Bitcoin, Ethereum, and all the other cryptocurrencies seem like an easy way to make money. Sure, prices are volatile, but historically they’ve been going up and up. Stories of people who got in early and made a killing have become crypto folklore. If they can do it, so can I, right?
Not so fast.
In spite of all the hype, technical handwaving, illegal shenanigans, and everything else that makes up the world of crypto, there’s one simple fact that people are desperate to overlook.
It’s a con. A long con to be sure, but a con nevertheless.
And cons never end well – at least, not for the marks.
Breaking Down the Confidence Scheme
According to Wikipedia, a confidence scheme, or ‘con,’ has six stages.
The foundation work includes preparations for the con. In the foundation work, the con operator approaches the victim, or ‘mark.’ (‘Con operator’ is the gender-neutral form of ‘con man’ – although to be sure, they’re still mostly men.)
Next comes the build-up, where the operator gives the mark an opportunity to profit from the con, playing to their greed.
The pay-off, in turn, gives the mark a small payout to convince them that the scheme is real and not a con.
As the con reaches its conclusion, the fifth step is the hurrah, where the con operator manufactures some kind of event or crisis that forces the victim to act quickly – and invest big in the con.
Finally, the in-and-in leverages the actions of a third-party conspirator or ‘shill’ who also ‘invests’ in the scheme to give it an appearance of legitimacy.
Only after the con operator completes these six steps do they walk away with the mark’s money.
Calling Mr. Ponzi
There are many types of cons, of course. The one that most closely aligns with crypto is the Ponzi scheme.
With a Ponzi scheme, the con operator establishes a realistic-looking investment business (the foundation). The operator invites marks to invest, promising above market returns (the build-up).
The operator then uses the money they get from later investors to pay off any early investor who wants to cash in, convincing everyone that the scheme is on the level (the pay-off). Some of these people are shills, in cahoots with the operator to add credibility to the scheme (the in-and-in).
The operator executes the hurrah whenever they can – claiming some sort of event or insider info that requires marks to invest more money quickly – ideally, outsized sums of cash.
And then – poof! – at some point too many marks demand their payouts at once, and the Ponzi collapses, but not before the con operator has stashed away a fortune.
Is Crypto a Ponzi Scheme?
Cryptocurrency has many of the characteristics of a Ponzi scheme. Most importantly, the only funds (real money, that is, aka ‘fiat’) that are available to pay off marks who want to get out are funds that marks have previously invested.
True, there are all manner of shenanigans to hide this fundamental fact, often involving shady stablecoin transactions or complex derivatives – but if you take all cryptocurrencies (including stablecoins) as a unit and consider them to be a single bucket, then the only money going into the bucket are the funds people use to buy crypto.
The only money coming out of the bucket has to come from those previously invested funds. There is simply no place else for the money to come from – no value creation like with stocks or bonds or any other on-the-level investment.
However, in spite of this basic similarity to Ponzi schemes, cryptocurrencies do not quite fall under the definition of a Ponzi, because of their decentralized nature. In other words, there is no single con operator. Cryptocurrencies differ from true Ponzi schemes because no one is in control of the con.
It would also follow, therefore, that the role of shills is different with the crypto con as well, as they may not actually be in cahoots with a particular operator.
What we can say, therefore, is that crypto is a Ponzi-like con, because it shares the same money in vs. money out pattern that Ponzis do – but there’s no single Bernie Madoff running the show.
Identifying the Con Operators, Shills, and Marks
Just because there’s no Bernie Madoff of crypto doesn’t mean that there’s nobody in the con operator role. It just means that there is no single person in that role, and thus, no one person is in control of the con.
Instead, the people who fill the role of con operator are the shady individuals with large enough stakes in crypto to manipulate the market in their favor. These individuals know the trick to pulling out vast sums of fiat without collapsing the con. The crypto vernacular refers to these people as ‘whales.’
Shills, in turn, are people who make a positive return with crypto (either by cashing out or even simply earning more crypto), and who trumpet the fact that they are winners. You can identify shills because they are stating publicly that crypto will go up in value, and thus you too should invest.
In other words, shills are people who are pumping the value of crypto – whether they successfully dump their coins or not.
The key lesson here: anyone who states that crypto will go up in value or that it is a good investment is a shill. They are always – always – in on the con.
With a true Ponzi, shills are conspiring with the con operators, while with crypto, they typically are not. Correspondingly, shills in true Ponzis aren’t marks. With crypto, in contrast, shills are often marks themselves – even though they may not recognize that they are either shills or marks.
Shills, however, make up a relatively small percentage of all marks. Who, then, are the preponderance of the marks? Anyone who holds crypto and hasn’t cashed it in for fiat.
Yes, you read that right. All hodlers are marks.
The Fundamental Crypto Con Equation
Any Ponzi-like con can only pay out from funds invested. Therefore, in the final analysis, the totals of all payouts has to equal the total of all investments.
We have, therefore, the fundamental crypto con equation:
Total fiat funds available to cash out crypto investments (since the beginning of crypto)
Total fiat funds invested in crypto (since the beginning of crypto).
Note that this equation is independent of the market value of any crypto at any point in time. Sure, hodling crypto makes the market value go up, but so what? That appreciation doesn’t mean that there’s any more real money in the bucket. The supposed market value of crypto is simply another part of the con.
Because of the fundamental nature of this equation, you might think that the value of total funds invested in crypto up to this point in time would be a readily available number. It’s not – or at least, I certainly couldn’t find it.
Why not? It is certainly a much smaller number than the market capitalization of all crypto, which equals the market value of each type of crypto coin times the number of coins in existence, summed over all types of crypto.
However, the notion of market capitalization is just one more aspect of the con. It’s a meaningless number that has nothing to do with the value of any particular crypto stake.
Anyone who says differently – anyone who says, for example, that the market capitalization of any particular cryptocurrency represents the available funds for all hodlers to cash out is – you guessed it – a shill.
Furthermore, anyone who thinks that because they acquired crypto at some number and its market value is now a higher number means that they ‘made money’ is in reality a mark. You can only make money by cashing out for fiat, aka real money.
And you’d better do it before all the other hodlers figure out the con. Remember, Ponzi-like cons, just like true Ponzis, never end well. Bernie Madoff’s investors all lost money, and poor, poor Bernie died in prison.
The Intellyx Take
Whales, shills, and even marks love to obscure the fundamental financial realities of crypto with layers of technical minutiae, jargon, and financial mumbo-jumbo.
This obfuscation campaign continues to hoodwink new marks as well as regulators and even leaders of Central American countries into thinking that crypto is on the level.
It’s not. It’s a con. Sooner or later, it will end badly for almost everyone. You haven’t made any money in crypto until you cash out, so cash out now while you still can.
© Intellyx LLC. Intellyx publishes the Intellyx Cloud-Native Computing Poster and advises business leaders and technology vendors on their digital transformation strategies. Intellyx retains editorial control over the content of this document.