Since FTX collapsed into bankruptcy and its Ponzi-like shell game with investor money was revealed, many commentators have doubled-down on their criticism of cryptocurrencies themselves as a type of Ponzi scheme.
For those who need a review, Ponzi schemes start with initial investment from an early round of investors, and the money is then used (and spent) for the purposes of the general partners or issuers of the investment opportunity. When the time comes that the original investors want to withdraw their funds, their investments are returned through funds invested by subsequent rounds of investors, giving the illusion of solvency and returns.
Similarly, FTX kept making funds available to earlier investors on its exchange using the deposits of subsequent investors – those earlier investments had been swept away to Alameda Research, the sister hedge fund to the crypto exchange.
But let's be clear: Though bad actors are using cryptocurrencies as a medium with which to conduct Ponzi-like schemes, crypto itself is not a Ponzi scheme.
For one thing, tokens like bitcoin and ether do hold value, even in down markets, and are not dependent on inflows of new money to pay off investors. Rather, holders of these tokens can exchange them for other items of value, or fiat currency, any time they can find a counterparty willing to take their crypto.
There is no central entity giving these tokens the illusion of value, but instead the investing public's willingness to pay $17,000 or $21,000 or $68,000 for one bitcoin that determines the ultimate market value of the token.
The most popular cryptocurrencies are able to deliver value in and of themselves without the manipulations of a Ponzi scheme operator.
And as a reminder to financial advisors, cryptocurrencies do have fundamentals and real world use cases. That includes the following functions: medium of exchange, cheap and fast remittance, decentralized applications (dapps), high yield and investment diversification.
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