Hello everyone, today we will discuss from a data perspective: Is Bitcoin really a Ponzi scheme?
Recently, the price of Bitcoin has been rising all the way, reaching a peak of $99,000 per coin.
In the comments under the news, there are probably two factions: one advises everyone to be cautious, questioning why there are still fools believing in such an obvious scam, which is clearly a Ponzi scheme designed to lure you in and then harvest your profits;
Another perspective is that you don't understand, so don't speak thoughtlessly. Those who hold it are already financially free, so quickly buy some while you can still afford it.
I can easily be persuaded by others; both sides seem to have a point.
Those who hold a large quantity have indeed achieved financial freedom at the current price, which is a true statement. However, the rise in Bitcoin's price does require more newcomers to enter the market; more vigorous trading leads to more stable prices. From this perspective, it seems like a 'hot potato' game.
Empty talk is useless. Since the on-chain data is all public, let's look at it from a data perspective to see if Bitcoin is a Ponzi scheme.
What is a Ponzi scheme?
In simple terms, it means using the money from new investors to pay interest and short-term returns to old investors, creating a false appearance of making money, thereby deceiving more investors.
The all-knowing and all-powerful ChatGPT teacher tells me that Ponzi schemes have the following characteristics:
Unrealistic promises of returns often claim to provide high returns while having very low risks, promising fixed or stable return rates regardless of market conditions. Such unrealistic promises are often used to attract individuals who are not familiar with investment rules.
Relying on an ever-expanding chain of funds from new investors completely depends on attracting more new investors to join. Once the inflow of funds is insufficient, promises cannot be fulfilled. To attract more funds, scams will encourage current participants to refer newcomers and provide extra rewards.
An opaque operating mechanism scheme will not clearly explain how funds generate returns, often using 'trade secrets' or complex technical terms to conceal its essence.
A lack of regulation typically means that it has not been approved by financial regulatory agencies, and conventional regulatory reviews struggle to trace the actual flow of funds.
Empty talk is useless; please look at the data.
Are the promised returns outrageous?
Although Bitcoin is often followed by 'high efficiency in making money', let's look at the data to see if it fits the three characteristics usually found in Ponzi schemes: high returns and low risks.
1️⃣ Low risk?
Low risk means a low percentage of losing money. We measure risk using the maximum drawdown rate: the drop from the highest point to the lowest point over a period of time. In other words, in the worst-case scenario: if you buy at the highest point and can't stand it at the lowest point and sell, how much will you lose?
From 2010 to now, the highest annual maximum drawdown rates are in 2011 and 2013, reaching as high as 99%, while the lowest is 58% in 2021.
What does this concept mean? Let's compare it to the A-share market. From 2010 to now, the highest point of the Shanghai Composite Index occurred in June 2015 at 5178 points, and the lowest point was in June 2013 at 1849 points, with a price difference of 64% between these two points.
In other words, even the most stable year for Bitcoin has volatility slightly less than the maximum amplitude of A-shares in nearly 14 years.
The price trend looks like this; given such a huge pullback, if someone says Bitcoin is a low-risk asset, they must be talking nonsense.
2️⃣ High return?
To evaluate the return rate, we measure the annualized return rate, simulating a person investing 1000 yuan monthly, buying in and then selling at the end of the year. To simplify, we use the monthly average price for calculations. The annualized return rates from 2010 to 2023 are as follows.
The peaks are indeed high, and the losses are also severe, but overall, there are more years of profit than loss.
From the current perspective, saying that investing in Bitcoin is high return is not a problem.
From past price data, Bitcoin is a high-risk, high-return investment asset. From the perspective of drawdowns, it feels more exciting than A-shares as it goes up and down like a roller coaster. If you can tolerate the volatility, the returns are certainly more substantial than A-shares.
High risk and high return do not match the first characteristic of Ponzi schemes.
Does it rely on recruiting newcomers to survive?
1️⃣ Number of new addresses
Currently, there are nearly 63 million addresses with a balance greater than 0 BTC. Considering that one address does not necessarily correspond to one person, the actual number of Bitcoin holders should be even fewer. Compared to mainstream investment products, this is still a very early market.
The chart below shows the number of newly created addresses holding Bitcoin each year. The horizontal axis represents the year the address first received BTC transfers, while the vertical axis shows the number of addresses. From the growth of new addresses, the overall trend still maintains exponential growth, and the trend of 'referring newcomers' continues. In recent years, the new address ratio has been around 20%, still in a high growth phase.
2️⃣ Is it a hot potato game?
The meaning of passing the hot potato is that someone has to take over the game for it to continue; thus, older players constantly recruit newcomers to take over so that they can exit. Are Bitcoin holders also players in the hot potato game?
The chart on the left below shows the distribution of address age and balance. Addresses created in 2019 and earlier currently hold the most Bitcoin. As a result, it appears that older players hold the most; they seem to only want to drum, not pass the hot potato.
However, before 2019, the price of Bitcoin was not very high, so it's understandable that older investors bought more. The chart on the right provides a clearer view of the holding distribution of small and medium investors (excluding data for addresses holding more than 50 coins). There is no obvious relationship between the address creation time and the amount of tokens held.
In this game, both newcomers and veterans are playing; older players are not offloading, and newcomers are likely not just taking over.
Everyone is reluctant to pass the hot potato, only drumming.
Is the operating mechanism transparent?
There is probably no more transparent operating mechanism than Bitcoin. The term 'cryptocurrency' can be misleading; although it has 'crypto' in its name, all transactions and balances are public.
The crypto world has no secrets.
(Privacy protection, zero-knowledge proofs, and other technologies related to privacy protection are still in development, but currently, the mainstream situation is that on-chain information is transparent.)
You can understand that all addresses and every transaction's information are recorded in a database called 'blockchain', which can only be added to or queried, not deleted or altered. As long as you are willing, you can access and read this database without data permissions.
This means there are no secrets; you can monitor the amounts transferred in and out of any address, see what 'smart money' is doing, and what 'whales' are buying.
With data openness to this extent, I find it difficult to be more transparent.
Is there no regulation?
Compared to traditional financial markets, the level of regulation is indeed low, but even a strong entity like the SEC probably cannot eliminate the 'Bitcoin organization', because there is essentially no so-called 'institution' to operate Bitcoin. There are no official staff; people who believe in the BTC story synchronize and store a database filled with transaction records on their own computers, that's all.
A common question is, when Bitcoin rises, who actually profits? Did the 'Bitcoin organization' make a lot of money? If you carefully read the Bitcoin white paper, you will know that this technology is fully called 'a peer-to-peer electronic cash system.' What does peer-to-peer mean? It is Peer to Peer, which is usually referred to as P2P (another term that has been stigmatized), meaning you sell something to someone, and the counterpart receives your money, just like in the original barter system.
It's not harsh to evaluate BTC as an air coin because it is built on air. There is no sovereign state backing it, no precious metals or other commodities as a 'standard.' It is based solely on some logic and algorithms, and that's it.
Some friends compare Bitcoin to digital gold, which I think makes sense.
Before the industrial era arrived, ancient people probably did not realize that gold had good conductivity for processing electronic products, nor did they know that gold's excellent infrared reflection capacity is crucial for the aviation industry.
Apart from the 'practical' attributes that industrial society has only recently understood, gold has no backing from a sovereign state; in ancient times, aside from being beautiful, it had no other practical attributes.
Why did our ancestors choose gold to store value?
Textbooks usually explain that gold is suitable as a medium for storing value because it is easy to carry, easy to divide, has a limited supply, and has a stable form. However, it is clear that gold is not the only metal that meets these conditions.
Why do all the ancestors around the world think gold is a good thing? How did they form a consensus despite being separated by thousands of miles?
I don't know.
But I suspect that the process of forming this consensus has a mechanism where the majority rules. Once most people feel that gold has value, the remaining small group will also find it difficult to continue trading with shells. The formation of consensus is always the hardest at the beginning; as time goes on, the progress speeds up, and persuasion is often unnecessary. For example, if you ask someone now: Is gold valuable? They will most likely check the current gold price and tell you, rather than doubting whether gold itself has value, its conductivity in terms of money, or whether it has the backing of a sovereign state.
Bitcoin is undoubtedly an air coin, but whether it can form a broader consensus in the future is uncertain.
At least it's not a Ponzi scheme.
