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Can somebody ELI5 how cryptocurrencies don't run afoul of Ponzi scheme laws? The only way the price can be going up is if new money is coming in constantly, rig

Can somebody ELI5 how cryptocurrencies don't run afoul of Ponzi scheme laws? The only way the price can be going up is if new money is coming in constantly, right?

nadaviv 9y ago
The same thing holds true for gold, diamonds, art paintings and fiat currencies.
- bandrami 9y ago
  Gold and diamonds have industrial uses and so some inherent value (even if a seller's cartel in both cases overinflates them). Fiat currencies are backed by big militaries, which, again, is an inherent value.
  - bdamm 9y ago
    Bitcoin can be transferred from anywhere to anywhere, with almost no interference. That is its inherent value.
    - foepys 9y ago
      Western Union can do this, too. Even into a lot of regions where nearly nobody has internet access. Depending on the state of the Bitcoin network, sometimes also cheaper than Bitcoin.
      - bdamm 9y ago
        As someone who has used Western Union and ended up in money-trail hell, I can tell you with complete confidence that Western Union and their ilk are huge pains in the butt and charge too much for their overly complex "service". Sure, you need to get money into bitcoin and then out in order to take advantage of that property, but the ability to do that is getting easier and cheaper all the time.
  - syntex 9y ago
    You must be from the past, as blockchain creates value by lowering cost of operations. Bitcoin, Litecoin - money transfer IOTA - micro transactions without fee ( Internet of Things ) Ethereum - contracts Monero - private, non-traceable transactions the list is long. 99% percent of these projects will fail, but 1% will create added value to the world.
    - billmalarky 9y ago
      Hey now don't sell Ethereum so short. IMO it's the real transformative platform for blockchains. It isn't just the features of Ethereum, which can be easily cloned, it's the massive and growing community around it already building exciting new products/services.
  - billmalarky 9y ago
    Bitcoin already has proven valuable properties. The question now is whether or not the future flushed out value it brings is higher, or lower, than the current market price. There's a lot of unknowns which is why at this time it is a speculative investment. Make no mistake though, bitcoin is already valuable as a value store, especially for wealthy individuals who live in countries not quite as stable as the US. It also has a place as a convenient high risk investment at the high risk end of any investors portfolio who is looking to increase their risk adjusted return.
  - joshontheweb 9y ago
    Bitcoins inherent value is utility. It facilitates things that were difficult or impossible before it existed. It allows you to transact online without middleman businesses. It allows quick, easy, and cheap international transactions. It allows you to not need a bank. It allows you to transact anonymously (if you do it right). Plus many more applications that have yet to be revealed.
- zanny 9y ago
  The stock trading value of gold is a pyramid scheme, of course. Gold, the metal, is not. Since bitcoin is just the currency, it has no intrinsic value besides its pyramid scheme. Fiat money isn't a pyramid scheme. You don't buy in on the assumption of future market growth that will drive up the value of what you have. You expect your fiat to become worth less, not more, over time. And Bitcoin is more "pyramidy" than other things because of how its coin creation algorithm worked. It halves every four years, so 16.5m of 21m bitcoin total ever to be made already exist. Early adopters got huge sums of cheap coin, while later entrants find the coin creation rates are slower and the price is magnitudes higher. Nothing precludes us having "breakout" means to increase the total market supply of things thought scarce right now. We could discover a way to synthesize gold cheaply that crashes the market, or we find space mining is a really lucrative source of gold. Suddenly the world gold supply gets a lot larger, and the price drops a lot in response. Bitcoin would require a major breaking and forking change to the algorithm to change the coin payout algorithm. And that kind of change hurts the people who have the bitcoin now, whose voice is what determines the canonical blockchain. They would never accept it unless the pyramid behavior of the current algorithm crashes the bitcoin economy.
  - pantaril 9y ago
    >Fiat money isn't a pyramid scheme. You don't buy in on the assumption of future market growth that will drive up the value of what you have. You expect your fiat to become worth less, not more, over time. Wow, so if bitcoin is or isn't pyramid scheme depends on your assumption when you buy it? That's a new one. Than i guess I'm safe because i bought it to buy goods with it, never expected that price will soar so much.
    - zanny 9y ago
      You buy goods with bitcoin by converting it to usd. Nothing is priced (at least for extended lengths of time) in bitcoin, because of the price voltaility, because of the pyramid scheme. And yes, your perception of the value of something does influence whether or not it is a pyramid scheme. If you buy 10,000 scented soaps because you want a ton of scented soap that isn't a pyramid scheme. If you buy 10,000 scented soaps thinking you can find 1,000 people to buy them off you at more than you paid for them, then you are dealing with a pyramid scheme. Fundamentally, the price growth most bitcoin users (you would be in the minority) want depends on a definitional pyramid scheme of attracting new money to drive up the price of bitcoin. It isn't even debatable - the coin minting model of btc that declines over time directly maps to how to run a pyramid scheme on it, where early adopters get the most return. Most IPOs are pyramid schemes. The stock traded price of gold is a pyramid scheme. Any system where you participate on the assumption of scarcity going up, and thus your piece becoming more valuable on the backs of new entrants to the market is a pyramid scheme.
jerf 9y ago
Well, in a nutshell, it's not a Ponzi scheme, which is not just a random slur you can fire at anything that vaguely seems like fraud, but a specific scheme that works in a specific way. In particular, it isn't clear to me how you can have a "decentralized" Ponzi scheme without making it something fundamentally different from a Ponzi scheme. To the extent that BitCoin may be fraudulent or people may be engaging in illegal behavior, it's going to be other things. Perhaps somewhere someone's even running an actual Ponzi scheme using BitCoin. But BitCoin itself is not a Ponzi scheme.
- bandrami 9y ago
  Current bitcoin holders can only see gain if new "investment" (I find that term funny since it's a "security" with no fundamentals) comes in. That's pretty much the definition of a Ponzi scheme. Perhaps somewhere someone's even running an actual Ponzi scheme using BitCoin. Sure, but that's a different question. I'm talking about new investment in a security being the only source of increased value in that security. Which is what a Ponzi scheme is.
  - Phil987 9y ago
    Bitcoin is an alternative currency, really the only thing going up is the exchange rate.
    - wickawic 9y ago
      But what makes something a currency? If in an alternate universe Bernie Madoff printed MadoffBucks and made agreements that you could use these as currency in some online stores and Pizza Hut, does that make it a real currency? Unfortunately I think the only way something becomes a currency is when a government calls it one.
      - nicky0 9y ago
        It may not be a currency, depending how you choose to define that word, but it is certainly a fungible asset and a means of exchange. It acts both as a store of value and as method of transferring value from one party to another.
kruhft 9y ago
I can't say why they don't run afoul of the laws, but my realization of value of a system was due to Bitcoin. For Bitcoin to have 'monetary (dollar) value' people have to exchange 'real money' for them, putting monetary value into the system. This money becomes the pool of money or value that the system has; Ponzi schemes require that new users are providing the cash to pay the old users, but a ponzi seems for early users to be about constant guaranteed return. There is no guarantee that a whale won't take their holding out of BTC, but that's their choice, not a requirement of BTC, even though the new users (investors) are providing that cash.
bdamm 9y ago
The more people who find bitcoin useful for settling transactions, the higher the short-term value there is in bitcoin. Sustain this long enough with enough people, and you have long-term high-value. It's useful as a currency, nothing Ponzi about it.
billmalarky 9y ago
That's not how it works. The price is set on an exchange by supply and demand like any market. If bitcoin owners hold their supply, and buying interest mounts, the price will go up until an equilibrium between buyers/sellers is met (the "market price"). It's really no different from the stock market, except the asset is different. For the stock market the asset is company ownership, in the crypto market the asset is the cryptocurrency. Cryptocurrency has value, frankly, because it has valuable properties. Currently as a convenient value store (think of Chinese investors storing wealth digitally instead of in NYC/Vancouver real estate), but the technology is developing so there's a lot of speculation that it could have further values we haven't discovered yet. The fact that investors are speculating on unknown future valuable properties of the tech instead of known cash flows is what makes crypto investing high risk - if the tech ends up truly being transformative then early investors will win big, if not then expect a bloodbath.
ISL 9y ago
A price is set when a buyer and seller agree on a price. If all sellers want a high price, then the price will be high. The bitcoin price is rising as much because current holders would rather hold as because buyers are willing to pay more than they were in the past. A Ponzi scheme promises a return, and uses new money to fund returns to existing investors. Cryptocurrencies themselves make no such promise -- those buying with intent to sell in the future are buying with the belief that the future price will be higher, but such a reality is hardly certain.
- SippinLean 9y ago
  and even if that reality was certain, there's no one "running" Bitcoin to determine who to pay dividends to (such as in a Ponzi)
  - bandrami 9y ago
    Only if you ignore the exchanges, who have been marketing them to people.
    - SippinLean 9y ago
      The exchanges cannot decide who receives dividends and who does not, very much unlike a Ponzi.
SippinLean 9y ago
because a Ponzi Scheme has a meaning more specific than "scheme" that Bitcoin does not fit
deleted 9y ago
[deleted]
ojr 9y ago
bitcoin was created to be a deflationary currency that couldn't be regulated, the market deciding the price is a feature not a bug, not everyone agrees with their local monetary inflationary policy and bitcoin provides an alternative store of value, cypherpunks think cryptography and math should run things and the the us stock market is the real bubble

Can somebody ELI5 how cryptocurrencies don't run afoul of Ponzi scheme laws? The only way the price can be going up is if new money is coming in constantly, right?

nadaviv 9y ago

The same thing holds true for gold, diamonds, art paintings and fiat currencies.

bandrami 9y ago
Gold and diamonds have industrial uses and so some inherent value (even if a seller's cartel in both cases overinflates them). Fiat currencies are backed by big militaries, which, again, is an inherent value.
- bdamm 9y ago
  Bitcoin can be transferred from anywhere to anywhere, with almost no interference. That is its inherent value.
  - foepys 9y ago
    Western Union can do this, too. Even into a lot of regions where nearly nobody has internet access. Depending on the state of the Bitcoin network, sometimes also cheaper than Bitcoin.
    - bdamm 9y ago
      As someone who has used Western Union and ended up in money-trail hell, I can tell you with complete confidence that Western Union and their ilk are huge pains in the butt and charge too much for their overly complex "service". Sure, you need to get money into bitcoin and then out in order to take advantage of that property, but the ability to do that is getting easier and cheaper all the time.
- syntex 9y ago
  You must be from the past, as blockchain creates value by lowering cost of operations. Bitcoin, Litecoin - money transfer IOTA - micro transactions without fee ( Internet of Things ) Ethereum - contracts Monero - private, non-traceable transactions the list is long. 99% percent of these projects will fail, but 1% will create added value to the world.
  - billmalarky 9y ago
    Hey now don't sell Ethereum so short. IMO it's the real transformative platform for blockchains. It isn't just the features of Ethereum, which can be easily cloned, it's the massive and growing community around it already building exciting new products/services.
- billmalarky 9y ago
  Bitcoin already has proven valuable properties. The question now is whether or not the future flushed out value it brings is higher, or lower, than the current market price. There's a lot of unknowns which is why at this time it is a speculative investment. Make no mistake though, bitcoin is already valuable as a value store, especially for wealthy individuals who live in countries not quite as stable as the US. It also has a place as a convenient high risk investment at the high risk end of any investors portfolio who is looking to increase their risk adjusted return.
- joshontheweb 9y ago
  Bitcoins inherent value is utility. It facilitates things that were difficult or impossible before it existed. It allows you to transact online without middleman businesses. It allows quick, easy, and cheap international transactions. It allows you to not need a bank. It allows you to transact anonymously (if you do it right). Plus many more applications that have yet to be revealed.
zanny 9y ago
The stock trading value of gold is a pyramid scheme, of course. Gold, the metal, is not. Since bitcoin is just the currency, it has no intrinsic value besides its pyramid scheme. Fiat money isn't a pyramid scheme. You don't buy in on the assumption of future market growth that will drive up the value of what you have. You expect your fiat to become worth less, not more, over time. And Bitcoin is more "pyramidy" than other things because of how its coin creation algorithm worked. It halves every four years, so 16.5m of 21m bitcoin total ever to be made already exist. Early adopters got huge sums of cheap coin, while later entrants find the coin creation rates are slower and the price is magnitudes higher. Nothing precludes us having "breakout" means to increase the total market supply of things thought scarce right now. We could discover a way to synthesize gold cheaply that crashes the market, or we find space mining is a really lucrative source of gold. Suddenly the world gold supply gets a lot larger, and the price drops a lot in response. Bitcoin would require a major breaking and forking change to the algorithm to change the coin payout algorithm. And that kind of change hurts the people who have the bitcoin now, whose voice is what determines the canonical blockchain. They would never accept it unless the pyramid behavior of the current algorithm crashes the bitcoin economy.
- pantaril 9y ago
  >Fiat money isn't a pyramid scheme. You don't buy in on the assumption of future market growth that will drive up the value of what you have. You expect your fiat to become worth less, not more, over time. Wow, so if bitcoin is or isn't pyramid scheme depends on your assumption when you buy it? That's a new one. Than i guess I'm safe because i bought it to buy goods with it, never expected that price will soar so much.
  - zanny 9y ago
    You buy goods with bitcoin by converting it to usd. Nothing is priced (at least for extended lengths of time) in bitcoin, because of the price voltaility, because of the pyramid scheme. And yes, your perception of the value of something does influence whether or not it is a pyramid scheme. If you buy 10,000 scented soaps because you want a ton of scented soap that isn't a pyramid scheme. If you buy 10,000 scented soaps thinking you can find 1,000 people to buy them off you at more than you paid for them, then you are dealing with a pyramid scheme. Fundamentally, the price growth most bitcoin users (you would be in the minority) want depends on a definitional pyramid scheme of attracting new money to drive up the price of bitcoin. It isn't even debatable - the coin minting model of btc that declines over time directly maps to how to run a pyramid scheme on it, where early adopters get the most return. Most IPOs are pyramid schemes. The stock traded price of gold is a pyramid scheme. Any system where you participate on the assumption of scarcity going up, and thus your piece becoming more valuable on the backs of new entrants to the market is a pyramid scheme.

jerf 9y ago

Well, in a nutshell, it's not a Ponzi scheme, which is not just a random slur you can fire at anything that vaguely seems like fraud, but a specific scheme that works in a specific way. In particular, it isn't clear to me how you can have a "decentralized" Ponzi scheme without making it something fundamentally different from a Ponzi scheme. To the extent that BitCoin may be fraudulent or people may be engaging in illegal behavior, it's going to be other things. Perhaps somewhere someone's even running an actual Ponzi scheme using BitCoin. But BitCoin itself is not a Ponzi scheme.

bandrami 9y ago
Current bitcoin holders can only see gain if new "investment" (I find that term funny since it's a "security" with no fundamentals) comes in. That's pretty much the definition of a Ponzi scheme. Perhaps somewhere someone's even running an actual Ponzi scheme using BitCoin. Sure, but that's a different question. I'm talking about new investment in a security being the only source of increased value in that security. Which is what a Ponzi scheme is.
- Phil987 9y ago
  Bitcoin is an alternative currency, really the only thing going up is the exchange rate.
  - wickawic 9y ago
    But what makes something a currency? If in an alternate universe Bernie Madoff printed MadoffBucks and made agreements that you could use these as currency in some online stores and Pizza Hut, does that make it a real currency? Unfortunately I think the only way something becomes a currency is when a government calls it one.
    - nicky0 9y ago
      It may not be a currency, depending how you choose to define that word, but it is certainly a fungible asset and a means of exchange. It acts both as a store of value and as method of transferring value from one party to another.

kruhft 9y ago

I can't say why they don't run afoul of the laws, but my realization of value of a system was due to Bitcoin. For Bitcoin to have 'monetary (dollar) value' people have to exchange 'real money' for them, putting monetary value into the system. This money becomes the pool of money or value that the system has; Ponzi schemes require that new users are providing the cash to pay the old users, but a ponzi seems for early users to be about constant guaranteed return. There is no guarantee that a whale won't take their holding out of BTC, but that's their choice, not a requirement of BTC, even though the new users (investors) are providing that cash.

bdamm 9y ago

The more people who find bitcoin useful for settling transactions, the higher the short-term value there is in bitcoin. Sustain this long enough with enough people, and you have long-term high-value. It's useful as a currency, nothing Ponzi about it.

billmalarky 9y ago

That's not how it works. The price is set on an exchange by supply and demand like any market. If bitcoin owners hold their supply, and buying interest mounts, the price will go up until an equilibrium between buyers/sellers is met (the "market price"). It's really no different from the stock market, except the asset is different. For the stock market the asset is company ownership, in the crypto market the asset is the cryptocurrency. Cryptocurrency has value, frankly, because it has valuable properties. Currently as a convenient value store (think of Chinese investors storing wealth digitally instead of in NYC/Vancouver real estate), but the technology is developing so there's a lot of speculation that it could have further values we haven't discovered yet. The fact that investors are speculating on unknown future valuable properties of the tech instead of known cash flows is what makes crypto investing high risk - if the tech ends up truly being transformative then early investors will win big, if not then expect a bloodbath.

ISL 9y ago

A price is set when a buyer and seller agree on a price. If all sellers want a high price, then the price will be high. The bitcoin price is rising as much because current holders would rather hold as because buyers are willing to pay more than they were in the past. A Ponzi scheme promises a return, and uses new money to fund returns to existing investors. Cryptocurrencies themselves make no such promise -- those buying with intent to sell in the future are buying with the belief that the future price will be higher, but such a reality is hardly certain.

SippinLean 9y ago
and even if that reality was certain, there's no one "running" Bitcoin to determine who to pay dividends to (such as in a Ponzi)
- bandrami 9y ago
  Only if you ignore the exchanges, who have been marketing them to people.
  - SippinLean 9y ago
    The exchanges cannot decide who receives dividends and who does not, very much unlike a Ponzi.

SippinLean 9y ago

because a Ponzi Scheme has a meaning more specific than "scheme" that Bitcoin does not fit

deleted 9y ago

[deleted]

ojr 9y ago

bitcoin was created to be a deflationary currency that couldn't be regulated, the market deciding the price is a feature not a bug, not everyone agrees with their local monetary inflationary policy and bitcoin provides an alternative store of value, cypherpunks think cryptography and math should run things and the the us stock market is the real bubble