worth about a trillion. It's true that a better valuation would take into account the price at which the total supply could be sold to a private buyer, but I don't know enough to make that calculation.
Have you ever wondered what you'd find if you upended your life for a few months and did a deep dive trying to understand what makes the crypto ecosystem work?
It just so happens that due to exogenous circumstances mostly beyond my control, that's exactly what I did starting a few months ago. I've spent over two months learning about crypto full-time as part of a research gig. This post is the first of what I hope will become a collection of stories from my work so far.
A new kind of Ponzi scheme
On October 31st, 2008, a pseudonymous user named Satoshi Nakamoto published a whitepaper on Bitcoin.org titled "Bitcoin: A Peer-to-Peer Electronic Cash System". The paper, and Satoshi's subsequent comments, are almost entirely focused on the technologies puzzle pieces necessary to allow for a peer-to-peer, anonymous, permissionless method of sending cash over the internet.
It turns out Satoshi was correct in the short term: the earliest users of Bitcoin were cryptography libertarians, followed by a wave of people using Bitcoin to buy and sell illicit goods and services over the internet. But Bitcoin did not become a trillion-dollar asset because it was better at facilitating online purchases of drugs. Bitcoin's real innovation was enabling a new kind of Ponzi scheme that is more stable than those that came before it. To understand Satoshi's innovation, I'm going to tell you the story of one of the earliest examples of a Ponzi scheme in the US.
The Ladies' Deposit Company
In the 1860s, a fortune teller named Sarah Howe moved to Boston. There isn't much information about what she was doing in Boston prior to the late 1870s, but in 1875 she seems to have discovered a taste for financial fraud. Howe took out several loans from different banks all secured by the same collateral and was subsequently arrested. Her conviction was overturned on appeal, freeing Howe to begin what would become her most famous business: The Ladies' Deposit Company.
In the 1870s, banking in the US was almost completely unregulated. Pretty much anyone could start a bank so long as they could convince enough other people to give them money. "Anyone" included the woman who had committed financial fraud a few years before.
Like any good startup, the Ladies' Deposit Company focused first on accruing power users with a particularly acute need not addressed by the existing industry players. In the 1870s, the best group of power users for a new bank were unmarried women: single women, divorcees, and widows were particularly poorly served by the existing banking system.
Sarah let it slip to a few of her female friends that she had attained backing from the reputable "Quaker Aid Society" to start a new bank that would pay its depositors 8% monthly interest. Such eye-popping interest rates would be enough to perk any naive investor's enthusiasm and any experienced investor's suspicions. However, Howe did not advertise these rates broadly, as one might naively expect.
In fact, Howe was very particular in her recruitment strategy and set strict conditions for new depositors. Listen to this account from 1892 describing how she convinced new depositors to join the bank.
Howe also made a point to immediately return the deposits of any customer who questioned anything about the bank's operation or how it was able to generate such eye-popping returns.
There are a dozen little tricks like this which are described at length in this 1892 article from the Atlantic. Howe seems to have mastered the parlor manners of Bostonian upper-class women from the time. Some contemporaries described her as having a "maternal affect".
When The Boston Herald published the first article about the LDC, Howe seems to have retained the writing advice of a lawyer in drafting a reply, which the paper duly published the following week. The article, which was meant to cast doubt on the whole enterprise, ended up doing far more to spread news of the Ladies' Deposit Company to the broader Bostonian populace. When Howe's pool of deposits grew large enough, she bought a large house in the middle of downtown Boston and began opening new branches around the city.
Eventually, the scheme became unsustainable. Howe had not even bothered lending out the money given to her by depositors in any attempt to generate interest. Instead, she had kept most of it in a large chest of drawers in the back room of her house, then later on the upper floor of the bank's office building. As time went on, the imbalance between deposits and claims on deposits grew and grew and grew, until withdrawals by only a small fraction of the bank's depositors would be enough to clear out all of the bank's savings.
On September 25th, 1880, the Boston Globe published the first of a series of investigative articles into the LDC, alleging fraud. Within days, panicked depositors began withdrawing their money in mass, and by October 4th, Sarah Howe was forced to announce a suspension of withdrawals. In its three years of operation, The Ladies' Deposit Company had accrued at least $271,000 of deposits, amounting to about $8 million in today's money.
Howe served three years in prison for the scheme, though remarkably enough, the main charge brought against her was "raising money under false pretenses", a charge brought against her for the false claims she made that her bank was backed by the Quaker Aid Society.
When released from prison, Howe almost immediately started the exact same fraud all over again. She even named her new bank the "Women's Bank". She accrued another $1.5 million in inflation-adjusted deposits before the new fraud was exposed, at which point she fled the city to avoid prosecution.
Howe tried the scheme again in Chicago and several other cities before finally returning to fortune-telling in her later life. She died in 1892.
Normal Ponzi schemes all follow the same trajectory
If you squint, the story above follows a simple trajectory:
Historically, this general structure is shared by nearly all Ponzi schemes. However, there are a few notable exceptions, one of which was invented only recently.
Magic internet money: a new, more robust kind of Ponzi scheme
Bitcoin shares some, but not all of the characteristics of normal Ponzi schemes. Like a normal Ponzi, Bitcoin holders can only make money if more people buy into the money-making scheme. Like many old-school Ponzi schemes, Bitcoin does not produce any surplus; it is a fundamentally unproductive asset (in fact, Bitcoin produces negative value because proof of work consumes substantial hardware and energy). Like Sarah Howe's Ladies' Deposit Company, Bitcoin can only make some people rich at the expense of others.
But Bitcoin differs in one key way: there is no bank account that can run out of money. This is the key to understanding why Bernie Madoff's Ponzi collapsed at $50 billion while Bitcoin reached $1 trillion in value; there is no piggy bank to raid when FUD causes investors to lose their nerve. So Bitcoin can never truly be killed.
This is why Satoshi's invention actually matters; the peer-to-peer cash aspects of crypto are ultimately a side-show. The main event was a new, super-viral method for creating and spreading a more stable type of Ponzi scheme on the internet.
Bitcoin (and other cryptocurrencies), can still face crises of confidence, which can see the on-paper value of people's holdings drop by 80% or more. But so long as a single person on the earth is willing to buy Bitcoin, the price will never go to zero[1], and the potential for another even bigger bull run will remain.
Unless a fundamental, unfixable flaw is found in the foundations of cryptography like an algorithm to reduce NP problems to P problems. Even if proof of work is somehow broken, Bitcoin will just do a hard fork and switch to some other consensus mechanism.