If you can believe it, scams and Ponzi schemes have existed and thrived in the cryptocurrency industry well before the recent speculative exuberance a
If you can believe it, scams and Ponzi schemes have existed and thrived in the cryptocurrency industry well before the recent speculative exuberance around decentralized finance (DeFi), non-fungible tokens (NFTs) and token launches on blockchains like Binance Smart Chain. For sure there are a lot of sketchy “profile pic” projects (PFPs) and questionable economic games played using smart contracts, those lines of code that supposedly cut out the middlemen from basic financial services. So, you know, do your own research.
Thankfully, some crypto projects make it easy for you. In 2014, Ponzi.io launched. It promised 1.2 times returns paid in bitcoin on deposits as little as 0.0001 BTC. “Get rich off the world’s first open Ponzi scheme!” the project’s website advertised. To say nothing else about it, Ponzi.io is guilty of false and deceptive marketing; it wasn’t even the first self-evident Ponzi.
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Just as these schemes have long thrived in crypto, there have also been commentators willing to go out on a limb, risking libel and alpha capital gains, to dismiss the entire blockchain-based industry as fraudulent. Last month, Robert McCauley, an economist at Boston University, wrote an op-ed stating, “Bitcoin is worse than a Madoff-style Ponzi scheme.”
His case? People buy bitcoin with the expectation of a profit. Because bitcoin is a “zero-coupon perpetual” rather than a “income-generating” digital asset, the only way to profit is to “cash out” to someone else – the salutary greater fool. Bitcoin is worse than your everyday pump-and-dump penny stocks for McCauley. If the economic project fails, it’s not just zero-sum for investors who lose their money, but “negative-sum” for society because of bitcoin’s steep power bill.
While McCauley’s prediction that Bitcoin might collapse is a bit histrionic, it’s not totally out of the question if one is fair-minded. He’s off-base, however, in stating that mining bitcoin “represents a real cost” for the world. It’s simply not for any individual to decide what power switches to flip on or off in a free market, especially given that many people willingly enter into the economic arrangement of securing this largest of decentralized, digital monetary networks (sometimes profitably).
Still, you can’t fault the man for using the P-word. Major crypto media companies, “thought leaders” and informed users of crypto platforms often throw it around. Hardcore bitcoiners have called everything from BitPay to Brave “scams” simply for trying to get people to spend their bitcoin or earn crypto for using a browser. That “Ponzi” has been picked up by critics as a cudgel is crypto’s own doing.
See also: NFT Scams: How to Avoid Falling Victim
Jake Chervinsky, the head of policy at the Blockchain Association, thinks this is detrimental branding.
“You’re using the term ‘Ponzi’ to mean an economic game with built-in investing incentives & high risk of implosion,” he said. “When regulators hear ‘Ponzi,’ they think it means a fraudulent scheme in which a criminal deceives victims to steal their money.
“This term is doing massive damage,” Chervinsky tweeted Monday.
With all due respect to the newly hired policy lead, I think the term is actually a useful heuristic for describing much of this industry’s activity. As Chervinsky notes, crypto projects are “Ponzi-like” in that they often incentivize early participation in a project with the promise of a return. That’s a broad definition, but these behavioral incentives are widespread.
As a reporter, I find that there is value in speaking with economy, clarity and honesty. “Ponzinomics” is a term that has come up in the industry because it accurately captures much of what goes on. It’s why people “ape in” to protocols, and even the mindset behind “hodling” bitcoin.
There should absolutely be more of an effort to draw a distinction between actual scams and legitimate efforts, but the term is what it is and, again, there shouldn’t be language policing of free markets. I advocate the use of softer words: “Ponzi-like” or “Ponzi-esque” because we’re rarely ever discussing the real deal.
“Ponzi scheme” has a well-established definition. As McCauley noted, in 1920, Charles Ponzi guaranteed 50% returns on 45-day investments. Early investors profited from fresh incoming capital before the entire plot collapsed less than a year in. Bernie Madoff ran the same game, the longest-such scheme we can all agree on, before the Great Recession hit and redemptions halted. The key is that there is no legitimate economic activity, just a terminal perpetual-motion machine.
DeFi protocols like Ohm, which “Ohmies” described as a Ponzi, are based on continuing adoption, a constant stream of money. But it was also…
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