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Comment by andrewla | Hacker News Reader

I thought there was a thread about this a couple of days ago.

A Ponzi Scheme is where the sum of all investor's reported account values exceed the total value of assets held by the institution.

In order to sustain the fraud, new investors are sought out to get capital to pay out old customers.

Bitcoin may be a scam, or may be used by scammers, etc., but it's not a Ponzi. Rather than give it a label, say what you think is happening -- that it's an asset bubble sustained only by the existence of greater fools and thin, unregulated, manipulated markets. That's fine and we can argue points on that. But calling it a Ponzi just makes things confusing.

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> A Ponzi Scheme is where the sum of all investor's reported account values exceed the total value of assets held by the institution.

Which is exactly what Tether, other stablecoins, and a lot of shady centralized exchanges did. They report account values in USD, coin market caps in USD, total on-chain trading volumes in USD, where are there is often no USD to be found anywhere, just lots of digital play-money being thrown around. It's a completely false report of account values, so while Bitcoin itself might not fit the strict definition of a Ponzi, many of the enterprises operating in the ecosystem do.

[1] Anyone Seen Tether’s Billions? https://www.bloomberg.com/news/features/2021-10-07/crypto-my...

Sure; you want to accuse Tether of being a Ponzi Scheme? I think it fits the plain definition to some degree. The points that have to be dealt with are:

1. How much tether is held by Tether itself (and thus is a self-cancelling asset) vs. how much is held by outsiders (and does Bitfinex count as an outsider?)

2. What is the fair-market valuation of Tether-held assets. A bank may have non-cash assets (like outstanding loans); that does not make it fraudulent unless the valuations are fraudulent, and does not necessarily make it insolvent.

Regardless this doesn't make Bitcoin into a Ponzi. To even connect it to Bitcoin, the question is to what degree fraudulently issued tether affects the market for other cryptocurrencies? Madoff, for example, was a Ponzi that "operated in the ecosystem" of traditional finance, but that does not taint the stock market by definition.

I continue to feel that stablecoins are far more dangerous than floating cryptocurrencies because they are piggybacking off of the legal status of sovereign currencies but are not under their supervision, so like S&L or LTCM they are a shadow banking system that imposes two-way risks on finance systems. But this doesn't really affect my thinking around floating cryptocurrencies in any significant way.

I think for "stablecoins are far more dangerous" you mean stablecoins backed by same amount of currency/fiat/asset?

For example UST stablecoin from Terra maintains the price in another way.

Yes, Gold is definitely the closest asset class that aligns with Bitcoin. Not a pyramid scheme

Gold I think is a good benchmark. But really any forex asset is just as good or better for a comparison.

Gold has some portion of its value derived from decorative uses and numismatic purposes. People don't put 100 dollar bills on necklaces or wear quarter pendants.

If you hold Euros as an investment as an American (or vice versa with dollars) then this as an investment class is extremely similar to Bitcoin. Sovereign debt has similar characteristics but is subject to interest-rate based fluctuations to a greater dgree.

The main difference is that the markets for foreign exchange are tightly regulated and trade with huge amounts of liquidity -- it is difficult to inconceivable for any entity to affect the price in any way useful for market manipulation (with some exceptions, like Soros's little game with the Pound).

If BTC-style price manipulation was the rule with gold, married couples would be melting their wedding rings.

You simply cannot rely on bidding for price discovery when a significant portion (>50%) of the trading volume in cryptocurrencies appear to be wash trades, and with nothing else to tether it to, the prices keep bouncing around.

> If BTC-style price manipulation was the rule with gold, married couples would be melting their wedding rings.

You mean like all of the "Cash 4 Gold" commercials that aired in the 2000s when gold went on a huge climb?

Gold doesn't make false claims about being "decentralized" while being anything but. Gold also has actual industrial uses outside of simply being a store of value.

Neither of those pertains to pyramid schemes. You want to say that Bitcoin is useless so you should say that. Words mean things and Bitcoin is not a pyramid scheme.

> A Ponzi Scheme is where the sum of all investor's reported account values exceed the total value of assets held by the institution.

Also how fractional reserve banking works

Incorrect. The bank holds assets (book value of outstanding loans + receivables + reserves) that balance out the customer balances.

*If the banks valuation calculations are correct, which is unfortunately not always true. Case in point: the 2008 financial crisis.

This is a question of solvency. They were not Ponzis beforehand because the fair market valuation of their assets was correct. When the valuation changed, then they had the opportunity to become Ponzis, but things went a different way.

If banks had been forced to mark their assets mark-to-market, then they would have had to either 1) become insolvent, or 2) write-down customer deposits, or 3) take out huge amounts of loans to cover the difference.

The idea of TARP was to artificially mark up their assets so that they appeared to be solvent, with the Fed and the Treasury acting as the backstop in case of liquidity crunches or runs on the market. This never really panned out and the Fed just took the money and did 3 instead, and Congress was just "hey, fuck it, whatever".

2 is out of the question -- the formalism of the banking infrastructure created by the Fed and later the New Deal basically forbids saying "hey, you're taking a haircut on your savings account because you were really investing and investments may lose value".

1 was what some of them did, too, and then bigger banks came in and bought them up with borrowed money.

So the banks are the miners, absorbing risk for a time.

Sure, to the technical definition of assets, but the point is that by definition fractional reserve banks don’t have the money on hand to pay out if all of their customers decided to withdraw at once.

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