SHARE

Time for an economics lesson:

  1. A ponzi scheme is when the money from new investors into the scheme is used to pay out promised dividends or interests to those already in the scheme, thus fooling investors into a false sense of security, when in fact there is no real return on investment and the whole thing thus being unsustainable.
  2. A pyramid scheme is when new entrants into the scheme make a payment to those who joined the scheme earlier and then take similar payments from several of those who join after them, often with small parts of those payments being passed up the pyramid to keep it going for a little while longer.
  3. A bubble is when the price of a product (or the price of the shares in the manufacturer of a product) rises far above the mean value of the sum of the products, due to hype, over-excitement, misinformation, government interference or some such. It can go on for years, but typically pops suddenly.

Now, BitCoin does not pay investors any returns or interest, it does not require payments to older members, it does not distribute investments up the chain and it is not linked to any product or share in the manufacturer of any products… so it can be a lot of things, but ponzi scheme, pyramid scheme and bubble are not three of them.

I understand that some economists are having a hard time explaining what is going on with the price of BitCoin… that is because it does not fit most of the standard models, so they are valiantly groping around their toolbox of price-determination models, monetary and exchange rate models, PE-ratio models and so on… but whacking something with a hammer does not make it a nail.

Value is subjective and fickle. Price is a snapshot of a rough indicator of subjective value, which is relative to a variable (like the Dollar), itself fickle, based entirely in faith, collective experience and emotional mood-swings.

To model or explain the price of BitCoin, one must drop reliance on tangibles like supply & demand, utility or historical return, and look rather at less tangibles like the psychology of the actors in the market. Something we’re all typically pretty bad at.

  • Carl

    That was not a very good article at all! It does not explain what Bitcoin is and why it is not a Ponzi scheme etc. Usually RS articles are packed with good data to back up arguments/claims. This was seriously underwhelming. Sorry.

    • I’m sorry you think that. Please be aware that this isn’t an article, however. This is a ‘Rational Remark’ – a space for people to share their brief ideas and thoughts on the platform.