Is BitCoin a Ponzi Scheme?

522386-btc.streams_desktop_smallThere is a lot of chatter on the internet about BitCoin. Possibly because it has been in the news lately and is described as the anonymous Paypal for criminals. It also has been on the rise from a value perspective, topping out a about $188 per “BitCoin” last I checked.  The real question is, what is Bitcoin? and should I care?

Bitcoin has been described to me, I have read about it and I can say this… the answer is, It’s complicated. My answer should be viewed with the same understanding as when a friend chances their status to “it’s complicated” on Facebook.  It’s a new type of anonymous digital “cash”,  but that’s where the similarity to cash ends. Bitcoin uses a set of rules and an algorithms to decide its entire world, spanning from how many Bitcoins there are now,  to how many there can ever be. The creators of BitCoin have tried to buffer this new currency from inflation by building in real controls on inflation but have left alone the idea of supply and demand, causing much debate about whether it’s any better than the current fiat.

The Bitcoin network operates much like a peer-to-peer network, think, Bittorrent.  The resources of the computers running the client to connect to the network also power the transactions on the network. The difference here is that your cash is stored locally or in the cloud, either choice however is scary. Considering the anonymous nature of the currency, if it is lost or stolen, it’s gone. There is one last piece of information that is straight out of science fiction, you can “mine” bitcoins, much like the mining of gold. In this case your computer is used to search for new coins “hidden” within the cryptographic string of numbers generated by the algorithm that dictates what a coin is. The process of mining gets harder as time passes and hardware gets better at mining, ultimately ending when there are no longer any Bitcoins left to find. It is this process that has lead some to call this whole ecosystem a Ponzi scheme. This is where the early investors are paid back but the later ones are left holding the bill. Right now it seems like there are a few millionaires that have made their fortune from mining, so it may be that we are seeing the beginning of the end,  if it truly is just a scheme. If these newly minted millionaires start to cash out en mass will this destabilize the pyramid? Some say yes and other’s no.  It doesn’t seem like Bitcoin is a Ponzi scheme, but it is one thing…  In a word, Confusing. If this currency is meant to replace the dollar, someone needs to make it more user friendly. Either way this phenomenon is going to be interesting to watch, enjoy!

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