Bitcoin Accused (Again) of Being a Ponzi Scheme and of Funding Terrorists

Diane Abbott, the shadow Home Secretary in Britain has come out swinging at bitcoin. He makes two essential claims: That bitcoin is a ponzi scheme and that it funds terror.

Both of these claims have been made against Bitcoin repeatedly in its short history, and we can expect to hear them made many more times before its development and growth are sufficiently advanced to make such claims equivalent to ‘the dollar is a ponzi scheme’ and ‘the dollar funds terrorists.’

Let’s take a quick look at whether these claims hold water, or whether they are merely talking points opponents of this nascent financial tech can throw around.

First, let’s examine the definition of Ponzi:

A Ponzi scheme (/ˈpɒnzi/; also a Ponzi game) is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading.

Taking a look at this, a few things stand out: First, bitcoin has no operator or corporation. It is a decentralized network of users, developers, and miners. Older bitcoiners are not profiting directly from the revenue coming in from new users – except in as much as if there is a lot of new demand for bitcoin, its value rises.

The next things that stands out is that a ponzi scheme does not profit from legitimate business activities or profit of financial trading. On one level, these statements seem to be true. But they are true only to the extent that bitcoin, as it is not a business or corporation, has no business.

Bitcoin’s value does not come from a product or a service. Rather, it’s value comes from these points:

  • It is a way of transfering value

  • Anywhere in the world

  • Person to person

  • Without the need of intermediary banks or institutions

  • Without the need to trust anyone with that transfer

It is also a store of value – like gold – but infinitely easier to store, carry, and cash out.

Bitcoin has no business, but its decentralized network does provide a real and valuable service.

The only reason that people like Abbott can continue to claim that bitcoin is a Ponzi scheme is that it is still in the early stages of its growth cycle. We are seeing bubbles and pops in tandem with rising growth in users and development. This (often decried) volatility is an unavoidalbe part of bitcoins development, and it cannot succeed without going through his process. What Abbott claims as a Ponzi, is really just bitcoin’s growing pains.

Turning to terrorism, she is right. Bitcoin can be used to fund terrorism. As can the dollar, the pound, and bars of gold.

One difference, though is that at the moment bitcoin is not nearly as anonymous as has been claimed. All transactions are available to be reviewed on its public blockchain. And although bitcoin addresses don’t have names on them like bank accounts do, they often can be associated with real names. This site has a donation address listed. Anyone can look at that address and know it is owned by Bitcoin Warrior. If the NSA also discovers the address of an ISIS fighter and finds a transfer of funds from our address to that one, … Well, we’d have little way to explain such a thing.

What Abbott is really complaining about is NOT that bitcoin can be used to fund terror. Right now its market cap and fungibility is too small to be really useful for that. No, what’s she is complaining about is that it cannot be stopped, reversed, or confiscated like dollars and pounds can be.

Abbott is a drug war warrior, and as such, she wants to have total control over my and your money to make sure that we can use it only in safe, government approved, ways.

In conclusion: Bitcoin is not a ponzi scheme. It is a new technology still in its growth and development phase. Bitcoin can be used to do illegal things, but fiat currencies are still far superior at that. And in the final analysis, wouldn’t it be better to fight the ills of society by examining their causes and providing real solutions than subjecting everyone to pervasive financial surveillance?