Investment, Speculation, Gambling, and Pyramid Schemes

Cryptocurrency is not an investment. Cryptocurrency is a pyramid scheme that relies on greater fools buying at a higher price. You cannot buy anything with Cryptocurrency. There is no economy, like the United States, Japan, and the UK, that supports cryptocurrency. Cryptocurrency has no value, outside of the cryptocurrency ecosystem.

Investment

You invest in an asset that you expect to increase in value. The important point is that the asset has some underlying concrete value. Examples include stock in a company or real estate. Investments often have a payment stream (dividend-yielding stocks or bonds).

An investment asset has a core underlying value. For example, the underlying value of a company is its breakup value which includes the company’s assets. Real estate has an underlying value based on a physical asset like a building.

There is no underlying asset for cryptocurrency. Cryptocurrency is nothing more than a database annotation created by the software.

Speculation

Speculation is usually a directional bet on the future value of an asset. For example, a purchase of a wheat futures contract is a bet that wheat will increase in value, making the contract more valuable.

The size of the commodities futures and options markets are much larger than the actual market for physical delivery of the underlying commodities. Most of the market liquidity is driven by speculation.

The difference between the commodities markets and cryptocurrency is that there is an underlying commodity. A wheat futures contract can, and in some cases, does take physical delivery of wheat.

The prices in the commodities markets are largely driven by the supply and demand for the underlying commodities. They do not rely on a greater fool to pay more for the futures contract.

Speculation on cryptocurrencies is based on the idea that some greater fool will come along and buy your “coins” at a higher price.

Gambling

Humans have been making wagers for most of human existence. People will make bets with their friends or on sports or racing. There is a multi-billion dollar gambling industry. Wagers are based on some concrete underlying event. For example, whether a racehorse will win a race or the point spread in an athletic game. Casino wagers are statistically structured so that the players are always at a disadvantage.

Although casino wagers are a losing proposition, the odds of winning and losing are well known. Gains and losses depend on these odds, not the presence or absence of a greater fool, as is the case with cryptocurrency.

Pyramid Schemes

Cryptocurrency cultists often claim that cryptocurrencies can be used for transactions or are “stores of value”. These claims have been widely debunked so I will not reproduce these arguments here. If you don’t think that these claims have been debunked then nothing I write here will change your mind in any case.

The increase in value of something in a pyramid scheme depends only on another buyer who is willing to pay more. At some point, the number of buyers who are willing to pay more for the pyramid asset disappears and the pyramid scheme crashes.

Cryptocurrencies are pyramid schemes. Bitcoin and other cryptocurrencies are pyramid schemes (sometimes supported by Ponzi schemes). The price of Bitcoin will only increase as long as someone is willing to pay more to buy the Bitcoin.

Ponzi Schemes

A number of those who comment on cryptocurrencies refer to them as Ponzi schemes. A Ponzi scheme pays out a return that is capitalized by new “investors”. The scheme works until it runs out of new investors, at which point it crashes.

The cryptocurrency Ponzi schemes payout in cryptocurrency, which can often be “minted” as needed.

Many cryptocurrency schemes include a Ponzi scheme. These schemes include descriptions like “stake your cryptocurrency and earn 19.5% APY return”.

Imaginary Assets

The firm [Celsius] says it had $11.8 billion worth of assets as of Tuesday, down from $16.9 billion on May 6.

The nature of these assets is unstated. We can speculate that the assets quoted here are cryptocurrencies. An asset with no intrinsic value outside the pyramid scheme is being used to back another pyramid scheme asset.

A similar issue exists with Tether, which claims to have an asset-backed stable coin. Tether has, notoriously, refused to disclose the details of the assets that supposedly back Tether or to have their holdings and transactions audited.

Investing in Pyramid Schemes is not Investing

In terms of the personal wealth of unsophisticated investors, one of the most destructive ideas in circulation is that they can invest in cryptocurrencies. Even generally respectable publications like the New York Times have encouraged this idea. As I have discussed, cryptocurrencies are not investments or even speculation. Buying cryptocurrency is buying into a pyramid scheme with the hope that a greater fool will buy at a higher price.

A few of my friends have considered buying into cryptocurrency pyramid schemes. I have tried to talk them out of doing this and recommended the book Attack of the 50-foot Blockchain by David Gerard Since the book came out there are many other references on cryptocurrency as a pyramid or Ponzi scheme.