The following article is based on the opinions of cyber threats and financial professionals and is not intended to place blame on any parties. It is an important topic that has been brought to the attention of the US Government, even before the fall of the FTX Exchange.
The seemingly limitless innovations from information technology have created enormous opportunities for all kinds of predatory behavior uninhibited by social regulation. Cryptocurrencies are one of the leading contestants in this competition. Could Crypto be considered a Ponzi scheme? Some think it is the IT version of what Bernie Madoff did in a mutual fund fraud in New York City in the 1980s and ‘90s, which was the greatest Ponzi scheme of all time, perhaps until now.
The Ponzi scheme is named for Charles Ponzi, who in 1920 bilked thousands of people out of an estimated US$ 10 million before he was caught. Born in Italy in 1882, arrived in the USA in 1903 and worked in various jobs. He promised investors a 50% return for the funds within a few months. He claimed it was an investment in international mail coupons or IRC. The international reply coupon (IRC) allows someone sending a letter to another country to pay for the postage for the reply in advance. When the sender writes a letter to a foreign addressee that requires a response, they can purchase an IRC and enclose it with their letter.
A Ponzi scheme is an investment fraud in which clients are promised a significant profit at little to no risk. Organizations that engage in a Ponzi scheme focus all of their energy on attracting new clients to make investments. These new “buyers” investment is used to pay earlier investors their returns, noted as “profit.” The new investors continually pay a higher price to enter the investment to ensure that earlier investors receive their payout until nothing is left to pay the later investors.
Crypto coin platforms take in money when people buy virtual "coins," If enough people keep buying them, the coin's value increases. In simple crypto cases, the money sits idle; it is not invested in any activities that generate income or profit. People can sell their coins at a profit only if more and more people are still buying them. (Sound familiar.)
If many people buy, the coin value goes up dramatically, and those who cash out while that happens will make a considerable profit. But if new buying starts to fall off partly because the bit-coin gamers know the game is approaching its tipping point, then eventually, the cash reserves and coin values fall to the point where people cashing out get less than they have put in. At that point, everyone else panics and cashes out as fast as possible (it is not that easy to sell crypto coins in a hurry), and many coin holders will experience a loss; eventually, coins crash into bankruptcy.
Some banks figured this out (they were a little slow and careful) and got into it. The problem for everyone else in the game is that the banks have the IT resources to predict when the tide is about to turn and launch their coin transaction systems to get out quickly. So, unless you think you can compete well with the gamers and Wall Street IT, stay away from crypto (not to mention having an aversion to stealing from your peers).
A new aspect appeared in crypto with the crypto "exchanges." The crypto bosses said, "let’s invest our pile of cash," now acting like a mutual fund but under no regulations to protect investors (like those coming out of the Great Depression). The unique problem with exchanges is that when the coin value starts to tank, there is a strong incentive to make risky investments with the coin holders' money to save the ship, which usually ends badly. How can they compete in the stock market with the fake gains of crypto? That is why people are in there.
Difficult times are hard enough on the economic prospects for most working people. Crypto is a shiny new gimmick that makes things far worse. It’s the people being sucked into a scam that promises benefits by stealing from... the people.
It is exciting and dismaying that the pointy heads have not called out the Ponzi cryptos for what they are. Economist Paul Krugman of the New York Times came close on the editorial page several months ago (12 July 2022) but could not quite say "Ponzi" out loud. There are too many powerful players in the Crypto business, and no one wants to be sued, especially me or my company.
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