While Bitcoin and pals have taken a couple of knocks to their value recently, the general consensus is that the currencies remain more or less strong. But, there are also some growing voices that think all of these digital monies could just be elaborate, 21st-century iterations of the classic Ponzi Scheme.
If you’re unfamiliar, the Ponzi is among the most classic of cons. You essentially start by creating some type of organization that people would trust with money. Then you can pull in cash telling investors that they will receive dividends in the future. For a while, you can do what you will with the cash you pulled in, but eventually, those investors will want to see your dividends. To cover those, you pull in more victims, and the cycle continues. While they might sound like an obvious trap, Ponzi-style cons have been among the most successful in history. As long as you keep cash flowing, you can outwardly present yourself and your operation as legitimate. And the longer you can hold the ruse, the more you stand to gain — and lose — should it all fall to bits.
The Infamous Bernie Madoff scandal in the late 00s was one such example that fell apart, but, for a time, produced untold wealth for those involved.
At this point, you can probably see some parallels between this and Ethereum or Bitcoin or whatever. People are investing because they want to get a piece of the pie. We all here news story after story talking about the insane quantity of cash you can pull in by trading this stuff. And yeah, some folks have become insanely wealthy using blockchains and mining and all that goodness. But these things all have a critical weakness — they aren’t backed by anything.
All of this stuff is what economists call fiat money. In essence, it has value because people say it has value. That’s not particularly new or problematic — just about every modern currency works the same. But the difference is that those individuals investing in and operating these currencies are a lot more likely to poof on out and keep the spoils than say, the US is, to suddenly give a pair of middle fingers to the planet and take its financial toys home.
Supporters of cryptos don’t argue this, even. For bitcoin to work as a medium of exchange, places need to accept it, and these assets need to be liquid. That’s part of why so many folks push to get bitcoin accepted in as many places as they can — that deepens the roots of the currency and makes it more and more viable as a means to buy and sell goods and services. And it’s very much a feedback loop.
Where it can fall apart, however, is in how these cryptocurrencies shift between themselves. The reality is that we aren’t dealing with just one cryptocurrency, but a field of them — hundreds, in fact — because the underlying principles are so easy to work with. That has the unfortunate side effect of making all of this a lot more complicated, however.
If you know much about these digital currencies, you likely know that you can “mine” for them using a powerful computer. But many of these systems only release new units of currency very slowly. This is intended to keep the price from crashing and to prevent people with hyper-powered computers from essentially making money from thin air. Again, that’s totally sensible when we’re talking about just one unit of exchange. But we aren’t.
Bitcoin now only very, very rarely spits out more cash into this digital micro-economy. But, people still want to be able to mine for the coins. So, they get their mining rig and set it to work on something like TK, which sort of generically mines whichever currencies are worth the most. And that’s not even considering the fact that for most of these, like Ethereum, you need to buy into them which often requires trading directly with someone who already possesses what you need. That fundamental lack of liquidity and the significant barriers for using these currencies at all should be clue enough to just about anyone that there’s a problem likely coming. But it gets worse.
Since it’s so difficult to trade cryptocurrencies for things you can use, there’s a very high chance that when this is all over, you won’t really have much to speak of. Often in these schemes, the money you make along the way is used to at least buy a few things. And when the bubble hits, you’ve at least got that so you haven’t lost… y’know, everything. But cashing out is still really tedious with these currencies, and to do it, you need someone willing to buy in. There are only so many users to cycle through, and it’s hard not to shake the feeling that when this jig is up, everyone will try to walk away at once and find that there’s no one and nowhere to spend what they got.
That’s also while anyone who has any investment in cryptocurrency at all will fight tooth and nail to tell you otherwise. Whether you’re a serious crypto-anarchist or just someone to looking to buy into a trend doesn’t matter — to avoid losing money you need to press the faith. If no one believes bitcoin is valuable, then it won’t be. And yes, it has grown in value for some time — often stumbling only to rally harder soon after. But this entire mechanism has to stop sometime, and it has to stop somewhere. Endless growth cannot possibly exist in this universe, much less in the economics of our own planet.
It is possible, of course, for Bitcoin and others to become a commonly accepted method of exchange, but for that to happen, faith will need to solidify behind a smattering of them. From there, making the currencies far easier to use and exchange would be the next step. But until then, these assets aren’t generally liquid, and it’s a good idea to play conservatively.
I’m not saying cryptocurrencies are doomed, but until you can use them for groceries or rent, it’s a hard sell, and you run a very high risk of your investment evaporating. I’d love to be wrong. Until then, good luck.
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