Why Cryptocurrencies Are Worse Than Pyramid Schemes by Michael Shellenberger
Why did so many smart people fall for them?
The $32 billion cryptocurrency exchange, FTX, which declared bankruptcy 11 days ago, appears to be the second-largest pyramid scheme in history after Bernie Madoff’s scheme, which was discovered in 2008. The Madoff case provides optimism that a significant amount of the money lost by FTX could be discovered and recovered. The legal custodian to the Madoff fortune found and returned a remarkable 88% of the assets to Madoff’s more than 40,000 victims. This morning, Reuters reported that Bankman-Fried and his parents bought over $120 million of Bahamas real estate properties, including seven luxury beachfront homes worth nearly $72 million, over the past two years. The custodian-CEO of FTX, John Ray III, who oversaw the Enron cleanup, will likely announce many such discoveries in the weeks to come.
FTX is not the first apparent crypto pyramid scheme. OneCoin cryptocurrency, founded by Ruja Ignatova, took in over $4 billion. As such, the FTX scandal raises an important question: are all cryptocurrencies pyramid, or Ponzi, schemes? Many on the Right and Left alike believe they are. “I’m a major skeptic on crypto tokens, which you call currency, like Bitcoin,” said JPMorgan CEO, Jaime Dimon, in congressional testimony in September. “They are decentralized Ponzi schemes.” The progressive Substack columnist Matt Stoller wrote earlier this month, “At the top of the market, back in December 2021, I wrote a piece very explicitly saying that crypto was a set of Ponzi schemes.”
A Ponzi scheme is a kind of criminal fraud in which investors in a business are paid by new investors who go on to recruit new investors, and so on. There is little to no real economic value created by the business. It’s just investors giving their money to existing investors, thereby creating the perception among participants that they are in a real business, even though they are creating no real value. It’s called a pyramid scheme because it depends on a growing base of investors to funnel money to the top of the organization.
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Defenders of cryptocurrencies say FTX was a unique case and that most cryptocurrencies aren’t Ponzi schemes because they are decentralized. Bitcoin is a blockchain technology, which means it’s a computer code held in a peer-to-peer computer network that cannot be altered. “Bitcoin cannot be a Ponzi Scheme,” writes a defender of the technology. “Due to the nature of blockchain, anyone at any time can verify all transactions made on the Bitcoin network, dissimilar to a Ponzi Scheme where ‘investments’ are shrouded in secrecy.” Writes another, “if Bitcoin were a scam, there’d be a nefarious person or people behind it actively profiting from the scheme.”
