Several users in this forum have addressed bitcoin and other cryptocurrencies as ponzi schemes. Bitcoins have several uses which could legitimate its value as a currency, but also have received massive investments in the last months, making it considered a highly speculative asset. Are there signs and information that proves that cryptocurrencies are being used as a (intentionally fraudulent) scheme, or should we consider it a speculative asset similar to other assets in economic bubbles that happened before?

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    $\begingroup$ Does it have to be either? For sure there are some dodgy things going on. And also, for sure there are some coins that are over-valued. Perhaps what we are seeing is a radical new product with an enormous potential application that people don't quite know how to price yet. $\endgroup$
    – Jamzy
    Commented Jan 30, 2018 at 4:40
  • $\begingroup$ One problem with this question is that it jumps between Bitcoin and other crypto-currencies. If we look at some ICO’s, they certainly appear to be scams (e.g. Prodeum), and the SEC is prosecuting some other ICO’s. Obviously, Bitcoin supporters would argue that Bitcoin should not be lumped in with such questionable ICO’s. $\endgroup$ Commented Jan 30, 2018 at 13:58
  • $\begingroup$ Every asset price has both fundamental and bubble components. In most cases, the bubble component of an assets price is zero and the asset price is driven by its fundamental value. For bitcoin, one can argue that the fundamental component is zero and that the price of bitcoin is entirely driven by behavioral frenzy. Bitcoin has no fundamental value and, really, no intrinsic value. $\endgroup$
    – 123
    Commented Feb 7, 2018 at 15:11

3 Answers 3


In general, "Ponzi schemes" in the context of asset pricing refer to "rational bubbles", or a failure of the transversality condition you need when passing from a flow identity to a present value identity. They are not "fraudulent schemes". For instance, there can be a rational bubble on a "fundamentally" worthless asset in a perfect foresight world if its price grows at the real interest rate available in the broader economy. (This is actually what you're talking about, in case it's not clear to you - each investor assumes they can offload the asset at a higher price to another investor, and you push the problem of the "greatest fool" to infinity, which makes the assumption a rational one ex post.)

Is there any evidence for the existence of such rational bubbles? Cochrane (2002) points out that rational bubble theory does not account for the association of "bubbles" with high trading volume. In a rational bubble, it is rational to hold the asset in every period: there's no reason to observe high turnover along with high prices. They are also silent on the association of high prices with high volatility - in a rational bubble context, volatility (induced by shifting from one equilibrium to another) is always present, and the choice of equilibrium (the fact that we're on an explosive price path) does not produce more volatility than usual. Rational bubbles appear to be a poor explanation of events that people have historically described as "bubbles" (and of the price behavior of cryptocurrencies).

In contrast, the convenience yield theory outlined in Cochrane (2002) and also in this blog post seems to fit the data much better. If "overvaluation" is driven by a liquidity premium induced by shorting constraints and a short-term constraint on supply, then we would expect to see the standard prediction of monetary economics that high prices should be associated with high turnover. In that case, overvaluation relative to "fundamentals" should also require shorting constraints - in the case of dollars vs treasuries, for instance, it's illegal to print banknotes or close substitutes to money to finance a purchase of bonds, which is a kind of shorting constraint. Indeed, shorting constraints are what we see in the cryptocurrency market: BTC futures have only recently started trading on stock exchanges, and even then the "electronic paper" that you hold when you take the long side of a BTC futures contract is not the same thing as holding BTC directly, so what appears like a possibility to short BTC through these contracts is in fact not so. (It satisfies "speculative demand", so it's possible to "bet on cryptocurrencies" without having to hold any, but it's not possible to use these contracts in the place of cryptocurrencies in transactions.)

If you want to ask whether cryptocurrencies are a bubble, then you have to define what "bubble" means. If it is "overvaluation relative to fundamentals", then is USD a bubble? After all, it's trading at a premium relative to T-bills. If you include any convenience yield the asset may have in your definition of "bubble" so that USD is not one, then it's likely that cryptocurrencies are not "bubbles" either. It's very difficult to say anything about whether cryptocurrency valuations are "justified" or not by this explanation, since the convenience demand of cryptocurrencies, like of cash, has components which are not transparent. We're mostly in the dark, and I wouldn't try to outguess the market price of an asset in a circumstance where we know next to nothing about the factors which are driving the convenience demand for it.

  • $\begingroup$ I would like to remind all parties that 1.) prolonged conversations should be taken to a chat room and 2.) civil discussion is expected out of everyone. Calling people absurd or speaking of "idiotic" ideas is not conducive to productive conversation. $\endgroup$
    – Kitsune Cavalry
    Commented Jan 31, 2018 at 14:57
  • $\begingroup$ Separately, w.r.t. Brian's comments, if "Y has property B and X doesn't", then if B interferes with property A, then it is true you cannot make a meaningful analogy. Confounding variables are one of the primary concerns when making economic comparisons. I wish to intervene no further in this conversation. Move any other comments to chat. I am moving your comments to chat and deleting those on this post. $\endgroup$
    – Kitsune Cavalry
    Commented Jan 31, 2018 at 15:01
  • $\begingroup$ Comments are not for extended discussion; this conversation has been moved to chat. $\endgroup$
    – Kitsune Cavalry
    Commented Jan 31, 2018 at 15:01

I would say cryptocurrencies are in a speculative boom phase based on examples of Ethereum being 10 dollars in 2016 and jumping to 370 dollars the following year and Bitcoin going from 900 dollars to 10,000 dollars in those same years.

With that said, speculative boom phases are poor guides to future valuations and the maturation trajectory of a new sector.

So, to answer your question, yes they are in a speculative boom phase or as you put it in a bubble.

Many people decry the current speculative frenzy in cryptocurrencies, and others warn the whole thing is a Ponzi scheme, a fad, and a bubble in which the gullible sheep are being led to slaughter.

I think what non-experts or rather people who don't write software for cryptocurrencies should do is analyze these cryptocurrencies through the filters of scarcity and utility and come to your own conclusion on a case by case basis based on the application of those filters.


A Ponzi Scheme is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading.

Hence, cryptocurrencies are not Ponzi Schemes, since this would require some central authority falsifying records to mislead investors. Cryptocurrencies are specifically designed to make this type of fraudulent activity, which relies on information asymmetry and trust in a central authority, mathematically provably impossible. Nobody is buying shares in an investment scheme, investors are trading an asset among themselves in the most transparent way possible (Everyone has access to an immutable public ledger, the Blockchain, containing details about every transaction that has ever occurred).

So in some sense, cryptos are the exact opposite of a Ponzi Scheme. On the other hand, one could make a case that Fractional Reserve Banking and Social Security are Ponzi Schemes.

EDIT: Other answers have suggested that fraudulent activities are not a necessary condition for a Ponzi Scheme. Other objections to my answer include my use of a non reliable source. From a legal perspective, the last word on whether something is a Ponzi Scheme lies with the Securities and Exchange Commission, whose definition should therefore be considered:

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.

Furthermore, it has been suggested that a group of actors attempting to drive up the price of cryptocurrencies by engaging in leveraged buying, are effectively running a Ponzi Scheme, and therefore cryptocurrencies are a Ponzi Scheme. I strongly disagree with this claim. Apart from the fact that it does not meet the definition, it is also not a claim about cryptocurrencies but about rogue actors using crypos in an attempt to implement a Ponzi Scheme. Any arbitrary asset could be traded in this way - this is not a specific characteristic of cryptocurrencies. Such "strategy" qualifies as deliberately creating a bubble, (an ill-conveived undertaking, exposing the creator to ever increasing market risk), rather than running a Ponzi Scheme.

  • $\begingroup$ "cryptocurrencies are not Ponzi Schemes, since this would require some central authority falsifying records to mislead investors": falsification is not a necessary aspect of Ponzi schemes, according to your "source". All it says is that new investors will obtain revenues from new investors rather than legitimate business. $\endgroup$ Commented Jan 30, 2018 at 6:28
  • $\begingroup$ @Limonada, you are completely missing the point about a) what the main characteristic of a Ponzi Scheme is, and b) about what the raison d'être of cryptos is. Of course a PS has to involve some entity who unilaterally misleads other investors. One means by which they COULD achieve this is falsification of records. The fact that it's new investors benefiting at the expense of old ones is merely a consequence of this, it's not a salient characteristic of it. Cryptos solve exactly this problem, hence, they can't, BY DEFINITION, be PSs. $\endgroup$ Commented Jan 30, 2018 at 14:57
  • $\begingroup$ Here is how you can prove this to yourself. Can you provide an example of a PS that does not involve an actor/group of actors unilaterally misleading investors? This is a necessary (but not sufficient) condition for a PS. 2. Can you give an example of how any group of actors could unilaterally mislead/deceive/defraud others using Blockchain technology? I'm not talking stuff build on top of it, e.g. crypt brokers etc. I suggest you look into how BC technology actually works, that would have answered your question immediately. $\endgroup$ Commented Jan 30, 2018 at 15:03
  • $\begingroup$ you can refine your answer instead of adding comments, as future visitors will most likely read only the answers and not comment discussions $\endgroup$ Commented Jan 30, 2018 at 22:41

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