In a tweet that has been celebrated by the Bitcoin community worldwide, Stephen Palley (who is a lawyer and knows a lot about crypto, inside and out), ruled: Bitcoin is not a Ponzi.

And of course, I have to agree. I will also continue to say that “Bitcoin is a Ponzi”, of course, because that’s what describes best Bitcoin as an investment, and that’s what anyone who is considering “investing” in Bitcoin should know about it.

But for those who think of Bitcoin as more than a magical chart rising from zero to infinity where you just can’t lose, Bitcoin isn’t a literal Ponzi scheme. It’s much more than that, and its Ponzi-like part is just one piece of the machinery.

The Ponzi part of Bitcoin

Bitcoin looks a lot like a Ponzi scheme as an investment. When you buy Bitcoin, you don’t buy anything real. It doesn’t give you right to a share of a business, or to something that has economic value (“economic value” means that someone could transform it into a product that can be sold for a price that’s higher than the sum of its parts). Neither does it give you any claims on assets that could be sold to meet your “redemption request”.

Paying off old investors with new investor money

Palley states that “Ponzis are an investment fraud where fraudsters pay old investors w/ new investor $$, unknown to either.”

If you want to get out of Bitcoin, you need to find someone to buy it from you. Intermediaries will take care of that task for you, of course – you’ll usually sell your Bitcoin on an exchange, who will connect you with a buyer, for a fee. But you still need someone who thinks that Bitcoin will go up and wants to buy it, in order to be able to cash out.

The crucial difference with legitimate markets and assets, where you still need someone to “buy your bags” when you want to cash out, is who this buyer is likely to be. A stock, for example, can be bought back by the company itself, as a way to return cash to shareholders. It can be bought by another company, in a takeover, because the combined company will be more valuable that the two operating separately (think of Facebook acquiring WhatsApp, or Instagram). Or inversely, a stock can be also be bought because people think that the company is worth less than the sum of its parts, and will reorganise it, selling off some of its assets. This is particularly true when markets are in distress, and valuations are low.

The only motivation for buying Bitcoin, however, is the hope of selling it at a higher price. Its price is only supported by people who think it’s going higher, no one is buying Bitcoin because it’s too low. There is no floor to its price, Warren Buffet won’t come in to buy Bitcoin at $500 because it has some kind of underlying value that’s higher than that.

Here you have it: the only way to pay out old Bitcoin investors is to get money from new investors. The only difference with a genuine Ponzi scheme, is who pays the old investors. It’s not the “fraudsters” (as Palley puts out in his tweet), but exchanges. Neat!

Intention to deceive

One of Palley’s arguments against Bitcoin being a Ponzi scheme, is that there’s no intent to deceive:

I mean, Stephen, really? You have thousands of Twitter accounts of Bitcoin “personalities” spewing out crap like this on a daily basis:

The linked article is a braindump of every Bitcoiner meme and conspiracy theory ever, posted in the panicky days of March 2020 when crypto prices were collapsing.

Demand is increasing, especially now. [Bitcoin] will be fine.

CZ, March 2020

[Cryptocurrencies] still work. [Cryptocurrencies] are still in limited supply, no one can arbitrarily print more of [cryptocurrencies].

CZ, March 2020

I believe gold is sunsetting, whereas bitcoin is just starting.

CZ, March 2020

Fundamentally, I believe the current (or what I usually call the legacy) system is broken. And bitcoin fixes this.


The biggest deception of all, of course, is the meme “if you had bought Bitcoin ten years ago, you’d be a millionaire today”. No. If you had bought Bitcoin 10 years ago, you would have lost it. Between exchange hacks, lost passwords and wallet bugs, Bitcoin has only managed to go up in its early years because people who bought in, lost their coins and will never be able to sell. There’s a reason Barry Silbert is able to charge 2% per year to guard your Bitcoins, despite the “be your own bank” meme: not paying the fee will probably end up costing you much more. With time, as the infrastructure improved and wallets became more reliable, Bitcoin’s exponential rise has been curtailed as well because people were less prone to lose their coins. Bitcoin’s price rise from $0.01 to $20,000 is an illusion: the coins that were worth $0.01 are not the same that are worth $20,000.

But, here again, Palley is right: it’s not the “fraudsters” who deceive Bitcoin investors. It’s everyone and themselves, by repeating the same memes that have emerged over the years to provide easy answers to hard questions, in order to shut down any intent to understand the economics of Bitcoin and give way to the urge of buying magic Internet coins in hopes of moon and lambos.

The industry of Bitcoin – where does all the money go?

Who benefits from Bitcoin? Clearly not the poor shmucks who are buying it. It’s a zero-sum game with huge overheads. Imagine playing flip-a-coin where you only make 90 cents every time you bet a dollar and guess right. Yup, it’s that bad.

Mining costs

Bitcoin can’t exist without miners, who run ASICs. ASICs are specialised computers who calculate the very specific function that commands the production of new Bitcoins. Every ten minutes or so, on average, one of the ASICs guesses the right number out of a gazillion possibilities, a new block is added to the Bitcoin blockchain, and the owner of the ASIC that guessed right gets some Bitcoins (something that’s also called a “block reward”).

For the next three and a half years, block rewards will be worth 6.25 Bitcoins, or around 200,000 USD at current prices. Remember – there’s one block reward every ten minutes, so that’s $28M per day. That’s a lot of money, and a huge incentive for miners to buy new ASICs and run them, burning electricity. Because every ASIC is in competition, and the rewards are stable, turning on new ASICs reduces the profitability of Bitcoin mining by increasing costs. In a perfect market equilibrium, the cost of mining Bitcoin is equal to the rewards. It’s never the exactly the case, but it’s a good rule of thumb for evaluating how much it costs to run the network.

The consequence of this is that when the price of Bitcoin rises, miners are incentivised to buy and run more ASICs, which increases the cost of maintaining the network. As miners cover their costs by selling their block rewards, Bitcoin buyers are effectively paying for the network.

Forget the meme that “Bitcoin transactions are cheap”. The true cost of a transaction isn’t the “transaction fees” – those are indeed manageable, a few dollars per transaction – but the cost of maintaining the network. As the Bitcoin network currently processes around 300,000 transactions per day at a cost of $28M (plus transaction fees), the true cost of one transaction is around $100.

A lot of these mining costs go towards buying new ASICs. Bitmain, for one, is a huge beneficiary of Bitcoin going up. Its whole business depends on the price of Bitcoin remaining high – or miners won’t be incentivised to buy its flagship product, the Antminer. We are talking billions of dollars per year, and an IPO that’s brewing fast.

Miners, of course, also want Bitcoin to go up, because then their block rewards are worth more. Even if they have to pay a big chunk of that reward money to Bitmain and to electricity producers, high Bitcoin prices mean big profits.

Exchange fees

Over 200 cryptocurrency exchanges live off of trading fees. Transaction fees and bid/ask spreads, multiplied x-fold when traders put on leverage, stand for billions of dollars per year. It’s safe to assume that exchanges make more money than miners, as a whole.

Money made by arbitrage, where algos exploit price discrepancies between the gazillion of existing cryptocurrency pairs, and different exchanges, are also something that shouldn’t be ignored.

Because revenue from all these activities is raked in in crypto (mostly Bitcoin), and it needs to be converted into real money (to pay for the cost of doing business, at the very least), all these costs are covered, once again, by Bitcoin “investors”.

Lambos and Yachts

Let’s assume, for the sake of argument, that some Bitcoin investors manage to buy the bottom, not lose their coins in a faulty wallet or an exchange hack, sell at the top, AND cash out for real money.

Well, those lucky fellows need to be paid, and the money comes from other, less lucky Bitcoin investors. I deliberately put this category in the third place, after miners and exchanges, because these costs are the less certain, at probably the lowest in the Bitcoin economy.

During a gold rush, sell shovels.


Who are the enablers?

As Palley put it out, Bitcoin “literally” isn’t a Ponzi scheme because neither the communication nor the trading are being run by those who orchestrate the scheme.

I suspect Palley isn’t just theorising here – he knows what he’s talking about.

Now you can argue that “there are no fraudsters, the Bitcoin economy runs organically” – in which case I’ve got some Ripples to sell to you. N.B. this isn’t a random stab, the creator of Ripple, Jeb McCaleb, was a Bitcoin pioneer, launching one of the first Bitcoin exchanges, and certainly the most infamous and also the most important, which processed 70% of all Bitcoin trades at its peak (MtGox).

There’s something different with the recent Bitcoin bull run, from sub-4k to 28k as of the time I’m writing this. All the previous bull runs – to $30 (2011), $200 and $1,200 (2013), and $19,800 (2017) were incredibly messy in terms of market structure, with different exchanges quoting widely diverging prices for the cryptocurrency. The last 3 bull runs, that took Bitcoin from $2 to $20k, were also influenced by exogenous factors – 2013 was the work of the Willy bot, in charge of covering up the mess of the MtGox hacks, and 2017 was the result of the ICO euphoria, during which masses of gamblers investors rushed into Bitcoin to buy Dentcoin and other worthless shitcoins, hoping to see them repeat Bitcoin’s meteoric rise.

The 2020 bull run, on the other hand, was remarkably orderly, with exchanges sticking their quotes within 1% of one another, while no apparent exogenous factors are influencing the price of Bitcoin, despite the “institutions are coming” meme.

He who must not be named

I’m obviously talking about Tether.

  • Most Bitcoin trades against Tether
  • Aligned quotes on most exchanges mean that USDT is pegged at 1 at the exchange level – meaning that the exchange is assuming Tether’s credit risk
  • Most newly created USDT are sent to exchanges
  • USDTs are backed by loans, as per Tether’s own website – meaning that exchanges receive USDTs in exchange of IOUs to Tether
  • USDTs are used to circumvent capital controls and launder money in/out of China, where most of Bitcoin mining is happening
  • Tether has proven ties to the criminal underworld (NYAG investigation)

And of course, the 2020 Bitcoin bull run happened in lockstep with an ever-increasing issuance of new USDTs. As a matter of fact, the bull run started in mid-September, right after Judge Joel M. Cohen, who oversees the NYAG’s inquiry over Bitfinex and Tether, ruled that Bitfinex and Tether must turn over documents detailing their relationship. They have until January 15, 2020 to comply.

If you know that your days of running a scam are numbered, why not putting it in overdrive, and try to milk it as much as possible? In the case of Bitcoin, this would mean pumping its price artificially by issuing a crapload of new USDTs and buying all the Bitcoin you can get your hands on, to try and ignite investor FOMO, and then sell your Bitcoin bags back to them, for real cash. Before disappearing into the night.

Because most BTC is traded against USDT, Tether holds a death grip over exchanges’ balls operations. It has also positioned itself as the go-to medium of exchange for money laundering in China. Tether is the heart that pumps the lifeblood of the crypto economy, and can reasonably do whatever it pleases. To understand the kind of power it exerts over everyone involved in Bitcoin, look no further than the outrage of the Bitcoin community when the US Congress announced its intention to regulate stablecoins, on December 2. Or the fact that Tether/Bitfinex themselves admitted,

BTC would tank below 1k if we don’t act quickly

Merlin (“a senior Bitfinex executive”)

Who better than Tether to run the Bitcoin not-a-literal-Ponzi scheme? There is no one more powerful in the Bitcoin economy. They control the miners, the exchanges, and the price of Bitcoin. And I’d be surprised if they don’t also end up with the largest piece of the pie, through agreements and dealings with exchanges and miners.

The genius part of this scheme is that Tether’s control over the Bitcoin economy is mostly soft power. It enables everyone, without forcing anyone to do anything that wouldn’t also benefit them as well. There aren’t really any hard links between the intermediaries – those who shill Bitcoin, and those who enable investors to trade it – and Tether. And that’s one really smart way to run the Bitcoin not-a-literal-Ponzi scheme.

Seriously, not a Ponzi?

I think Palley is right for a very important reason. I have a personal grudge against the Bitcoin not-a-literal-Ponzi scheme (mostly because I’m not part of it, of course). And I crave for authorities to do something about it.

The only way to attack the scammers, is through the courts. And it’s paramount to attack them for their exact crimes, as per the letter of the law, or they will wiggle out with the help of expensive lawyers. They have the firepower to fight back. So the legal challenge must be as precise as possible. If it’s not a literal Ponzi, and Palley points out, then attacking Tether or anyone else, is doomed to fail.

Don’t waste ammo. Bitcoin isn’t a literal Ponzi scheme. It’s more complex than that.

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1 Comment

  1. Hello ,

    Nice articles lately … it is amazing how slim the pickings are on analysis in this area after a good four years of this manipulation… I would say back to the $200-$700 range – at least for the tether manipulation stage…

    My question is this : Regarding the legal situation… the providing of documents are deadlined for 1/15/21 , but do you have any thoughts on the time scale we are working on here ? That day is a Friday … are we talking about an exit crash that weekend ? Will the NYAG be filing motions immediately on the following Monday that will send the market into a selling frenzy ? Will NYAG take more time to make sure their case is inpenetrable by the high-powered legal team tether is sure to have ? How much time ? Are there other ways out from under such a potential boot for tether ? pre-arrangements with emergent alternative stablecoins , supra-jurisdictional preparations perhaps , or other ways for this complexified ponzi to continue ?

    In other words , when do you think the price tanks ? DOES it tank ? Does it go to a million ? Is shutting down the internet the only way to stop it ? Have you any thoughts on this ?

    Thanks again for your writings and research !

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