I am not against cryptocurrencies. In fact, I am all in favor of alternative currencies, private currencies, LETS, etc. I believe that people should have the freedom to choose what assets they want to hold, and what to use as a medium of exchange for their market transactions. But I have never been in favor of Bitcoin. I think it is a stupid ponzi scheme.
I am broadly ignorant of what’s happening around the world since I don’t follow news. Thus it was that I learned from my friend Veer that cryptocurrencies were crashing today. That was interesting news to me. I looked up some sites to see what was happening. Here’s a graph of bitcoin prices over the last few months:
Bitcoin hit a high price of $69,000 on Nov 9th, 2021. Today at one point it was trading in the $27,000 range. The volatility of bitcoin makes it a lousy substitute for money. What’s it good for? Gambling.
Bitcoin and other cryptocurrencies are a wonderful innovation. In the bad old days, you had to get your ass over to a casino so that you could hand over your money to them. These days, you can gamble from the comfort of your bedroom or bathroom by logging into some cryptocurrency exchange and handing them your money.
Motivated by greed compounded with stupidity, people in search of easy money end up being taken for a ride by sharp operators. A fool and his money are soon parted, so the saying goes. The originators of ponzi schemes depend on the gullibility of the stupidly retarded to make out like bandits.
Just as a reminder, let’s recount how ponzi schemes work. They attract the greedy to invest in the scheme. Then, in the initial phase, the early investors are rewarded with insanely high returns. That attracts more greedy investors in the later phase which pushes up the price; the initial investors exit with profits; the price begins to fall and there’s a rush for the exit — and the ponzi scheme collapses, with the later investors left holding the bucket.
Ponzi scheme do not create wealth; they’re pure wealth transfer from one group to another. It’s a zero sum game: the aggregate gains by some is equal to the aggregate losses by others. That’s a mathematical certainty.
I am not a fan of fiat currency either. Governments cunningly inflate fiat currency for their own nefarious ends. Aside from the occasional bout of crippling hyperinflation that tinpot dictators inflict on their helpless citizens, most fiat currencies inflate slowly enough for people to take suitable action. Instead of a government monopoly on the issuance of currency, there should be a vigorous competition among private providers of money, and the government money must be required to compete with other currencies (if not constitutionally prohibited from issuing fiat money.)
I confess that I wasted a lot of time on twitter today. Many people were weeping in their coffee about how they put all their savings in crypto and now they’re ruined. These people were mostly not wealthy to begin with; and now they’re poorer than they needed to be.
Some people do get rich by being greedy. But being greedy is not a very stable strategy. The people who become wealthy in well-run economies (as opposed to banana republics) do so by creating wealth, which is never about getting unearned wealth. I doubt that Warren Buffett ever steps foot in a casino; I doubt Charlie Munger ever bought a bitcoin.
The moral of the story: it’s better to work hard to produce wealth so that one can be wealthy in proportion to the value one created for others. I am not wealthy because I am not capable of hard work. That’s the bad news. The good news is that I am not greedy. Thank goodness for small mercies.
Post script: I noticed that I had written about Munger’s and Buffett’s take on cryptocurrencies a few years ago.
Life is a Random Draw 
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I doubt Charlie Munger ever bought a bitcoin
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OOps sorry about that messy comment…
I wanted say that … Charlie and Warren continued explaining why they hate Bitcoin in the latest Berkshire Hathaway annual meeting. Buffet said “He wouldnt buy all Bitcoins in the world for $25” .. LOL Munger is the one generally with the more acerbic take – always funny !!! He also railed against bitcoin in that meeting on May 1.
But, I am fascinated with how money – the medium of exchange works. The problem with fiat currency and possibility of depletion of value via inflation is a tough problem to solve. Some people assumed that cryptocurrencies do that. But they clearly dont do that. Until we come up with an alternative system for exchange of value we have to be happy with fiat currencies, it appears.
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Don’t know how I could have missed this piece! 🙂
“Instead of a government monopoly on the issuance of currency, there should be a vigorous competition among private providers of money, and the government money must be required to compete with other currencies”
Very wishful thinking, I’d say. Wishing for the state to let the plebs compete them.
“I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can’t stop.” – Hayek
It seems like you are too consumed by the bitcoin price chart and the mainstream TV gibberish narrative around it. While you have your first principles in order about free market, you straight up dismiss bitcoin to be ponzi and like every other hateful denier you take a victory lap over a btc price crash. Appalling!
You don’t seem to know what a ponzi scheme is, and I’m sure you never bothered to read the bitcoin white paper and got all your confirmation biases from the TV or some marxist economist. ( https://bitcoin.org/bitcoin.pdf )
The only “wonderful innovation” in bitcoin is its ability to resist the state.
As all the haters are laughing at the umpteenth 50%+ price crash, bitcoin just continues to work like a clockwork adding more blocks. tick tock next block.
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Mango,
I think you are making too many wrong assumptions and reaching unsupported conclusions. I don’t watch TV news and commentary. I’m not into reading any kind of news. Even at the top of this post I wrote that if a friend had not mentioned it over a call, I would not have known that bitcoin was tanking. You can take your mainstream TV and shove it, is my attitude.
I don’t know what a ponzi scheme is? I described it in the post. Which part of my description is wrong?
Your claim that bitcoin has the ability to resist the state is not quite accurate. Wait and you will find out soon enough.
I am convinced that one of the many problems of bitcoin is that the quantity is capped at 21 million. Certainly, therefore, bitcoin cannot be inflated like fiat money is by central banks but it runs into the mirror problem — the supply is absolutely fixed.
The final point I would make is this. I think of money as a means, not as an asset. The quantity of money therefore must grow as the real economy grows. Bitcoin doesn’t meet that requirement; it is rigidly fixed amount.
I am not the smartest person on the planet. Maybe I am wrong about bitcoin. Fortunately, it will be settled not by argumentation but what happens to bitcoin in about 10 years. Also, I don’t think Munger and Buffett are stupid. They know a bit about markets and money. Look them up.
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Thanks for your honest response, sir!
Equating bitcoin to a ponzi scheme is straight up incorrect, and none of the analogies in this piece holds true for bitcoin. A scheme would need some sort of a central planner and promises from this entity about the future of the scheme.
I don’t know what you meant by ‘mirror problem’ and couldn’t find any leads upon searching.
Why must the monetary base units increase in numbers? If we are right in assuming it needs to increase, who gets to decide by how much and who gets to allot the newer units? This is a slippery slope into central banking and fiat money.
P.S.
Bitcoin’s value in the market was emergent. Only many months after the launch did it get a fiat price. Henceforth it’s liquidity has increased exponentially, naturally user base holding meaningful cash balances in btc has also increased exponentially. So has the price.
Q: At what point in the future would you re-consider your opinions?
P.P.S. Funny small clip, you might like- https://www.youtube.com/watch?v=XbZ8zDpX2Mg
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