In the early 1920s, a businessman in Boston had a realization: everybody wants to get
rich, without doing any work.
So this businessman came up with a brilliant idea to make a LOT of money.
And, like all good financiers, he promised to make those around him really rich too.
The businessman told his investors he was buying discounted coupons in foreign countries
and making money reselling them in the US.
It was a middleman opportunity that he claimed was totally safe and guaranteed a return.
The businessman promised his investors a 50 percent profit in 45 days, or a 100 percent
profit in 90 days.
What this businessman was actually doing was paying the people who got in early with the
money from the people who got in late.
Those later investors, excited by hearing about a guaranteed high-return investment,
were left holding the bag.
That businessman was named Charles Ponzi.
His name has become synonymous with these sorts of swindles.
His “Ponzi scheme” made millions of dollars in just a few months.
But the con could only go on for so long.
Eventually, you run out of other people’s money.
And for Ponzi, when that happens, you go to jail.
A hundred years later, a new bunch of wealthy investors say they too have a brilliant way
to make YOU a lot of money.
They promise to make you really, really rich.
The best part is, they say, the returns are guaranteed!
Anyone can buy in with any amount of money.
It’s called Bitcoin.
Sounds fun, right?
Bitcoin is a digital token, with no physical or government backing, that’s run by a global,
decentralized network of computers.
These computers keep track of every Bitcoin transaction, and can move Bitcoins easily
from one user to another.
There are a limited number of Bitcoins in the world – 21 million.
19 million of these have already been “mined.”
These “mining rigs” are large systems of computers which perform complex calculations,
expending huge amounts of energy, to create new bitcoins.
Massive Bitcoin mining “farms” are set up in places like Siberia and Northeastern
China, where people take advantage of cheap electricity in massive, wasteful facilities.
But how Bitcoin works doesn’t really matter that much.
All of the stuff you hear about “peer-to-peer technology” and “the blockchain” really
only explains how Bitcoin works as a CURRENCY.
But despite the name, Bitcoin is not really used much as a currency at all.
When people buy Bitcoin, they rarely use it to buy goods and services.
They’re really buying access to a Ponzi scheme.
Only 1.3 percent of Bitcoin’s economic activity is in merchant transactions.
The rest is SPECULATION – people buying it just because they think it will go up.
And the more it’s used in speculation, the less incentive people have to actually use
it as a currency.
Why buy something with Bitcoin when you can hold it and make some easy money?
That’s why the peak of Bitcoin being used to buy things was actually back in 2017, before
the price really took off.
And, a currency should be stable in value, not bounce all over the place the way bitcoin
does.
Rises are nice, but Bitcoin also falls a lot.
If you want to speculate, that’s your own business.
But you don’t want the value of your checking account to gyrate wildly and unpredictably
just because Elon Musk tweets about it.
If you have friends or relatives who are into cryptocurrency, you know that the reason people
are into Bitcoin is because they think it can make them a profit.
Because Bitcoin is just a digital token without any inherent value, they’re not really making
an “investment”: they’re engaged in a financial betting game.
Anything you “invest” in bitcoin (or ethereum, or dogecoin) just goes into the pocket of
the previous holder—there’s no real income-generating asset behind it.
What they’re betting on is that other people will bet on it, and the value will keep going
up.
If more people are joining the market, you CAN make money.
You’re not a sucker if the person next in line is a sucker too.
And as long as you can make it out on time, the next guy is left holding the bag.
The good news for these gamblers is that there are a lot of suckers in the world.
The bad news is that eventually, you run out of suckers.
So to keep the scam running as long as they can, the wealthy proponents of Bitcoin say
that it’s “changing the world.”
They say that Bitcoin is going to replace “fiat currencies,” like the dollar.
They say that it’s going to undermine cruel dictatorships and greedy banks, and help usher
in a libertarian utopia of privacy and security.
And, most importantly, they say what every scam artist has said since the beginning of
time: get in right now, and you’ll make quick and easy money.
And for the last few years, they’ve actually been right.
If you had spent that money on buying shares of Apple, you’d have about five hundred
and forty bucks.
If you spent $100 on Bitcoin in January 2016, you’d have made more than nine thousand
dollars.
But that doesn’t mean that Bitcoin is working.
It just means that a lot of people have fallen for the scam.
And the more people who buy in, the more the price fluctuates, and the less usable it is
as a currency.
The success of Bitcoin as a speculative commodity has made it socially useless.
Anything can fill the role of that scam currency.
You’d actually have made just as much money buying a parody cryptocurrency called Dogecoin
that makes none of the grandiose claims that Bitcoin does.
Meanwhile, as more and more people speculate on Bitcoin, it consumes more and more electricity,
and emits more and more carbon.
Because of how complex Bitcoin transactions are, they consume an incredible amount of
power.
One Bitcoin transaction consumes more electricity than the average American household does in
a month.
Bitcoin as a whole consumes more electricity than Venezuela, Bangladesh, Pakistan, Kazakhstan,
and the Philippines.
If Bitcoin ever WERE to be widely adopted, it would consume many times more energy than
is produced by the entire world right now.
Bitcoin isn’t useful at all, except maybe as a symbol of how capitalism has changed:
from something that could once build factories and develop the country, to a system of pure
speculation totally divorced from the real world.
Look at this system: millions of computers emitting huge amounts of carbon, all to gain
access to a digital token with no actual use, all while infrastructure crumbles and people
go hungry.
This is a terrible way to organize a society.
But just because Bitcoin is a Ponzi scheme without any benefit to society does not mean
it’s going away.
Bitcoin has become a CULTURE, an IDENTITY: amid the vast meaninglessness of a society
in decline, a lot of people find value in it.
In a world where traditional forms of identity are in decline – family, unions, religion
– new ones, like cryptocurrencies, spring up to take their place.
The fact that so many lonely, atomized people find community and meaning in Bitcoin means
that for the people at the very top – people with millions or even billions of dollars
– there’s a ready and willing community of suckers to exploit.
You can still make money off cryptocurrencies.
In an age of low wages and mass underemployment, people will ALWAYS be lured by the promise
of getting rich quick.
But there will always be somebody left holding the bag.
And it could very well be you.
In essence, Bitcoin is a gamble.
Gambling can be fun at low stakes with friends.
But the people trying to sell you Bitcoin aren’t your friends.
No matter what you tell yourself, you’re just gambling – not that an asset has value,
but that the person next in line is more gullible than you.
This is Doug Henwood, author of Wall Street, for the Gravel Institute.