More and more people around the world are becoming aware of the existence of the Bitcoin cryptocurrency. This isn’t surprising considering the media buzz surrounding this “digital money”. But with such fame comes a price – some parties are declaring that Bitcoin itself is a scam. To be more specific, these analysts dub the Bitcoin business a pyramid scheme.
Is Bitcoin really a pyramid scheme? Let’s investigate further to find out.
How Do Traders Acquire Bitcoin?
To purchase Bitcoin, you may visit a crypto exchange and trade with other parties who already own their stash of Bitcoin. Bitcoin itself is created via crypto mining. However, there are only 21 million Bitcoins throughout the world. No one is going to create more Bitcoins.
Since the supply of the cryptocurrency is that small, it isn’t surprising that the price of each Bitcoin will go up if there is sufficient demand from traders to acquire it. Here you can see basic economics at work – the more people seek after this digital money and the smaller the supply, the higher the price reaches.
There are also “friends” who might gift you with cryptocurrency. And of course, there are shady characters who make it a point to acquire their Bitcoins via elicit means.
The Pyramid Scheme Accusation
Enter pyramid schemes. A pyramid scheme is sometimes better known as a Ponzi scheme. The terms describe a scenario where a scammer (the head of the pyramid) will recruit people to invest their own money into the scammer’s pyramid system. The scammer will promise to give a very lucrative profit to these people if they will recruit others to join the pyramid system.
The trick is for the scammer to be very convincing about this process so that more people will be enticed to join the scammer’s network. As these new recruits enter, they invest their money with the scammer also.
The money from these new recruits is then “paid” by the scammer to the previous batch of recruits. To pay the new recruits, the scammer has to keep recruiting more people. Each batch of recruits form a new base of the pyramid. So there are layers of investors whose common goal is to take advantage of the “generous profits” offered by the scammer.
The pyramid will grow taller and taller and the scammer will be able to skim off some of the funds that are coming in from each batch of recruits for his own stash. But the key to any pyramid scheme is that no one is actually doing any business with the “investments”.
There are no or very few products sold at all. So the scam will collapse if there are no new recruits coming in to invest their money. At this point, the scammer may suddenly disappear, leaving the investors high and dry without their investments.
The reason some parties online are calling Bitcoin a pyramid scheme is that the cryptocurrency itself only has value if both the trader who owns it and the other party who seeks it can agree on a market price for the cryptocurrency.
Other than this “supply and demand relationship”, Bitcoin is not supported by any valuable security, as claimed by LendingTree Chief Economist Tendayi Kapfidze. Kapfidze noted that “it has no underlying value”. The logic behind this is that there have to be more traders seeking after Bitcoin to support the market price at the ideal level.
To contrast, the US dollar used to be based on the gold standard until President Nixon of the USA did away with that financial relationship. That is why financial literacy author and successful businessman Robert Kiyosaki calls the US dollar “fake money” – there is no intrinsic value either. Because the US dollar’s value is not based on anything but people still want it anyway. That’s how similar it is to Bitcoin cryptocurrency.
How Does a Cryptocurrency Gain Value?
As mentioned, it really depends on whether people will want Bitcoin a lot. Since it is becoming more popular, that can be interpreted as growing market demand. There are also companies that are incorporating Bitcoin payments into their business system, specifically to pay for goods and services. In addition, many individuals are seeking to acquire Bitcoins of their own, to stash in their crypto wallets until such time that they can trade these.
When a trader opts to sell his cryptocurrency, there are two major ways to profit. The trader can opt to exchange his Bitcoins for fiat currency (such as the US dollar) or for other cryptocurrency instead.
(The trader can exchange Bitcoins for other Bitcoins too, if necessary.) The Bitcoins may then be used to pay for goods and services of the third parties, if both sides agree that there is a fair exchange of value.
Why Bitcoin Cannot Be Described as a Pyramid Scheme
Though not a pyramid scheme, Bitcoin itself may be perceived as being very valuable anyway. This, in turn, may convince people to acquire their own Bitcoin, following the “herd mentality”. As Bitcoin becomes more famous, more people may feel that they want to join the bandwagon. And the end result is that the market price of Bitcoin goes up exponentially.
But when you buy Bitcoins you are not asked to buy or sell any products or services to stay in contention as a Bitcoin trader. You are also not asked or pressured into recruiting anyone to buy or sell anything. It is the Bitcoin itself that you are buying from another trader.
The Bitcoin can be saved until such time that the value goes up, then sold to someone else. Or just use it to buy goods and services from merchants. That is why the claim that “Bitcoin is a pyramid scheme” is flawed and just fallacious.
If you are convinced that Bitcoin is a legitimate and valuable investment, the good news is that you are free to buy it from other traders. You won’t have to recruit friends and family to buy it too. You don’t have to sell anything for someone else just to buy your own Bitcoin.
However, you should also practice caution when buying Bitcoin since it is still subject to market forces that may affect its market value over time. This is why many traders keep a close eye on the Bitcoin market price – they don’t want to lose a thing.