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 Bitcoins
 Why Bitcoin is a Ponzi scheme
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scottrnelson
Advanced Member
6960 Posts
[Mentor]


Meridian, ID
USA

Honda

XR650L, 790 Adv R

Posted - 01/13/2015 :  10:01 AM                       Like
While following a few links here and there on the internet I ran into this article: Why Bitcoin is a Ponzi scheme

I'll admit that the author comes off as a bit biased, but I would love to hear an analysis of why his is wrong.

I won't get involved in Bitcoin because it doesn't feel right to me. But I'm still quite interested in it from both a technical and economic point of view.

James R. Davis
Male Administrator
17396 Posts
[Mentor]


Houston, TX
USA

Honda

GoldWing 1500

Posted - 01/14/2015 :  11:57 AM Follow poster on Twitter  Join poster on Facebook as Friend  
Your negativity is well known and the author's negativity was amply displayed.

Bitcoins are not money - he says. What he demonstrates is that bitcoins are not US Dollars. No disputing that fact.

That dollar bill in your pocket is PROBABLY money. If you can exchange it for goods or services, then it's money. If it happens to be counterfeit, but people still accept it in exchange for goods or services, it's still money - though illegal.

That credit card in your wallet in not money - except if you can use it to buy goods and services; then it's money. This is a particularly good comparison since that credit card provides access to DIGITAL currency - an amount not necessarily in paper or coin, but recoded digitally on a bank's ledgers. Bitcoins are digital currency recorded not in just one bank's ledger, but on MILLIONS of identical ledgers all over the world. But with bitcoins there are no tellers, no brokers, no dealers (mo middlemen of any kind) who are required to facilitate moving it around and adding COST to the use of your money.

When our currency was backed by gold or silver, it had more credibility than what is now backed only by the 'full faith and credit' of our government. Either was, and remains, money. (After all, our 'you can keep your doctor' government is trustworthy, no?)

would you rather have one dollar's worth of bitcoins or one dollar bill? That is the argument posed by the author - a deliberate misdirection. If you were in London, the same question would be would you rather have one pound's worth of bitcoins or a one pound note? But if you asked the question without bias, it would sound like "would you rather have a dollar bill or the EQUIVALENCE in Great Briton Pounds? They are BOTH MONEY. That is, they can be exchanged for goods and services. So can bitcoins.

But unlike US Dollars or GB Pounds, bitcoins cannot be counterfeited, do not depend on governments (or Federal Reserve Banks) to not devalue them by simply printing more, are divisible into 100,000,000 pieces, can be transferred anywhere in the world within less than one hour and essentially without cost, can't be lost if your bank fails, and can't be spent by any other person in the world except you.

The value of bitcoins is wildly volatile - true. That is, the value of bitcoins as measured in US Dollars (or any other currency) is volatile. That means you probably should not INVEST in bitcoins - just buy as many as you want/need and transfer them (spend) them right away. The REAL value of bitcoins is NOT their store of value, it is their safety and flexibility of use.

Not money? Then how is it that you are able to buy Dell computers with bitcoins, or book airline travel, or buy Microsoft code with them? A hugely growing number of merchants, and growing daily, accept bitcoins. I allow the attorneys who retain me to pay my invoices with bitcoins.

What those merchants, and me, have in common is that we exchange received bitcoins into dollars - instantly - and deposit the proceeds into our banks - thus avoiding ANY market volatility risk.

In my case, I don't have to wait for a check to arrive in the mail, and I don't have to go to the bank to make my deposit. And when I deposit a check at my bank I have to wait another day or two before I can spend it whereas I can immediately spend bitcoins.

The IRS says that bitcoins are a commodity, not currency. Hmmmm. But when an attorney pays me in bitcoins I must report that as INCOME. Sounds like the IRS kinda thinks it's money despite their ruling.
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scottrnelson
Advanced Member
6960 Posts
[Mentor]


Meridian, ID
USA

Honda

XR650L, 790 Adv R

Posted - 01/14/2015 :  4:05 PM
quote:
Originally posted by James R. Davis

Your negativity is well known and the author's negativity was amply displayed.
Forgive me.

It is not my intention to be negative in this area, but just to understand it better. I keep running into articles about bitcoins when looking for other stuff on the internet and feel that others might benefit from reading those too. Would you rather that I not share articles about bitcoins that I run into?
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James R. Davis
Male Administrator
17396 Posts
[Mentor]


Houston, TX
USA

Honda

GoldWing 1500

Posted - 01/14/2015 :  6:08 PM Follow poster on Twitter  Join poster on Facebook as Friend  
Share what you wish to share.

You keep running into stories about bitcoins for a reason - in 2013 only about 5% of the population had even heard about them but by 2014 that number has increased to an estimated 30%.

Stories - that is NEWS - tends to be about problems (sensational). That's the nature of news. Most have heard about the collapse of Mt. Gox. Some have heard that BitStamp (an exchange) just had $5 million in bitcoins stolen from it (apparently an inside job). Bitcoins were each worth $260 a week ago and are only worth about $180 today - and next week, if they become worth $300, you will NOT hear about that. You won't hear about the many tens of millions of dollars of venture capital going into new bitcoin start-ups.

Bitcoins are new - there is a learning curve. Newspapers don't have the time to look beyond the surface of stories any longer. But there have been television dramas that involve bitcoins, and common people are using the internet to learn more all the time.

I recently taught a class to a group of murder mystery writers about bitcoins. The objective of the class was to provide those writers with a working knowledge of the subject and a vocabulary that, if appropriately used in their writings, guarantees the audience will recognize that it is 'contemporary'.

Maybe we're all wasting our time (and money), or maybe not.
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Horse
Senior Member
258 Posts


Newbury, Berkshire
United Kingdom

BMW

R850RT

Posted - 01/15/2015 :  6:50 AM
quote:
Originally posted by James R. Davis you will NOT hear about that. You won't hear about the many tens of millions of dollars of venture capital going into new bitcoin start-ups.


Of course, that may not be a good yardstick; anyone remember the dotcom boom-bust?

The example you gave recently of a money transfer perhaps shows where the 'instant'ness - and so low exposure to risk or volatile exchange rates - of bitcoin is particularly useful.

NB You mentioned the IRS's attitude; we had a situation in the UK a few years ago, where a company paid its staff in sovereigns at 'face' value [Pound Sterling] 1. Unfortunately for the employees, the Inland Revenue decided they should be taxed on the coins' actual exchange value - currently about 200!
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bachman1961
Male Advanced Member
2273 Posts
[Mentor]


colorado springs, co
USA

Honda

CB750 NightHawk

Posted - 01/15/2015 :  11:02 AM
Interesting topic. I enjoy reading some inside scoop on things I know nothing about.
In my world, "market volatility" is having money in my pocket. There are times when it just Disappears !! Sounds like a good premise for those Mystery Writers.

At least now I have a concept of what bitcoins are. I thought it was a music group.
I suppose I should quit looking for their songs.

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rayg50
Male Moderator
2083 Posts
[Mentor]


NYC, NY
USA

Honda

Shadow Spirit 750DC

Posted - 01/15/2015 :  12:28 PM
Mind drift kicked in.

My take away from this discussion is that bitcoins can be "money" or an investment.

As money they can be a low cost way of moving money from point A to point B, whether or not they are used as payment. You get in and you get out as close to immediately as you can. You would do this to minimize your exposure to loss due to price fluctuation but at the same time you minimize your exposure to gain. A bank check ever increase in value enroute?

As an investment you would treat bitcoins the way you would any other investment. You buy low, hold, and sell high (or maybe lose your shirt, LOL).

I semi recently exchanged paper money for Gold and Silver Eagles and Gold Buffalos. I did it in part as an investment and in part as an exchange for what I view to be a universal currency. Maybe bitcoins are on their way to being the worlds Euro.

I have yet to invest in first issue comic books, or old baseball cards or paintings by masters. Besides the fact that I can't afford them I don't have faith that they will hold their value. Now, to me, those are Ponzi schemes, LOL.

My point to this long winded post? Every investment has risk and is based on the faith the buyer has that they will be able to sell it. If the market dries up you are SOL whether it be Bitcoins, comics, art, gold, diamonds, stocks, etc.

I think the author raised some valid points, IMO they can apply to just about anything else under the investment umbrella. Just look at Wall street over the last decade. How about the real estate bubble?

Where Bitcoins in my opinion have the edge over trading cards and the like is that they should always carry some worth as a means of moving conventional "money".

BTW, Don't invest (or play cards) with scared money.

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Baggsy
Male Advanced Member
728 Posts
[Mentor]


Ottawa, Ontario
Canada

Suzuki

09 Wee

Posted - 01/16/2015 :  6:13 PM
My feeling is that some of the money coming in, is a response to the attempted Global crackdown on money laundering. Since it's a new area with not much case law, Pioneers with lots of cash could sway the way things go on a Global level.

Does the money trail end once funds are exchanged for bitcoins and/or back again?

I don't think it's so much negativity, but more ignorance, and we fear what we don't understand. We also choose to interpret things in the ways that we are familiar with and/or benefit from, so the reactions of different people are understandable and somewhat predictable.
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James R. Davis
Male Administrator
17396 Posts
[Mentor]


Houston, TX
USA

Honda

GoldWing 1500

Posted - 01/17/2015 :  6:39 AM Follow poster on Twitter  Join poster on Facebook as Friend  
I think most of you are missing the point of all of this.

Bitcoins are almost irrelevant. It's the technology upon which bitcoins is based that is exciting and is the essence of what is driving all crypto-currency activity.

Imagine, if you will, that instead of bitcoins, we are interest is US Dollars! If that technology was used to ledger control US Dollars, then you could keep your money, safely, in any digital wallet anywhere in the world (even on a printed piece of paper), and ONLY YOU could spend or transfer it to any other wallet in the world, almost instantly, with essentially zero cost.

[By 'keep it in any wallet', I mean, of course, it would be ledgered on all blockchain ledgers in the world and only your secret key would be in your wallet (or printed piece of paper).]
That's the end of Wire transfers. The end of American Express money orders. And it may even be the end, except for specialized purposes, of BANKS!

Credit cards and debit cards? Fees? Who needs them?
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Horse
Senior Member
258 Posts


Newbury, Berkshire
United Kingdom

BMW

R850RT

Posted - 01/17/2015 :  1:36 PM
Sorry, I can't ignore my cynical, perhaps practical, persona, which asks: Who profits?

Unless it's being done for charitable or philanthropic reasons, presumably someone is funding the transaction processing etc.?

So, if that's the case, it's not an unreasonable assumption that someone has control over the level of profit. Now, and in future.
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James R. Davis
Male Administrator
17396 Posts
[Mentor]


Houston, TX
USA

Honda

GoldWing 1500

Posted - 01/17/2015 :  5:50 PM Follow poster on Twitter  Join poster on Facebook as Friend  
The bitcoin miners are all in it for the bitcoins and transaction fees associated with mined blocks.

While I've said that transferring bitcoins is essentially free, in fact a small 'contribution' is expected for each transaction paid for by the sender. Whether you send $1, $1,000, or $1,000,000, the contribution has historically been 0.0001 bitcoins. That's about $0.02 at today's value of bitcoins.

Compare that to $15 to send a wire transfer and you realize that 'essentially free' is quite accurate.

There are no other fees of any kind associated with bitcoin transfers.

It is the miner's computers which maintain the blockchain - validating each transaction and the validity of the blockchain itself.

For perspective, most corporations have a profit margin on the order of about 6%. So when they allow you to pay for your purchases with a credit card, Visa or Master Card and the others consume 2% to 3% (or MORE) as a processing fee, those corporations take a big hit allowing you to use those credit cards. That's why some small companies often will not allow you to use a credit card on purchases less than $10.
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