Recently this year I started investing in crypto currencies (aka coins/tokens).
Yet, now that I pay more attention to the crypto marketplace, I cannot help but think, “is this a Ponzi Scheme?”
Let us discuss:
(Note that all numbers are being accessed on December 4th, 2021.)
Ponzi Schemes
The FBI defines these as criminal practices that “promise high financial returns or dividends not available through traditional investments” which “falls apart when the operator flees with all of the proceeds or when a sufficient number of new investors cannot be found”.
In short, Ponzi Schemes benefit first those who propose the ‘opportunity,’ second those that get into the scheme early to capitalize on later investors, and to anyone else, no benefit at all.
You either start the Ponzi Scheme, get in early, or play the victim to everyone who came before you.
Am I a sucker for a Ponzi Scheme?
Due Diligence
Though only doing this with ‘play’ money (dollars left after expenses and savings), I still do my homework on the range of value a coin might be worth in the future.
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- Does the coin have future general or environmental application?
- Is the team experienced with MAST goals?
- Is it staked (i.e. environmentally more viable than non-staked)?
- Has the coin thought about its own economy with a plan to handle the downsides of fiat currencies?
- Between the day-week-month-year changes in value of the currency, am I allowed to be contrarian with two or three decreased values in that timeframe?
- And most importantly, is it not a meme coin (i.e. a community-hyped coin meant to “go to the moon” in value over a short period of time before dropping again)?
Depending on those results, I weigh my investments accordingly, adding a bit of ‘fun’ diversity to my portfolio (super-majorly weighted in stocks, which I understand better than crypto).
It is clear now by no means am I a “YOLO” investor, someone who throws caution to the wind for a stake in a gambling venture. I am skeptical, thorough, and inclined to a “hell no” if an investment is not a “hell yes” for me.
I would like to think I have avoided being duped, but yet…
State of the Market
It is an understatement to say the crypto market is volatile. A lot of that may be attributed to the ‘wild west’ nature of not just deregulation, but a complete absence of oversight on the trading habits and market changes of crypto.
Nothing is insured, nothing is guaranteed. As Stanford points out, that’s the point.
Yet while the goals of crypto leave open great opportunities for a truly democratic and transparent economic and record system, so too does it leave open great opportunities for opportunists to leveraged others’ trust and ignorance.
(Causal link to Tragedy of the Commons.)
One only has to rely on short-term recall on recent scams that, well, sound an awful lot like Ponzi Schemes:
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- SQUID coin was at best a very bad joke based off of a recent Netflix show, a coin with absolute 0 economic value. Within one (1) day of the coin hitting peak trading heights, the creators blew away the coin and got away with $3.3 million after thousands invested. Sounds like the makers in a Ponzi Scheme.
- DOGE, the first meme coin intentionally created as a joke, was meant to make fun of the fevered intensity of speculation in the crypto market. In the past year, the toy coin has blasted away at ~5,550%, yet fallen ~73% in the last 7 of 12 months. Sounds like the initial investors got cake, everyone after getting crumps.
- SHIB (Shiba Inu Coin) is a meme aiming to be somewhat useful, but without tangible utility and with rampant speculation, it looks a lot like DOGE: Spike 7 months ago, a fall, and now up 67,354,693.56% from a year ago but down 30.75% in a month. Lordy, it paid to get in early; sucks to be late.
Is There a Problem?
Even though according to Coin Market Cap there are only 265 out of 7933 coins (~3%) explicitly listed as memes, the immense speculation in other coins suggests that percentage is greater and not insignificant.
With income inequality getting worse, both ignorant speculators and smart-but-not-humble-enough investors are hoping to land a quick buck.
Yet, just as crypto lacks physical value, product, leadership, and for most coins a brand, most investors seem to be rudderless. With no end-goal in mind for their investments but to make more millions, folks speculate without an exit strategy in mind.
Even if due diligence is given and a person finds themselves on a “rocketship to the moon”, undue optimism is a common negative effect that causes a person to gamble their guaranteed golden parachute now for the exponentially lower probability for a second parachute later. More like the rocket explodes after being a “hodler” for “just one more day.” Then the investor can play the victim, decrying “bad luck” and the “paper hands” who sold too early and ruined everyone’s trip to the moon.
Still, this type of behavior is not unique. It is incredibly human. History has seen the dark effects of psyche when applied to wealth accumulation by any means other than trading work. Heck, dice as a form of gambling have been around since before the pyramids.
Getting out of work with high potential rewards is fundamental human behavior. Look no further than the stock market for speculation and rude economic schemes. Crypto is not unique in this regard.
Closing Thoughts
Crypto, though not unique in how it plays on human minds or the crimes that can be committed within its markets, crypto is unique in its unregulated status.
True, unregulated speculative ventures are virtually always acquired by central powers to crack down on cheating and to extract societal taxes from the exchange of wealth. Perhaps the same will become true for crypto someday.
However, as of now, while crypto can offer great rewards to those that create and get in early on a coin, the complete collapse of asset-less currencies stands crypto apart.
A fiat currency is backed by the production capacity and raw resources of a country. A stock virtually cannot be devalued to $0 because there are physical assets and human capital behind every ticker symbol. A crypto coin?
A crypto coin has nothing but promise. Even should a coin aim for great global benefits for many, the incentives in the market, as hot as it is now, is to get in early and run to the bank with the capital of those who get in late.
So is crypto as Ponzi Scheme?
…
Maybe.
Without regulation, the incentive is to ‘default’ on the system, the social trust of others, getting in early with promises, leaving early after the next few invest too.
With the goals of democratizing ownership in crypto, a coin has the potential to get above having the floor drop out from under it. Countries begin to back the coin, people exchange tangible goods or services through it, the creators relinquish control.
A few coins ought have achieved immunity from Ponzi Scheming. Huge quantities of coins and rampant speculation makes identifying those coins anything but easy.
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*Lets out breath.*
Don’t listen to me. I spout my impressions and ideas all over this website. Do I know anything about money? No. It can be fun (and it is only human) to speculate sometimes 🙂
What are your conceptions of crypto? The strengths are praised everywhere – the interesting part is what downsides have you encountered?
Been burned by rockets to the moon yet? 🚀🔥 Or caught falling knives expecting ‘just the dip’? 🔪 Be careful you are not swept up or already caught in a Ponzi Scheme yourself 🤞
Take care of your finances, folks. Cheers to any profits!
Jimmy Chattin 