17 July 2014

World Bank economist calls bitcoin a ‘naturally occurring’ Ponzi



Staunch critics of bitcoin have labelled the digital currency as a Ponzi scheme – economist Gary North went into great detail outlining a list of reasons why the popular cryptocurrency is one. Financial institutions, think-tank organizations and economic analysts have also called it a Ponzi scheme. But is it possible for the digital currency to be a “naturally occurring” Ponzi?


According to a recent report authored by authored by Kaushik Basu, a World Bank economist, entitled “Ponzis: The Science and Mystique of a Class of Financial Frauds,” it’s feasible that bitcoin could very well be a natural Ponzi, which doesn’t necessarily have anything to do with Ponzi schemes.


Basu discussed how Ponzi schemes today are a lot harder to pinpoint because they’re more sophisticated and more difficult to detect in the present day economy. Basu presented the case that there are examples of natural Ponzis in the market today: the housing market is one example because if potential homeowners think housing prices will soar then they’ll fight to acquire a home that leads to heightened demand and higher prices. However, once the bubble maximizes and bursts then those who entered at the tail end of it lose out.


The World Bank economist also cited gold as a victim of natural Ponzis.


Here is what Basu wrote in regards to bitcoin:



“One of the most recent cases of bubbles occurred in the new ‘Bitcoin’ experiment. Bitcoin is a cryptocurrency; the main and original attraction of which is the low transactions cost associated with its use. One can buy bitcoin the way one can buy euros and trade freely with others having euros. Trouble started when people began speculating that the value of bitcoin would rise, thereby raising the demand for bitcoin and making the value-rise a self-fulfilling prophesy. In other words, what we witnessed recently in the bitcoin phenomenon fits the standard definition of a speculative bubble.”



The United States Securities and Exchange Commission (SEC) previously wrote last month that bitcoin may very well be a Ponzi scheme and hurt investors who refrain from performing their due diligence and required research.


Economist Nouriel Roubini also chimed in on the bitcoin foray and categorized it as a Ponzi scheme as well. Roubini, who has called for many bubbles in the stock market today, averred that the peer-to-peer decentralized digital currency is a “lousy store of value.”


Of course, the words that really bothered the bitcoin community were that of North, who opined: “Here is an economic fact: the number of fools is limited. They are a scarce economic resource. As the price of bitcoins rises, more fools will be lured into the market. But this is a finite market.”




July 17, 2014 at 11:45AM



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