Bitcoin – The Fighter of Ponzi’s

Why is Bitcoin a good bet?

Bitcoin is an asset class that is going against the biggest powers in the world; primarily Central Banks and the Petrodollar.

As many have seen lately, Central Banks have no more control over their fundamental monetary tool, interest rates. Due to over-indulgence and lack of foresight, interest rates on the US 10-Year fell from +16% in the 1980’s to 0.5% early last year. Real rates in Western economies are effectively negative; meaning investors pay ‘interest’ on Bonds, rather than earn yield. This essentially points towards the redundancy of Bonds. 

Central Banks worldwide can’t increase yields on bonds as Debt-to-GDP is too onerous at this point. The entire system would collapse into itself if central powers were to increase these rates.

Thus, the only tool left is to print money. As most know, this leads to inflation – first through scarce assets via the Cantillon effect and then commodities and finally most goods and services (in a free market without government intervention).

Bitcoin is fundamentally the antithesis of Central Banks and their unilateral policies. 

Bitcoin is absolutely scarce in nature and there will only ever be 21million Bitcoin – nothing can change that.

Bitcoin’s issuance is inherently stable, predictable and consistent. This is primarily driven by the Difficulty Adjustment Algorithm which keeps transaction speed and Bitcoin supply consistent, no matter how many miners and hashpower are brought to the network. Secondly, there is a supply shock every 4-years where block rewards and the overall supply is halved. This is why many people agree that Bitcoin is a deflationary asset. 

Bitcoin is the most decentralized asset on this planet – more than any traditional investment vehicle or alternative cryptocurrency. It has a robust and distributed architecture with thousands of full nodes validating transactions continuously. These nodes are distributed worldwide. It is through this that users of the network determine which transactions and rules are valid, not any central authority. Its decentralised properties allow for no central point of failure and even if a large country (such as China) were to ban it; it would simply carry on without caring. 

Bitcoin also has global liquidity due to its distribution, network effect and overall adoption. There are willing buyers & sellers and liquidity in close to all countries worldwide. This also is driven by local peer-to-peer platforms that allow buyers and sellers to interact with each other easily and securely. It is close to impossible to find liquidity worldwide for all of the thousands of other alternative cryptos. 

Bitcoin also has a different culture to that of equities, bonds and alternative cryptocurrencies. It is a culture of self-custody, long-term thinking and of low time preference. More than 75% of Bitcoin is kept in cold, secure storage – in a self-custodial manner. Most Bitcoiners have held for more than 1 year as they believe there is much more upside to the price of Bitcoin. Alternative cryptocurrencies have a culture of ‘waiting to dump on the next retail speculator’. There is a lack of long-term vision and conviction in these other coins. 

Bitcoin is an active and open-source project that has been improved by hundreds of developers over the past 12 years. It follows a prudent and extremely Democratic manner of development to ensure the stability of the network and its participants. It has and continues to have incredible advancements in its capabilities; especially with the release of Taproot this year (or next). This will increase the anonymity of Bitcoin transactions.

Last but not least, Bitcoin has an unknown creator that brought this open-source project to millions of people worldwide. This only adds to its strengths of decentralization, with no central points of failure. Many digital currencies since the 1970’s were led by central figures and some ended up in jail because of their innovations. Satashi Nakamoto learnt from their mistakes. It seems like Vitalik Buterin and the many other altcoin CEO’s didn’t learn this valuable lesson. They preferred fame.

Why is Bitcoin not a ‘Ponzi Scheme’?

The Securities and Exchange Commission (SEC) in the US outlines the typical Ponzi Scheme:

A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.

With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.

Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.

Bitcoin is the furthest asset class from what is outlined above.

Bitcoin does not promise high returns, as there is no central authority or provider to ‘promise’ anything in the first place. 

Secondly, Bitcoin does have internal and external risks – all assets do, especially new types of assets. 

Bitcoin does not provide consistent returns. Based on previous patterns and cycles, it has provided an average return of 200% year-on-year against the Dollar, with exceptional short-term drawdowns from the peaks to troughs. Bitcoin is cyclical in nature with an average bull market of 2-3 years (when including consolidation periods) and bear markets of around 1-year. The last bear market saw a drawdown of ~80% and there is definitely a risk of another one. 

In summary, long-term Bitcoin holders have gone through a rollercoaster of ups and downs over time and have felt no consistencies that Ponzi Schemes normally promise. Long-term holders who believe in the fundamentals, understand that volatility is a characteristic of Bitcoin as it continues along its adoption curve and price discovery.

Ponzi Schemes do tend to have unlicensed sellers and in many countries, this is the same case with Bitcoin – due to lack of regulation. The most important point to clarify here is that Ponzi Schemes custody assets on behalf of investors and thus have the power to do with it what they want; whilst hiding operations and processes from clients.

There are and have been many similar custodians, exchanges and service providers in Bitcoin that do the same. That is why it is essential to purchase and immediately self-custody Bitcoin for oneself – without the need to trust any third party. 

Other Ponzi Scheme characteristics include secretive and complex strategies. Holding Bitcoin for oneself for the long-term is extremely simple in nature. 

Lastly, Ponzi Schemes work by a few holding many. That’s where the pyramidic symbology comes into play. When a few hold close to all, human greed and sociopathic tendencies tend to flourish. And so, the many end up the losers. This has happened for many years in all verticals of life.

What is Ethereum and why is it smoke and mirrors?

When looking at the underlying methodology and culture of Bitcoin as explained above; Ethereum seems to differ drastically. 

First of all, around 70% of Ethereum was ‘pre-mined’ by the founders of Ethereum. This is more than 50% of the total supply. Why they chose to do this remains the question; but this has always been an alarm bell to many prudent investors. 

When comparing to a Ponzi Scheme – there are easy comparisons to make here where a ‘few hold many’. 

Secondly, Ethereum chose to roll-back a hack that occurred on DAO a few years ago. This caused a split between Ethereum and Ethereum Classic. Many have asked the question; how can Ethereum be decentralised where a select few can change the rules and historics when they want? 

How can someone on Ethereum ‘be their own bank’ like one can on Bitcoin’s network?

As Ethereum is trying to be a distributed, global supercomputer – distribution of nodes should be key to this goal. Yet, most of the network’s power is run on AWS and not by individuals worldwide. 

When thinking in first principles, wouldn’t it be plausible to rather invest in Amazon Web Services, rather than Ethereum if that is where the underlying network lies? Ethereum Full Nodes are extremely data intensive, are hard to set up and even though there are numerous nodes worldwide; many seem to be out of sync as the supply total differs from node to node. 

Ethereum has had a history of scammy ICOs built on top of its chain which only worsens the culture, brand and the network capacity/fees – as it tends to become ‘choked’ by these other blockchains. 

Lastly, Ethereum’s narrative has been a ‘super-computer’, a ‘store of value’, a ‘smart-contract blockchain’ and many titles that shift with the ebb and flow of bear and bull markets. Even though it has central leaders and thus, central points of failure – it seems that it is in fact leaderless and without a set direction.

Bitcoin is fixed in his goal. It is going against central banks and their authoritarianism. Bitcoin’s network on its second-layer, Lightning Network, allows millions of transactions per second. It also had a third-layer in development. All layers allow for simplistic to advanced smart contracts. There is decentralised finance (DeFi) in Bitcoin such as HodlHodl where willing buyers and sellers can seek collateral against loans in a non-intermediary manner. 

Bitcoin doesn’t have a select few to control it or a marketing department to pump it. It simply focuses on taking each step at a time to reach its fundamental goal; Hyperbitcoinization.

Why Dogecoin is a bad bet

For those who don’t know, Dogecoin was created as a joke that has grown into a multi-Billion Dollar market cap and will likely turn into a nightmare for many in the coming months. 

Yes, Dogecoin has outperformed Bitcoin and Ethereum in the first two quarters of 2021, but when looking at its fundamentals – critical mass will undoubtedly be reached and massive drawdowns are likely to come.

Dogecoin is infinite in nature. It has a daily issuance/supply of 14.4m new Dogecoin. There is no cap to this (Bitcoin is capped at 21million BTC by 2140 AD). With 5.2 Billion Dogecoin being added to the supply every year, it needs incredible inflows of USD to keep its valuation. 

Issuance of new Dogecoin is unpredictable and can and has been changed in the past. In 2014 the finite cap of the supply changed to an infinite number. Dogecoin is also not decentralised at all. There are only a few hundred nodes running its blockchain. One wallet/address holds >27% of the total supply of Dogecoin and 101 addresses own around 67% of the total supply. 

Its current hashrate is around 248 TH/s whereas Bitcoin’s is at 176,000,000 TH/s in May 2021. These are scary numbers for a decentralized network – where once again a few economic actors hold most of the power.

Dogecoin is extremely illiquid globally and only a select few exchanges provide liquidity. The peer to peer markets are negligible and there are hardly any formats for self-custodying this asset. Most Dogecoin is kept on exchanges where third party risk is always a danger. In Bitcoin, close to 75% of Bitcoin is kept in a self-custodial manner, in cold storage. 

Dogecoin’s code base has not been updated since 2017 and lastly, this coin has a pattern of extreme pumps and dumps since 2014. Nothing in the current climate reflects this has changed. 

Like the altcoin frenzy in 2017, similar patterns are playing out and once again, only a few will sell the top whilst the many will watch their returns and initial base dwindle drastically.

Why holding Bitcoin is the best strategy over the long-term

Some Bitcoin proponents say that Shitcoins are growing in such popularity as the current US Dollar is the shittest Shitcoin of them all. Maybe they’re right…

Nonetheless, most prudent analysts, economists and the average Joe don’t see governments turning off the taps of endless money printing any time soon. They simply can’t – as it is their last tool left to keep the current system running. 

Inflation is happening on two fronts. One from constant printing and the other from supply shocks in ill-invested sectors such as oil and other commodities. The Coronavirus shock led to a deep drop in demand for oil but as the World turns back on; there has not been enough to plan for the increase in demand. This will likely lead to considerable increases in the oil price and thus, thousands of products across the world – directly and indirectly. 

Other scarce assets of course will increase in value as they have been for the past few months. This places pressure on consumers but also with investors holding low-yield asset classes. It’s hypothetical, yet prudent to think investors would seek an asset that has sound principles with more than 200% return year-on-year; Bitcoin.

As explained through this article, there are vast and fundamental differences between Bitcoin and other altcoins. Bitcoin is the only truly decentralised, scarce and sound cryptocurrency on the market. It can do everything that other altcoins can do but it does it better and in a more secure manner. 

There was only ever a need for one Internet. There is only a need for one Blockchain – Bitcoin.

Brandon van Niekerk

Co-Founder of Bitvice & ICT Project Manager (PMP) who has worked with dozens of international institutions and teams such as Barclays, Standard Chartered etc. Agile practitioner. Product Owner who has owned numerous fintech products and their development. Motivated problem-solver and consistent communicator. Specialist in Banking, Institutional & Enterprise software development and integrations. Gregarious, passionate about working with others and always looking to make the best out of any situation.

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