All Ponzi schemes topple eventually | Hacker News Reader

All Ponzi schemes topple eventually

theguardian.com

43 pointssrvmshr53 comments

I know it's a losing battle, but I'm going to tilt at this particular pedantic windmill.

Not all financial scams are Ponzi schemes. Most are not. Ponzi schemes involve the operator deceptively using incoming funds to pay out early investors. Ponzi schemes are based on deceptive manipulation of cash flow not on price appreciation.

If Bitcoin were an actual scam (and I'm not saying it is is) it would be a pump-and-dump. Most ICOs and shit-coins are clear pump-and-dumps.

There is a huge variety of financial scams, and it would be a fiscally safer world if more people knew about them and could discuss them.

That feels overly pedantic, since bitcoin does function as a ponzi from the investors' perspective if not a textbook one.

The difference is that miners are constantly pulling dollars out of the system rather than some sinister individual constantly pulling dollars out of the system. Hopefully we'll end up with a new word for "decentralized ponzi" to differentiate them in future.

Obviously there are actual ponzis involving bitcoin (e.g. Tezos/Nexo/BlockFi/Crypto.com, possibly USDT/USDC) but those aren't bitcoin itself. Maybe that's part of the confusion.

>That feels overly pedantic, since bitcoin does function as a ponzi from the investors' perspective if not a textbook one.

Right, but the following are all different things:

1. a guy holding a gun to your head and demanding that you withdraw cash from an ATM

2. a hacker hacking into your coinbase account and draining your funds

3. a scammer pretending to be the IRS and demanding that you to send money via western union

even though from "your perspective", they all function the same (ie. you losing money).

>Hopefully we'll end up with a new word for "decentralized ponzi" to differentiate them in future.

Yeah, it's called "speculative bubble". I suspect the reason why people don't use it is because it doesn't carry a sense of malice/criminality that "ponzi scheme" does.

They don't function the same if you take a macro-economic view. Bitcoin does in this sense (If the value extracted by miners from the BTC ecosystem to keep it running exceeds the value created by it, then it by definition has to be a speculative bag-holding scheme.)

The difference in nearly every other speculative bubble is people agree the underlying assets have some real value. Housing may be way overpriced, but nobody thinks it should be 0.

With crypto there are plenty of rational arguments that the underlying assets are worth absolutely nothing.

> Hopefully we'll end up with a new word for "decentralized ponzi" to differentiate them in future.

We don't need new word.

We already have words like "pump and dump" or "irrational asset bubble" or "high yield fraud" that accurately describe what's going on.

By understanding the kind of financial fraud that is (or many be) actually occurring and calling it out correctly, we can more effectively put a stop to them.

In fact, although there are many different kinds of crypto scams, very few are new. Most have been run many times before in a variety of different ways and have well-defined names.

> "In the murky world of crypto DeFi, it’s hard to know who provides money for loans, where the money flows, or how easy it is to trigger currency meltdowns. There are no standards for risk management or capital reserves. There are no transparency requirements. Investors often don’t know how their money is being handled. Deposits are not insured."

This should be a red flag for any investor.

And green flags for a gambler. ;-)

becausev DeFi is just code, a big pile of code, and you know how the money are being handled, every single transaction is clear, the smart contract code is open.

>>Celsius Network – an experimental cryptocurrency bank with more than one million customers that has emerged as a leader in the murky world of decentralized finance,

Celsius Network is a centralized entity with the traditional model of opaque operations relying on the integrity of its functionaries, not a decentralized finance application.

All of the reputable DeFi apps - Uniswap, MakerDAO, Compound, Aave - have operated without any problems during the crypto crash.

As for the crash itself, crypto is a giant emerging technology sector, and such sectors frequently suffer crashes. That doesn't mean they don't offer long term value or are ponzis.

How many more decades is it going to take for something useful to emerge from it?

The commercial applications of emerging technologies like the printing press, the self-propelled steam engine, the automobile, the airplane, the telegraph, the telephone, the cellphone, and the internet were immediately obvious, despite those technologies emerging with many, many, many rough edges.

How many more decades will it take for crypto to figure out a use case that it didn't have on day 1, and that isn't a scam?

Bitcoin launched in 2009, 13 years ago. Ethereum launched in 2015, 7 years ago. We're still early days.

Crypto is the first sector where rampant speculation began before mass-market consumer applications were on the horizon, and that's owing to the initial prototype having its own self-enclosed and permissionless financial system and token that could be speculated on by the general public. So the gulf between when the tokens accrued significant speculative value, and when the sector produces broadly useful applications, is exceptionally large.

That means a lot of malinvestment in nonsense projects, but also significant capital to accelerate the building out of the useful parts of the technology that will get us to broadly useful applications. I provided a list of what I believe are the necessary building blocks for mass-adoption that are being worked on right now:

https://news.ycombinator.com/item?id=31797395

Optimistically, I'd say we're two years away from production quality Rollups, which will be able to host mass-consumer applications. More cautiously/conservatively, I'd say we're four to five years away, and with emerging technology, I think it's better to go with the cautious/conservative estimates.

i'm really tired of seeing every single year the same shit told by people that don't know anything about crypto, every single year it goes down and people say "the ponzi died", after a few months it goes back again and after a year it happens again, but people that still don't know anything about how crypto works still try to talk about them like they've been studying them for years.

with the same logic you can also consider gold a ponzi scheme because if people starts mass selling it the price crashes

The Venn diagram of folks skeptical of crypto and calling it a Ponzi who are big gold investors is a dot.

Edit: for erroneous autocorrect of Venn

This is not true, plenty of crypto sceptics are not goldbugs, especially in a tech oriented platform like hn

but most (not all) Goldbugs are crypto sceptics

My financial understanding is rudimentary but please correct me if wrong: Isn't gold eventually a tangible wealth (and currencies being linked to it) unlike crypto which is purely a digital construct. Gold is a rarer metal & historically attributed to wealth over centuries. If gold & its reserves become meaningless then we have no basis for monetary exchange. We go back to doing barter trade.

The term digital construct is hiding that the value of gold is, just like bitcoin, a social construct. The digital part about it is to create artificial scarcity.

You can also build things with it.

At the end of the day, the use of gold as a store of value and medium of exchange is simply a social agreement that this is the case. There’s nothing inherent to gold, except perhaps some useful properties like rarity, that make it so — and if we all decide to stop believing that gold can be used for further exchange, then its purpose is immediately lost. There’s nothing really stopping us from choosing another subject as that medium.

Currency is largely a case of our particular choice isn’t that important, we just need to choose one, and everyone needs to agree on it. You have examples of other choices in prisons, where cigarettes and ramen are used, and the USD when it dropped the gold standard.

Crypto is just another choice.

Of course, there are certain things you want in a currency, that make some choices better than others, so you can’t just pick anything and say it’s the same as anything else (e.g. gold standard has a problem in that you can’t fully control the supply — if a new mine is found, then you just have to deal with the consequences of it’s existence; but this is less likely than say seashells. It won’t kill its wielder’s either, like say the choice of lead. Etc.), but you’re still left with quite a variety of choices, and certain properties have different impacts at different economic scales.

From that perspective, there’s nothing really stopping crypto from being a valid choice. The issue is largely in whether it’s a good currency (it has useful properties versus other choices), and whether it’s better enough that you can convince enough people to make the switch (you need people to believe that they get crypto from you, they can use that crypto to exchange with others).

The story however gets muddled because currencies can also be used as a speculative asset, driven by your belief in crypto being convincing enough to get people to make the switch. And you can also believe in other’s believing that it will switch, and bet on that. Which is where most speculation comes from — not the belief in crypto itself, but in that others will believe in it recursively.

The thing that fiat currencies have going for them is they’re the instrument needed to pay taxes in. So, even if you went to a system where toothpicks were the functional currency of your business endeavors, you’d eventually have to go buy some dollars (sell some toothpicks) to pay your property, employment, income, and other taxes.

This puts a floor of demand to prop up fiat currencies that doesn’t exist for crypto.

Sure but it’s the same story; the US gov can choose crypto as their currency for taxes as well (as certain countries already have).

The question ultimately is whether crypto’s properties as a currency is better enough to displace the current choice, and how much you / the market believes in this scenario occurring

They can but they haven’t. That difference means there’s more unavoidable demand for USD than for BTC/ETH/DOGE/Other.

Yes, and gold based investment schemes are where most of the hucksters plied their trade before crypto.

OK, then here's a request. The thing most bizarre to me about the crypto space over the last 5ish years (defi, staking, blah blah) is that it always appears to be a "circle jerk" for more crypto. E.g. crypto is borrowed in one currency to ... buy crypto in a different currency.

"Real world" finance exists, at least nominally, to fund real business activities. People put their money in banks, who in turn loan it out to real businesses that need capital to build shit and provide services. Speculators provide at least a useful counterparty to real businesses that need to hedge, e.g. farmers selling their product in the future or airlines that need to buy jet fuel.

With crypto "finance", I don't hear about or see any of these types of activities - it's always just plowing money into a different crypto scheme.

I would be more than happy to admit I'm out of the loop and just unaware of the real business value that crypto provides. If you have any examples I'd love to hear them.

I assume the volatility of crypto work against it being used for real world finance?

Well, it makes it great for use by real world finance.

Nobody is stopping you from using cryptocurrencies from funding legitimate business activities.

Exactly. No one is stopping me or anyone else, but no one does because crypto is a shitshow full of opaque risk, and the whole point of a financial system is to make risk explicit.

> With crypto "finance", I don't hear about or see any of these types of activities - it's always just plowing money into a different crypto scheme.

This is what the people lobbying for regulation are trying to achieve. If you want to hear about these activities, that’s where you should look.

>The thing most bizarre to me about the crypto space over the last 5ish years (defi, staking, blah blah) is that it always appears to be a "circle jerk" for more crypto. E.g. crypto is borrowed in one currency to ... buy crypto in a different currency.

Can't you say the same thing about the finance system in general? eg. portfolio loans are just taking one financial instrument (stocks), converting it into another financial instrument (cash), just so you can buy yet another financial instrument (more stocks). Same goes for options, futures, swaps.

Stocks aren't just financial instruments, they represent a claim to real-world value creation that exists outside of Wall Street.

What's the "claim to real-world value creation that exists outside of Wall Street" for VIX futures or an interest rate swap?

I can follow the chain of causality to the real-world value creation from them. I can't do the same with the ponzicoin of the week, where people are only making money because other people are losing it. With no causal chain that leads to anything getting produced.

For a particular example of an interest rate swap, anyone whose business incomes are closely correlated to short-term loans, and whose expenses are closely correlated to long-term loans (or vice versa) would care deeply about them, because they allow them to hedge themselves against unpredictable changes in interest rates.

Sure, but my whole point is that all of the underlying assets of the "real" financial system have a real purpose - none of that is true with crypto. Stocks represent real ownership shares, loans in the real world are made to direct capital from those that have excess (savers) to those that need it for real purposes (invest in productive capacity, buy a house, etc.)

I'm just looking for some actual use cases of using crypto finance to finance something in the real world, and I can't seem to find any.

>I'm just looking for some actual use cases of using crypto finance to finance something in the real world, and I can't seem to find any.

DAOs (distributed autonomous organizations) and ICOs both fit the bill.

all anyone needs to know is that bitcoin is the perfect ponzi. every 4 years it gets pumped, people forget about the ponzi, then they come back

the ever diminishing supply and narratives, technical or otherwise, only serve the greatest ponzi with the simplest ponzinomics.

dont have to overcomplicate a simple idea

Then you should invest and reap the 4 year reward, what's the problem?

If it goes from 60,000 to a dollar. Not sure anyone will ever forget.

every 4 year there is halving and the block rewards get smaller to combat inflation, and guess what's the opposite of inflation?

Looking at bitcoin like a game, which a ponzi scheme basically is, it is fair across the board for all people who have access to a computer and occasionally the internet. But yes it's not fair in that the largest holders of the coin can somewhat move the dial to their liking. I personally don't see that as a scam but more of a gaming a system according to its rules. The solution is more adoption to democratize the playing more evenly across that board. Until then, ride the waves.

why do you think negative sentiment implies not knowing anything about crypto?

some of us have crypto backgrounds of one or another type (NSA for example), and think it's overhyped.

Here's the punchline -- Robert Reich thinks something is a Ponzi. Can't keep a straight face.

I think we should coin (ha!) a new term - 'crypto scheme', a mainly speculative scheme based on artificially created digital scarcity created with block chain technology and promoted using narrative against current fiat-based monetary and banking system. It shares similarities with Ponzi scheme in functional sense but enough difference to warrant a new category on its own and doesn't quite fall under the legal definition of 'Ponzi' scheme.

And so castles made of sand

Fall in the sea eventually

- Jimi Hendrix

> It’s time for the Biden administration and Congress to regulate crypto.

I'm not too concerned one way or the other on regulating crypto, but the key difference between today and 1929 or 2008 is that crypto isn't a foundation of the economy. Regulation is probably at the right place right now because regulators are looking at it closely, but the blast radius of a collapse is (probably) limited, so they haven't acted on it.

I always find it funny when people call for regulation in crypto.

I just spent the past few years having crypto bros explain that decentralized finance is better in every way. Now they are decentralizing it and letting the government control it?

There are a lot of reasons people get into crypto. A lot want to get rich quick and aren't concerned with if it's bitcoins or tulips. Some are smarter money trying to make money off dumber money. Modern bitcoin miners opportunists. Some use it for illegal transactions. Then there are the true believers. I think only the get rich quick crowd will the be one clamoring for regulation after see how much money they've lost.

I live in Ontario and all my crypto accounts bar Coinbase have been closed.

Regulation working I guess.

How long before the banks topple, then?

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