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The surge in bitcoin and other crypto assets has given doubters a shot to look clever by accusing cryptocurrency as a "Ponzi scheme" that could "cause a recession.”
These scare tactics about bitcoin are unsurprising, but they are ill-informed.
It is high time that we don’t allow people who do not understand (or simply ignore) the truth to remark on this market as if they know something us greater fools simply cannot see.
Is It a Ponzi Scheme?
People who don’t like bitcoin try to label it a Ponzi scheme or a fraud because then they no longer have to discuss its merits
Unfortunately, these people have never looked up the definition of "Ponzi scheme" or "fraud."
This is because even if bitcoin will falter, it does not meet the definition of a Ponzi scheme or fraud.
Some claim bitcoin "will stay afloat only as long as enough people buy the fiction that bitcoin represents real value."
They fail to say how this is any diverse than the U.S. dollar or the Venezuelan Bolivar.
Their central argument leans on the premise of ANY medium of exchange.
It is that it works as long as people will accept it for goods and services.
Even if we let them change the definition of a Ponzi scheme to fit their argument.
Or even if we let them ignore the fact that we can buy things like sheets, toasters and tennis shoes with bitcoin.
They simply defining ALL currencies.
Nobody accepts dollars because they like green-colored paper, and the idea that government can compel confidence in a currency is immature.
It is also proven false by the Venezuelan bolivar, the German mark, and the Zimbabwean dollar.
Contagion and market collapse
The new argument from financial experts this week comes from the trading bitcoin futures at the CBOE.
It goes something like this:
"We have to care about this crazy bitcoin bubble because, now that futures are trading, a price collapse could trigger a recession."
They argue that “An asset’s value comes from the fact that its market is liquid.”
This is smarter the previous argument.
However, Edwards stops notes with alarm that a pub in London and gaming company Steam will no longer accept bitcoin as payment.
He goes on to extrapolate from those that bitcoin might lose its liquidity.
They do not mention that Overstock.com has seen the variety and amount of its bitcoin sales more than double the past year.
Or that payment processing companies like Bitt, Square, and Spera are working to let customers pay for virtually anything at any merchant in bitcoin.
That kind of liquidity is nearly as good as the liquidity of dollars.
They also ignore the variety of crypto assets that any holder can buy on cryptocurrency exchanges.
Their final point that the market has never been tested by futures trading is true but does not mention the important aspect of bitcoin futures:
There is no direct link between the bitcoin market and the futures market, which is cash-settled.
It is incongruous that speculative bets denominated in dollars that will never be settled in cryptocurrency are now the reason for concern about the price of bitcoin.
There will never be a short squeeze.
There will never be failures to deliver on short sales.
This is not even a real futures market as we know it because no contract will ever be fulfilled or settled in the actual currency/commodity that is subject to the contract.
So, the threat isn't bitcoin itself or any of the people who use bitcoin.
It is the doubters on Wall Street making long and short bets on what will happen to the bitcoin price.
Instead of worrying about how perilous bitcoin is for the economy, perhaps we should be asking why we want to let Wall Street bet billions every day on whether bitcoin’s price will go up or down and how much they will try to influence the bitcoin market to ensure they win in futures trading.
If there is indeed a hazard, it can be found in the derivatives market, and not bitcoin.