Hacker News Reader

Comment by gzer0 | Hacker News Reader

> Where do these high APYs come from? Well a lot of it is coming from incentives of these protocols and speculation in those native assets. But the author doesn't even know that, so I won't bother steelmanning his argument

Is this not the very definition of a ponzi scheme? The returns coming from "incentives" of these protocols and "speculation" in those native assets sounds very ponzi-like to me.

View on HN

If the yields are actually coming from speculation, it's not a Ponzi. Ponzis don't generate real yields, they just shuffle money from new investors to old investors. If it's actually making risky bets and winning them it's more like a hedge fund or something.

Of course hedge funds don't have steady 10% yields, they lose money when their risky bets don't pan out.

That's essentially exactly what a Ponzi scheme is. You have an asset with 0 intrinsic value that only goes up in value due to new investors buying in.

You will only ever make more money if somebody buys in after you.

Unlike stocks where owning a share entitles you to profit stream of the company (intrinsic value)

If they are actually lending the money out to people who aren't investors, earning interest on it and returning that to investors, then Celcius is not a Ponzi scheme, it's probably speculating on weird, opaque and shitty assets, but it's not a Ponzi.

Like, if I set up a business "investing" in worthless penny stocks and somehow manage to generate returns, I'm not running a Ponzi. Maybe I'm pumping and dumping those penny stocks. It's still a scheme, it's just not a Ponzi- I am actually earning money for my investors! I'm defrauding other people, but I'm not defrauding my investors.

Pump and dumping penny stocks works exactly like a Ponzi scheme. It's a layer removed perhaps, but the early buyers win and the later buyers lose, by definition.

I'm not an expert in Celsius, perhaps it's structured a bit differently. But any system that relies on new investors paying out the old is structured akin to a Ponzi scheme, if there's no intrinsic value element to the speculation.

If AAPL pays a 10% dividend, huge numbers of people would buy it for the yield. The yield comes from their underlying business, not from investor money. This puts a floor on the price.

When your yield only comes from newer investors, that's not intrinsic value or sustainable

Not every financial fraud is a Ponzi scheme, and it's silly to call everything a Ponzi. It sounds like Celsius probably is one, though.

"A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors"

Explain how pump and dumping penny stocks doesn't apply? I agree that it's a bit different in nature than most Ponzi Schemes due to lack of central entity orchestrating it, but the net effect is the same in the end.

You get in early, you win, you get in late, you lose.

Even if we call it something else, it's clear the underlying mechanism and unsustainability of returns is the same.

I'm talking about a hypothetical scheme where you get some capital from some investors, and then go out and pump and dump penny stocks onto other people who aren't your investors, and then return your winnings as interest to your investors. You are genuinely earning money for your investors (and defrauding other people).

In a Ponzi, you can't satisfy all your investors- you literally don't have the money you say you do. Eventually it will collapse and piss off most of your investors. But if you are really good at pumping and dumping you could in theory just keep doing that until you can't make money anymore, and then close up shop with a tidy profit for you and your investors.

They're both frauds, but they're different.

I've seen that definition of Ponzi schemes a lot and it doesn't really explain how they work - you could say the same about, say, most of the stock market where the only way to exit your position is through funds from new investors. The defining feature of Ponzi schemes is that they pay out interest using the funds of new investors. It's important to understand this carefully because it's the reason Ponzis have to fail - the actual paper amount investors have in their acounts and can withdraw is backed by a pool of money that's slowly eaten away by the fraudulent interest payments, until one day the scheme can't meet withdrawals and the whole thing implodes. Ordinary cryptocurrencies like Bitcoin and Ethereum don't have this underlying mechanism and so it doesn't make sense to call them a Ponzi scheme. That doesn't mean that they're a good investment, but they don't work anything like a Ponzi. This lending scheme, on the other hand, has most of the usual Ponzi warning signs.

You get dividends from stocks, so new investors is not the only way.

Stocks that don't pay a dividend have promise of paying one in the future as their cash flows grow. That's the fundamental basis to all stock valuation. It's why people talk about P to FCF, PE, PS ratios. For growth stocks, hypothetically, how much in dividends could I get 30 years from now?

It's true that many investors don't consider what the fair value actually is, but that's how you end up in a bubble and the price disconnecting from the fundamentals never lasts forever.

Real estate more obvious and direct via rents.

But yeah, pump and dump kind of stocks where they far exceed their fundamental value are similar.

We can argue semantics and what defines a Ponzi scheme, all I'm saying is that crypto largely has no intrinsic value. Any value that's explained is always self referential in terms of other crypto.

Bitcoin has some small intrinsic value for illicit payments, or hedging inflation in countries without capital markets. You could argue the net intrinsic value is negative due to the environmental costs though. But outside of edge/fringe cases, all valuation relies on a greater fool effectively.

Even gold is still majority used for industrial purposes, despite also being seen as an investment vehicle.

> Explain how pump and dumping penny stocks doesn't apply?

That's just market manipulation. Going on Twitter and saying "BTC to the moon!" isn't a Ponzi. It requires an actor (like Charles Ponzi) to take new investors' money and pay it to old. Bitconnect was Ponzi scheme, not in some abstract sense.

> You get in early, you win, you get in late, you lose.

So vague it applies to everything that pays interest...

Not true.

If I buy a stock or a bond, I get the dividend payment regardless of when I get in. It doesn't require you to be early, just to accept what the current value proposition is.

You'll make more money if you time it right, but you get some intrinsic value from it even if no future investors ever come along.

Or more obviously, buying rental property. Cap rates change over time, but you always get some real return.

And "pump and dump" implies a coordinated scheme. Usually they'll create groups/networks and call for everybody to buy in. But they tend to frontrun the group. We can call that something other than Ponzi, but at the end of the day, the later buyers are paying off the earlier buyers, and it's zero sum.. the underlying relationship is the same

Yields for nascent crypto projects are basically marketing budgets and user acquisition costs passed on to the user as profits instead of going to Google Ads or being a coupon for free fries with your order. They want to incentivize people to bring liquidity to them, and pay them for it. The real question is whether or not this actually leads to retention or of it's wasted capital, but that's beyond the point of the article.

Reply on news.ycombinator.com