Video - Bitcoin 101 - Why Bitcoin is Not a Ponzi Scheme - Debunking Bitcoin Myths - Part 1

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme.


Hello!  This is James D'Angelo.  And welcome to the Bitcoin 101 blackboard series.  Today we're going to talk about Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi.  And that's quite a name but most people just know him by his last name.  The guy made famous for the scheme, the money-making scheme and when you see all these insane videos people are confused by Bitcoin.  They come after it by calling it a Ponzi scheme.  And today we're going to look at it and find out exactly why it's not a Ponzi scheme.

Now let's rewind one quick second and understand that one of the reasons why there's so much confusion about Bitcoin is because Bitcoin is owned by nobody.  So this video is Bitcoin is not a Ponzi.  But its key to understand that one of the reasons why the confusion exists is because Bitcoin has no owner and why is this so, why is this so important?  Well, if you're Apple computer and you come up with this genius idea.  And you release it as a product, you're going to do everything in your power to make sure that people understand it.  

So you're going to put in millions and millions of dollars of advertising to explain to people what you're up to.  Well, Satoshi Nakamoto hasn't put in 10 cents.  The guy who developed it and then released it as open source he is no longer part of it at all.  And this thing is running entirely on its lonesome.  And therefore, there is zero dollars, zero dollars a year.  Well, let's just do it like this in advertising.  Now so you aren't going to watch the Super Bowl and see an advertisement about Bitcoin, you're going to see nothing at all.  You haven't heard one on the radio, you haven't seen one in print.  You're going to start to see as this smaller sort of auxiliary companies build. 

You've got Coin base, you've got Bitpay, you've got the new Coinkite, you've got a number of others that are climbing into this market.  They might start to advertise them but they're going to be advertising for themselves and partly as an advertisement for Bitcoin.  So Bitcoin suffers from massive misunderstanding because it's owned by nobody.  Now when you see these videos and these online articles about Bitcoin as a Ponzi scheme it's important to know that Bitcoin isn't perfect.  It does have flaws and there are some serious scares involved with Bitcoin.  So even though it's not a Ponzi scheme, and we'll talk about that entirely, there are some real problems, some real worries if you own Bitcoin.  And we're going to cover these worries in other videos but let's go through some of them here so you understand that there really are some things to be afraid of. 

I'm not going to sit there and pat your head and give you a warm hug and say, put all your money in a Bitcoin.  I'm going to say be wary of the fears.  So what realistic fear.  So let's see if I can write in an angle.  Realistic fears that you should have.  And these are things that you want to take with you as you're working and speculating and putting money in a Bitcoin or doing something with Bitcoin.  So one of them is if you're a small user or even a big user you have to worry about wallet theft.  First of all to a real beginner you don't actually have a real wallet, it's not made of leather.  This is an online analogy to a wallet.  It's a pretty good analogy because you can have your wallet stolen in real life.  So if you're walking down the street you get pickpocketed, someone's going to take your wallet and they're not going to give you your dollars back.  

So while theft is a real concern and right now you've got hordes of wallet providers online and different ways to do your wallet.  And we're going to talk about that but you have to be concerned with how your wallet is maintained.  So that's a real fear.  So I don't know how to draw for uh-huh-oh.  Another fear that's very realistic is the US government.  So some countries like Germany have been warm to Bitcoin.  Other countries have been exceedingly warm.  The Germany's already put in some statements about how they feel about Bitcoin and they're saying for the most part that it's okay to use it.  Canada has been warm to Bitcoin.  US government has not made a real peep about it.  There's been cases where they've called it a currency so they've acknowledged it as such.  

But it's more than a currency.  It's a payment protocol.  It's other things and the US government is going to come after these in some way.  Because the US government basically survives as a democracy, it survives as a good democracy.  Good democracy survive off of taxes.  Fake democracies thrive off of kleptocracy or whatever else.  So and there's a real value to paying your taxes.  If you have ever benefited from public schools or policemen or clean water you have to see that that's an issue but the real issue if you're using Bitcoin is that the US government tomorrow could say Bitcoin is illegal.  It could say it.  It seems unlikely that they're going to go this far but everybody who got their Bitcoins right now is waiting for this word from the US government.  

We just don't know where it's going to be.  So this is, you know, here's fear number one.  Here's fear number two.  A third fear and a very realistic one is that Bitcoin can be subject to bank runs.  And these won't be your traditional bank runs.  And bank runs happened a lot during the Depression.  So people would show up to the bank, they knew they had money in their account then they would asked to withdraw their money.  I'd like my $10,000 out.  The bank might not have had the cash on hand so they say sorry, we don't have it.  The guy leaves the bank in a panic.  I couldn't get my money out.  He goes tells people and they all run to the bank trying to get their money out.  But if the bank was waiting for just actual cash from the US government or somewhere else and could actually pay them all out.  They have to say no and so everyone goes crazy and everybody tries to get their money out.  And that bank run will often set off other bank runs.  

So bank runs are these moments of panic usually based off of nothing more than panic.  And in Bitcoin we've already seen some examples.  So say like a whale investor.  You know, the big whale.  We've got the tails like this, right.  You've got the whale investors blowing there -- so everybody sees their blowhole.  So you have your whale investor and what if your whale investor goes wow! 250 bucks of Bitcoin or whatever the current price is and goes I'm selling.  So a whale investor sells, who knows.  Say they sell 80,000 Bitcoins.  Right now if someone sells 80,000 Bitcoins the price will drop.  That's just the way a floating currency works.  He's going to be taking 80,000 Bitcoins out of the Bitcoin system and putting it into someplace else, US dollars.  You can put in a gold, you can put in Euros, whatever his exchange provider provides.  

Now you might even see because he's pulling so much out and sticking in yours you might see a slight tick up in Euros but Euros is a much bigger economy so you probably won't even affect the price of Euros.  But Bitcoin being much smaller you're going to see a major price drop.  Now that major price drop, any price drop scares people and day traders especially are prone to this and the go like oh! my god, Bitcoin is failing.  I'll get my money out.

So smaller investors start pulling.  Now as they pull and more pull and more pull you might start to put pressure on Bitcoins young exchanges.  So Bitcoins got great exchanges trying very hard but they have young exchanges.  They aren't used to huge volume so and we've seen this happen. right.  Bitcoins exchanges are trying to give everybody their money as fast as possible.  What happens if they choke?  So their servers can't handle the demand as the whale drops then a number of other people drop.  Well, that will create the panic.  So if the exchange is choked or can't get the money out in time that creates this panic and then you have the feedback loop which creates a bank run.  Bitcoin just like anything can suffer it but because it's smaller it might be more susceptible because one whale investor, right, somebody who owns a lot of Bitcoins.  I own a lot because I'm a whale, right, can create these issues.

Now as Bitcoin grows every day and more and more people are getting in these things are less likely to happen.  And remember that true bank runs, actually true real dollar or euro bank runs have a lot to do with liquidity.  So as I mentioned liquidity is if a bank just clearly has the money on hand well, with Bitcoin everyone always has their money on hand so a true bank run created by lack of liquidity is Bitcoins not going to be susceptible. So these are real fears.  So you've got bank runs over here.  You've got the US government still waiting to say something and you've got wallet theft.  These are things you need to be concerned with.  So you came here wondering about Ponzi schemes which it's not and we're going to tell you why right now.  But these are real worries that you should walk away with.  And these are things that you should be looking at if you're investing or stockpiling or whatever.  So that leads us to ask what exactly is a Ponzi scheme. 

And here he is in his, this looks like he's getting checked into jail, right here, our dear friend Carlo, right, who had aliases with many other names so one of his last name is a Bianchi and I'll use aliases because Carlo just like all guys who run a Ponzi scheme are con men.  And this is crucial so we're going to start with this.  Ponzi schemes require a con man and they usually require one con man because it's hard to keep secrets.  So one con man.  So you're familiar with Madoff.  He ran a Ponzi scheme.  Now let's take a look at the definition.  Let's get into an example case and let's get out and look at why Bitcoin is not a Ponzi scheme.  So one thing I want you to recall or think about as we're moving through this is that Ponzi schemes require, they require complete lack of transparency.  Require complete lack of transparency.  And we'll get into this but keep in mind that Bitcoin is the most fully transparent investment you'll ever make.  So think about that as we're moving along.

So a Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by their subsequent investors rather than from profit earned by the individual organization running the operation.  Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments in the form of short-term returns that are either abnormally high or unusually consistent.  So a lot of this is kind of gibberish too many people and we're going to color this all up.  But Bitcoin often does smell to a wise investor like a Ponzi scheme.  Because Ponzi schemes do this.  They offer high short-term returns and even long-term, right or high long-term returns.  

And Carlo, you know, Mr. Ponzi over here he was offering returns of 50%.  So he was offering 50% over a few months or a month.  He was offering a 100% over 90 days.  A 100% return in 90 days.  Now Bitcoins had days like this.  It's going up that fast.  In fact right now it's just jacking up (Inaudible 00:12:27) 240's and 205's.  So I can understand why these poor guys making these videos smell Ponzi scheme but they don't understand a Ponzi scheme at all.  So let's color this with an example and you'll see that a Ponzi scheme is a zero-sum investment.  And zero sum means the losers, there's lots of losers in a Ponzi scheme, lots of losers end up giving all their cash to one winner and that one winner often gets so excited about that it keeps going and ends up in jizznel.  He ends up in jail.  So there's his little jail number.  So let's bring up a window and look at an example and how Ponzi schemes are run.  So if you want to run one by all means be my guest.

So Ponzi scheme how to Ponzi schemes always require a central con man.  And what that con man does is he convinces an investor who we'll call Sucker Number One.  So he convinces Sucker Number One that he's got this insider thing.  He has some inside scoop on some investment that's going to skyrocket really quickly.  And in Carlo Ponzi's case he was talking about stamps and arbitrage in Europe and paying back in US dollars.  But it really doesn't matter what it is.  If you think that the government's all of a sudden is going to buy up a bunch of companies you tell this guy and he, Sucker Number One and it's key here that he hands the con man the money.  If Sucker Number One just ran and he understood the investment, he ran to Europe and bought stamps and did his thing that's not a Ponzi scheme.  So if Sucker One goes directly to the place of investment and invest it's already avoided a Ponzi scheme.  So you can already see how Bitcoin differs.  Because when you buy because you're buying into the Bitcoin system, you're not paying someone directly.

So Sucker Number One hands con man some money.  Now was does con man do.  He comes back in 30 days and he goes bang! we've hit the mother load.  Your investment made 40% and I've got the cash on me.  I'm going to hand you that money right now.  And the Sucker Number One goes oh! that's awesome.  What's the story?  Is this going to keep happening?  Do you think it's going to keep happening?  Con man goes well, you know, I mean, I think it's going to happen for a few years, you know, I think what's going up is going to keep going up and will keep being able to pull this off.

So like many people do when an investment is going well, Sucker Number One turns down his interest and he says let it ride.  All right.  So let it ride.  And it's key that early investors are so excited that they let it ride and that's part of the con man's job to make sure that this guy says let it ride.  So the con man has not handed him 40% and in fact at this point he has handed him nothing.  But what happens in the ensuing days.  Well, the con man goes around he tries to find more suckers but what's more likely to happen is that Sucker Number One is going to scream and shout about it. 

Anyone who's doing well an investment wants their friends and their family to get in.  So sucker number one goes to the con man and he goes look I've got Sucker Number Two, Number Three and Number Four for you.  They all want in.  The conman is like yeah, I think I can, you know, I think I might be able to pull that off.  And so Sucker Number One, Two, Three and Four hand their money to the con man again it's key that they hand it to the con man.  And the con man does the same thing.  He goes look, you know, after 30 days he comes back and he goes God! you guys are killing it.  We're really doing well.  And a lot of times and Carla Ponzi did this.  

They make these fake certificates.  Fake certificates.  And it shows (Inaudible 00:16:38) I don't know if I spelled right.  And on that fake certificate it shows their earnings and how much they've made and their interest and all that and it gives them this lump sum and he's like hey! you guys want that back or do you want to let it ride.  Now it's key once again that they want to let it ride.  But it's not as key now because more money's in the system.  So if one investor, and this is the way odds work, one out of ten or twenty might say I want out.  So one investor, one early investor, now Sucker Number Thirty-two, one early investor wants out.  Now here's where the comment has to make a decision.  He can hand because he's made a lot of money, everyone's handing him money.  He's not making any interest on it but he's getting now, he's got money from Sucker Two Three Four all the way up to Thirty-nine, Five thousand, who knows how many suckers are coming in.  Right. 

This is a process, creates a positive feedback loop in the community, everyone's recommending it to their friends.  He's making more and more money.  Now he can decide to disappear at that point.  He could say well, I'm not paying anybody out and co man splits.  So he splits early.  But he has probably got a lot of money and a lot of times these early investors not doing so well aren't asking for a lot.  So he could even pay this guy out with extra money.  And he makes sort of a public thing about it and people get even more excited.  Well, he really did pay that guy out and so now you get Sucker Forty through Two million.  And he never makes it that big.  Ponzi schemes are usually pretty small with a lot of big whales coming in and investing and so everyone's throwing money now at this con man who seems to have built more trust by paying, so he's built a trust line here by paying someone out.  And that's a Ponzi scheme.  

Now this thing will eventually collapse.  If someone's going to ask out and he won't have the cash.  So he's going to be riding his speed boats.  So he has taken everybody's money and he has going down to Florida and he's riding a speed boats.  When someone goes hey! you know, I read something in news about those stamps in Europe and it's not doing what you said you were doing or I got some idea that I just want out.  He comes a little bit sweaty and he goes, get me out.  And the commenting goes yeah!  I'll get back to you tomorrow and the con man disappears.  Goodbye.  Right.  And that's when everything collapses.  And this is a zero-sum game and this is a Ponzi scheme.  And it's zero sum because con man got all the money and he has probably spent it on all the things that rockstar spend money on and everybody else loses.  And that's it boom! game over.  Now again, it relied Ponzi, Carlo Ponzi scheme and every other Ponzi scheme relies on complete lack of information.  Complete lack of transparency and one person kind of being the central con man.  Right.  It could be a group of people but it's harder.  Secrets don't stay between two people.  You need a central con man.

Now Bitcoin does things.  I mean, there is no investment you're going to make where you have all the info like Bitcoin.  So Bitcoin first of all again is not a company and it's not a person.  So when you buy Bitcoins you're putting money into this network.  And the network is open source so you can see exactly how the codes working.  You can download it onto your computer, you can run little test.  Bitcoins, you could copy the open source call it Dave's coin.  And run it and just see how it works, might even gain money and might start to take over the world.  And people are doing that.  They're creating their own coins Litecoin which isn't Bitcoin and you can't get Bitcoins for Litecoins unless you go to an exchange but it's open source.  

And how was Litecoin made?  Well, exactly how I just said.  They copied this open source.  They made somethings they thought would be a nice change and they did it.  So Bitcoin is open source.  That's one big deal.  It's all the code for how it runs.  All the laws, the rules, how it runs is there.  But it's even more transparent than that because every transaction and I mean every single one, every transaction ever made is on anyone's computer who wants it.  So you can go and download every transaction every time in fact to run the system.  The computers that are doing the mining have to download it so they keep copies of it everywhere.  So hundreds of thousands of computers hold this information.  So you know exactly who got what, when, where and why.  So that's the biggest reason why you are not dealing with a Ponzi scheme.  

You can see how one person can create a Ponzi scheme but this code can't, an open transparency.  Now like I said you can have things that feel like a Ponzi scheme.  So say Satoshi Nakamoto actually was mining all his coin.  So Satoshi Nakamoto the original developer ended up mining his own coin, Nakamoto and ended up with one million coins and this is very similar to what we were talking about before.  So if he ended up with one million Bitcoins and then he just decided to dump them all.  The price would drop but people aren't left out.  Right.  Right now, if he drops all of those the price would drop but it would still have value and it might just climb right back up going oh! Satoshi Nakamoto is out, we don't have to worry about it anymore.  

So the price might even go higher.  This is a non-zero sum game.  Bitcoin early investors do well.  There's no question about it and if that pisses people off well, you know, that's life on Earth.  Early investors do well.  But late investors can do well as well, late investors do well.  Not as well, it's impossible, right.  But late investors do well as well.  And so the system is adding to everybody's usage.  And if the early big investors get out, price may drop but it might go back up.  We're just not sure about that and we've seen examples of that.  When Ross Ulbricht currency was pulled off the market.  Maybe the government is going to sell.  We saw the price dropped with then bounce back up.  Ross is gone.  The Silk Road worry is gone.

So now you understand a Ponzi scheme.  You see how it works, you have a better feeling about Bitcoin and we'll keep making videos whenever there's concern or questions.  Hope you enjoy, like, subscribe, smile, go hug your neighbor, do whatever it is you do.  Hope the information helps.  We'll see you at the next video.

Written by James DeAngelo on November 6, 2013.