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Robert McCauley, nonresident senior fellow at Boston University’s Global Development Policy Center and associate member of the University of Oxford’s history faculty, says that “Bitcoin is worse than a Madoff Ponzi scheme.”
The value judgment in the title of the article notwithstanding, McCauley rightly points out that Bitcoin makes no promise – despite Jorge Stolfi’s cries to the contrary that Bitcoin proponents are somehow selling the promise. of Bitcoin as an investment – and cannot end at the end of a Ponzi scheme. It also correctly states, in my opinion, that Bitcoin is unique in the history of economic speculative assets.
Stolfi’s fifth observation – “operators take away a lot of the money” is a view of Bitcoin’s zero-sum game. Here, McCauley states his position that while Ponzi schemes are “redistributive – zero-sum”, Bitcoin is “negative-sum”.
This is because huge amounts of electricity are “wasted” to generate new Bitcoins in the hashing process. Business Intern reported that Bitcoin uses 0.5% of the world’s electricity in the process of mining. Due to Bitcoin proof of work hashing algorithmmost of the energy is not used to perform useful work or even to mine new Bitcoins.
energy waste is a feature of Bitcoin — it forces the miners to expend energy to earn the luck to record new transactions (and “mine” new Bitcoins) – making it expensive for hackers to alter the ledger (the so-called 51% attack which would allow hackers to double their spending, i.e. “counterfeit bitcoins”).
While this article does not discuss the environmental costs of bitcoin mining, what is relevant is that unlike a Madoff-style Ponzi scheme, where Madoff simply transferred money from new investors to existing investors without actually investing in anything, Bitcoin miners must invest in equipment, real estate, and energy.
Additional note: The specialized hardware required for Bitcoin mining also generates e-waste as well.³For more information on the environmental costs of Bitcoin, check out: Bitcoin Energy Consumption Index - Digiconomist
This makes Stolfi’s fifth point tenuous at best – while bitcoin miners and early investors are taking some of that money away, providers of bitcoin mining equipment, real estate, and energy are also taking money out of it. this setup.
McCauley concludes, somewhat ironically, by saying:
“To conclude, an economic analysis of bitcoin must recognize its singularity in the history of fads. As an object of speculation, bitcoin is unprecedented in that there are no [sic. I assume he meant “no other”] This post-modern mania offers high prices for entries on anyone’s spreadsheet. A perpetual zero-coupon arrived not as a joke but as a trillion dollar asset. Unlike a Ponzi scheme, bitcoin cannot end in a run. (emphasis mine)
