 A Ponzi scheme is a type of financial fraud in which early investors are paid with money taken from later investors rather than with actual investment income. When the flood of new investors draws up and there is no more money to pay early investors, the scheme collapses. In the world's largest Ponzi scheme, fund manager Bernie Madoff stole 65 billion dollars from thousands of investors over the course of 17 years. Since its inception, naysayers have been criticizing Bitcoin for being nothing more than a Ponzi scheme. Every time you invest in Bitcoin, the money that you invest goes to the previous investors or to the miners and disappears. But does Bitcoin actually match the definition of a Ponzi scheme? The biggest Ponzi scheme in history, Madoff's scheme, didn't promise anything. Yes it did. No it didn't. Yes it did. Did you study it? I studied it. In this debate, Georgi Stolfi, professor of computer science at the University of Campinas, meets Pierre Rochard, Bitcoin strategist at Kraken. Pick your side in our latest coin telegraph crypto duel. Georgi, back in 2016, you submitted a letter to the US SEC in the attempt to dissuade it from approving a Bitcoin ETF. The core of your argument was that Bitcoin is a Ponzi scheme, a belief that you continue upholding today. Could you summarize the main characteristics that would make Bitcoin a Ponzi scheme? Well, I mean there are five things. People invest in it because they expect to make a profit. That expectation is confirmed by people who decide to cash out. They really get the profit. However, there is no source of money that will pay for that profit. That profit comes only from the money that investors put in. And the organizers take out a big chunk of the money that investors put in. So I mean it is just, there is no money coming into the game and there is money going out of the game. Every time you invest in Bitcoin, the money that you invest goes to the previous investors or to the miners and disappears. And now your only hope of getting money back is if other investors give you money. There is because there is no other source of money. So those are the five things that make a Ponzi scheme a Ponzi. Those are the things that make Ponzi schemes bad investments and those are these, I don't know. Okay, so maybe now Pierre, would you like to respond to that argument? Yeah, sure. First off, on the definition of what a Ponzi is, I think that that definition is lacking a crucial part of the investment motivation, which is that the Ponzi promoter is promising returns, is promising a profit. And I think that with Bitcoin, there isn't such a promise. In fact, it's often highlighted by its critics that Bitcoin has repeatedly had periods where it lost value, 80% plus of its value. So to say that there's an expectation of profit, I think is contrary to fact, contrary to reality. In fact, what we see is that Bitcoin's promoters repeatedly emphasize that there is a risk of loss and that if we look at the empirical data, this risk has repeatedly been realized. And so I think that when we compare it to a Ponzi scheme where it says every month you'll earn 5%, and it's kind of the fixed expected return, which is unrealistic, that's what a Ponzi scheme relies on. Ponzi schemes, they never have this element of, hey, look, participants in this Ponzi scheme have repeatedly lost money. That's not how Ponzi schemes work. They work on the reliability of the return. Now, second of all, in the criticism that there's no other source of money, right, there's no cash flow, this is the same criticism made by value investors or folks like Warren Buffett, who emphasize that things like Bitcoin, but also silver and gold, right, monetary metals like that, that they don't throw off a cash flow. And so they're not selling goods and services that would ultimately provide a return on the invested capital. And that's true. That's true. And what that means, though, is that we have to look at, well, what are the other categories of assets that exist? And what we see is that money, cash, that is, does not have cash flows. It never does. No money in the world has cash flows. USD does not have cash flows. When you hold USD, you don't have cash flows, right? And so that's just a general property of money because it is cash, so it doesn't have cash flows. And that doesn't make it a Ponzi scheme. Let's keep in mind, Bitcoin is a peer-to-peer electronic cash system. That doesn't really hold up as an argument for it being a Ponzi scheme. Yeah, so I would like George now to reply. Okay, lots of things there. Well, first of all, I mean, Bitcoin is not cash, it's not money. We can discuss that later. We can discuss it now and get into it. Yeah, but first of all, I want to address the thing about the Ponzi scheme. Ponzi schemes don't have to promise returns. Do you have examples? Yeah, the biggest Ponzi scheme in history, made of scheme, didn't promise anything. Yes, it did. No, it didn't. Yes, it did. Did you study it? I studied it. It didn't promise anything. Did you study it? I studied it. It promised. In fact, that was one of the very telling parts of the made-offs Ponzi scheme. And it was actually revealed by a whistleblower long before it blew up, which was that the returns on made-offs fund were far too consistent. They were so consistent that they were mathematically implausible. They didn't promise that. Marco Paulus, look him up. I know that. I know him. He made it a whistleblowing to the SEC long before made-off blew up, showing that their returns lacked volatility. So this is something that you did not know, and you're learning about it now. No, no, no. I know that. I know that. And change your position in the face of facts about reality. So do you have another example? Do you have a different example? No, no, no. You're wrong about made-off examples. You had the wrong example. Sorry, sorry, Pierre. You are wrong about made-off. And he delivered consistent returns, and that's why it was a Ponzi scheme. It was one of the key characteristics of it being a Ponzi scheme. Pierre, I'm sorry, but you're wrong. You're wrong. Your argument using facts about reality. Pierre, you're wrong about made-off. He didn't promise anything. He delivered consistent returns, and that's what Marco Paulus complained about. That's what was saying. I mean, the reason why people invested in him is that he was paying everybody who wanted to cash out was receiving consistent returns better than the stock market. So he delivered that for 25 years, year after year. But he didn't promise anything. He just said, well, I'm investing. I have this fantastic method of investing. But, of course, he knew that he couldn't promise because a Ponzi scheme that promises consistent returns 5% a month is a dead giveaway. I mean, the SEC will come knocking at the door the next day if you say that. So a good Ponzi scheme doesn't promise anything. It just delivers. And people keep investing because when they cash out, they get profits. Bitcoin has been delivering profits all the time. You know that. I mean, of course, you agree with that. And the promoters, people go on CNBC or the video, the Bitcoin media channels, they all say, well, OK, I cannot promise that it will blow up. But I think it might be a million dollars in a few years. So that means that if you look at the forums and if you look at what people say in public, it is obvious that they are investing because they expect profits. And even when the price goes down, people say, OK, it's going down, but it does go down in the past and then it has gone up twice as much. So OK, we keep investing. I'm not losing that. So neither of those things, the lack of a promise or the fact that the price goes down has anything to do with the fact of being a Ponzi or not. I would like you now to reply to the second argument that Pierre put out. That was the fact that even fiat cash doesn't have any cash flows. So even if Bitcoin doesn't have any cash flows, why does it make it a Ponzi while fiat currency doesn't also have cash flows but still it's considered to be legit? Well, because it is not an investment. The dollar is a currency. It's not an investment option. So if people don't invest in it, they expect to make a profit. That first condition already fails. There is people who play FX trading, right? They think they are making a profit because the other currency drop it more than a dollar, but the dollar drop it in value too. That's not the only situation. So what we see is that people hold a currency like the US dollar. For example, when they think the stock market is going to go down, they are making a profit off of holding US dollars because of the valuations of stocks going down and then they buy the stocks at a lower price and they've made a profit off of holding US dollars relative to holding stocks. This is common. My argument would be, let's say Bitcoin is a currency. Why is it not a currency? Well, it has practically zero adoption. It is extremely volatile. So it is useless as a currency. I'm not arguing that it's a good currency. I'm not arguing that it's a good currency or that it's a valuable currency or a widely adopted currency. I'm simply arguing that it's a currency. And so you can say it's a bad currency. It has zero adoption as a currency, but it's still a currency. Well, in the same sense that screws are currency. No, because screws have utility to them. They are a consumer good or a production good. That's different than a currency. So screws are arguably an investment if you're using them for consumption, to enable consumption in the future as part of your factory, that they're capital good. But they're not a currency in the same way that fiat is. So why is fiat a currency and Bitcoin is not a currency? Currency is something that people accept in trades because they are reasonably certain that they can exchange it for other things later. That's not a real definition. That's a tautology. Because then you're saying that Bitcoin is not a currency until it becomes a currency, right? That's true. So it sounds like you're saying it's not a liquid currency. It's not a widely adopted currency, which is true. But why is it categorically, fundamentally not a currency outside of kind of what you're talking about, which is its currency? I can answer that. It is a politically useless currency. As long as we agree on that, that's fine. That's good. We reached that point. But I think that here the main issue was not whether Bitcoin can be considered or not a currency, but whether something that has no cash flows is to be considered a Ponzi scheme or not. So let's just move away from this currency argument and maybe use another example, like for example, fine art. Fine art also doesn't have any cash flows like Bitcoin, but it's still considered as a valuable thing, as a thing that has and preserve its value. So in that case, Georgie, how would you reply to that kind of comparison? Well, fine art is a complicated case because it's first of all, it's not fungible. I mean, each work of art is a completely different thing that has value by itself or not. It has some consumption in the sense that there are people who buy it just to hang it on their wall. And it is also the sort of commodity that people, the more expensive it is, the more demand it is because buying it is seen as a way of ostentating of showing off that you are wealthy. I don't think that there is much of the economic theory or financial theory that you can apply to the art market. But let's go to another thing that don't have cash value. There are lotteries, MLM schemes, pyramid schemes, pump and dump, penny stock schemes. I mean, they all have the same characteristic that there is no money coming into the system, there is no money going out. Let's not forget the fiat currencies, right? No, the currencies are not like that because we don't invest in that. We don't invest in that. I mean, there are people who don't invest in currencies. There are people, no, oh, come on. Other than people who are destitute and even people who are destitute, you know, they have coins in their hand. You say you keep your savings in currencies, but that's not investing. No, actually, if you look at it from the opposite of an accountant, when you look at someone's balance sheet, they have assets, right? So, I mean, what you label it, whatever, that doesn't matter. It's an asset on your balance sheet. Holding US dollars is holding US dollars on your balance sheet in the exact same way that holding a Monet is holding Monet on your balance sheet. In the exact same way that holding Bitcoin on your balance sheet is holding an asset. It's holding Bitcoin. And so, we can talk about the cash flows, right? Or what do we expect from the asset? But nevertheless, it's the case that holding dollars on your balance sheet as cash has no cash flow to it. And that's very much the same situation that Bitcoin finds itself in. But it is not an investment. It's not something that people say. Well, neither is Bitcoin, right? Bitcoin is. Almost 99% of the people who buy Bitcoin, they buy Bitcoin because they think I will get rich because the price of Bitcoin will go up 10 times in the future, and then I will get back 10 times more than I invested. It's still an asset, right? So, US dollars are an asset. Bitcoin is an asset. We can talk about whether it's an investment or not, and the fact that they are both assets that don't have a cash flow to them. And when someone holds dollars, they're expecting that value to not go to zero. They are speculating that US dollars will not go to zero. The value of the dollar is sustained by the Fed, by the central bank. Yeah, of course. Let me grant that the value of the dollar is sustained by the Federal Reserve. Let's talk about the other fiat in their central banks. Why is it the case that that's true, but that the value of Bitcoin is not sustained by the Bitcoin network? Let me clarify why it can't be considered as an investment, and that's because it's a currency, and currencies are never investments. Well, we agree with that. The currency is never an investment, but 99% of the people who invest buy Bitcoins. They think they are investing, but there's a different word for that. Real profit. The word for that is saving. No, no, no, no. When you hold equity or liability, that is investment. Exactly the opposite. Keeping money under your mattress is still saving. It's a bad form of saving, but it's not investment. It is not investment. Holding Bitcoin is saving. Putting Bitcoin under your mattress is saving. It's not investing. No, 99% of the people who buy Bitcoin buy because they expect the price of Bitcoin to be kept to the 10 times longer. I think you made your point pretty clear. It's just a matter of how you define Bitcoin. I think that Bitcoin is such an emerging asset that still hasn't found a consensus about how it can be defined. George, I have another question regarding your Ponzi scheme accusations towards Bitcoin because what I find important about a Ponzi scheme is that usually it has a malevolent organizer behind it. What I can see about Bitcoin is that there is not such a centralized organization behind it that is intentionally trying to fraud people. How would you respond to that argument? That's not the fact that there is a central organizer. It's not essential to the definition of Ponzi. Most Ponzi that we had so far were centralized because most business that we had so far were centralized. Ponzi has been described by several people, economists, big names in the economy as a decentralized Ponzi or a distributed spontaneous Ponzi or something like that. I don't think that the existence of a single central operator is essential. Certainly there are thousands of promoters who try to entice people into investing in Bitcoin. You see them all the time in public forums in media and whatever. Pierre, would you like to respond to that? Just 30 seconds to respond to that. I don't think USD is a Ponzi scheme and I don't think Bitcoin is a Ponzi scheme. What really is a Ponzi scheme in the US is social security. There are government operated Ponzi schemes throughout the world and arguably the sovereign bond markets are Ponzi schemes as well. Especially when we start looking at absurdities like negative interest rates. I think that first of all Bitcoin is not a Ponzi scheme. It's a currency and it's a decentralized currency. So that's true. Let's address Bitcoin as a store of value. George, in a recent debate with Lin Alden you dismissed the case of Bitcoin as a store of value saying that it is obvious and evident that the money that people will be able to take out of it is a lot less than what they put in. You said that Bitcoin investors are losing at least 20 million dollars per day and they have lost so far 15 billion dollars and that's only going to increase. We're not talking about losses due to price volatility. So can you explain what kind of losses are you talking about? Yeah, the miners create 900 Bitcoins a day right now. Actually a bit more because probably the hash rate has gone up and there is still not a difficulty adjustment yet. And they sell those Bitcoins to investors. And the fine investor is anyone who bought or will buy Bitcoins. So people who buy Bitcoins, they are buying 900 Bitcoins a day from the miners. That's turned out to be now, now it's probably closer to 35, almost 40, more than that, 45 million dollars a day. It was 20 million when I brought that piece. And so that's money that's leaving the system. If you look at the totality of all the people who are buying and selling Bitcoins, those people, when one of them buys Bitcoin, it gives money to another one of those guys. So as a whole they don't gain or lose anything no matter what the price is. But when they buy Bitcoin from the miner, money goes out from them to the miners and never comes back because there is no other flow. There is no other flow of money that comes into the system. So it's like a lottery, right? People buy lottery tickets, they give money to the organizers and then what they get back is always 40% or whatever or what they put in. Okay, so now I would like Pierre to respond to that. How do you see the role of the miners in this situation? Georges says the miners are taking out the money from the system and no more money is actually getting into the system apart from the investors. So how do you reply to Georges' argument? Yeah, I mean that's correct. And I just don't see why that changes anything. And in fact to me the argument here basically is that folks are getting diluted, right? And because the miners are issuing new Bitcoin and what they spend those newly issued Bitcoin or whether they hold them is kind of orthogonal to the question of that they're issuing new Bitcoin. And so this is also true on a much grander scale in the fiat system where in the fiat system you have central banks and commercial banks issuing US dollars or new fiat and diluting out the existing holders. And it's the same thing in gold mining, right? Gold, you know, 2% of the gold supply gets mined every year so that adds to the supply. And it gets back to this argument of stock-to-flow ratio. And so basically the argument that you're making here is that Bitcoin's stock-to-flow ratio is too low and so too much flow is coming into the system. But Bitcoin now has a better stock-to-flow ratio than gold. It also has obviously a much better stock-to-flow ratio than fiat currencies and frankly than real estate as well. And so I do agree that dilution is a problem but it's one that Bitcoin suffers from to a much lesser degree than any other asset in the world. You talk about stock-to-flow. Then stock-to-flow is something that applies to commodities where you compare the amount of stock that is at the end of speculators or middlemen and whatever to the amount of flow, which is the consumption and production. Bitcoin has no consumption because everything that every Bitcoin that's bought eventually gets sold again. It is no consumption of Bitcoin. So the stock-to-flow of Bitcoin is not very high. It's infinite. I mean, there are 20 million Bitcoins about 20 or whatever, 18 million now. Bitcoins issued and there is zero consumption. Partly for a small amount that is lost or whatever but in principle there is no consumption of Bitcoins. So the stock-to-flow ratio is 18 million divided by zero. Stock-to-flow doesn't mean that it's something good. Stock-to-flow is bad because it says how much the value can crash. If there is a big stock of things in the hand of speculators and there is a very small consumption rate, it means that well, if the speculators get a bit more pessimistic and they start selling, they will crash the market. How do you consume currency? That's the point. Currencies are not commodities. They don't have consumption. Right? Yeah. Okay? So the dollar doesn't have... I love hearing you say that. When you keep insisting in comparing Bitcoin to the dollar, Fiat is not a commodity. Fiat is not an investment. I mean Fiat in the sense that you define it. Bitcoin is an investment because people are investing in it. 99% of people invest in it. Fiat and Bitcoin are both assets. So from your point of view, they both have an infinite stock-to-flow ratio. And so if everyone went out and spent their fiat tomorrow, its value would plunge to zero, right? No. No. Why not? Because the federal keeps monitoring the value of the dollar and keeps regulating the amount of dollars in circulation month by month, so that to keep the value constant apart from the planet inflation. Yeah. You should know that. So why do we have 2% inflation? No, I'm kidding. Yeah, I don't know. Because the government does not want people to invest in fiat. What you would agree with, though, is that if it were to happen tomorrow that everyone goes and spends their dollars, the government, the Federal Reserve, wouldn't have the time to respond, right? The value would go to zero overnight. So the price of Bitcoin crashed several times since its inception. Still, Bitcoin has come back stronger every time. That makes it something radically different from previous speculative bubbles we saw in the past. Analysts at Man Group said that these price movements may not be defined as bubbles, but rather as a part of a not-so-random walk that will eventually dwindle to give Bitcoin more stability and, ultimately, legitimacy. What do you think of this perspective, Georgie? Why is it coming back? No one knows. So how can you be sure that just because it has done that in the past, it will do again? If you look at the stock of any company, many companies, they have gone up and down, right? So does the fact that the stock of a company goes up and down and then goes up again means that when it goes down, it will go up again? Of course not. So it has gone so far. I have no idea. Frankly, I have no idea how high the price of Bitcoin can go. It can crash tomorrow. It could go to infinity. No, I don't think it can go to infinity. Well, yeah, because the value of the US dollar will get a zero. I'm talking about the price in hamburgers or whatever. That can go on indefinitely in increasing its purchasing power because productivity of the economy can increase until we're in science fiction land of, you know, a multi-planetary world where economies of scale are such that your purchasing power is always increasing in a deflationary environment. Let's talk about the next 10 years or whatever. I mean, I think, George, maybe you are willing to concede the fact that Bitcoin has at least more upside potential than downside potential. No, I don't concede that at all. Because, I mean, for the price, for instance, to double, it means that investors of Bitcoin, people who invest in Bitcoin have to be given 80 million dollars a day to the miners instead of just 40 million dollars a day. So for the price to go up, people have to invest more, not just keep investing, but invest more per day. So will there be such people investing into Bitcoin? I don't know. I mean, I don't want to speculate on that because I see that most people who are investing in Bitcoin have no idea what investment is, what stocks, why stocks are valuable, what is the difference between stock and the Ponzi scheme or whatever. So you think that's the only reason people think the price is going to go up is because they heard somebody else say that the price is going to go up. They don't have any fundamental thesis. Paul Peter Jones wrote a piece on his investment thesis for Bitcoin, but did you read it? No, not his particular, no. Because maybe that would help you learn why it's going up. The fundamentals of Bitcoin are threefold. One is that it's permissionless. So anyone can generate a private key, generate addresses, receive Bitcoin. The second is that it has a stronger properties in terms of holding it than any other asset in the world. So we already touched on the fact that it can't be diluted. And then it also has native multi-sig, which no other asset in the world has. Then third is the ability to send it to anyone. So it's censorship resistant, and you can send it anywhere in the world 24-7. And those three of being able to receive, hold, send, those are Bitcoin's fundamental advantages over all other assets in the world. And on all three properties, they are orders of magnitude better than number two, right? No, no, no. I mean, there are many things. First of all, those properties that they are talking about, they are shared by all cryptocurrencies. They're not. Some exceptions, maybe. You got to do more research, buddy. For instance, BCH is exactly like Bitcoin, except that it doesn't have congestion. That's the only difference. Pierre said that in 2021 he expects half of the companies to be in debt and P502 follow the path of Tesla. So, I mean, if that happens, would you reconsider your position as a Bitcoin skeptic? No, because none of that, it doesn't depend on how many people invest into Bitcoin. It doesn't change the fundamental factor that the only money that comes out is money that investors put in, and only part of it comes out. So, I mean, it's like saying how many people will have to invest in a lottery for me to believe that a lottery is a good investment. So, in order for me to change my point of view, one of two things would have to happen. Either on the three fundamental properties of being able to receive, hold, and send, that Bitcoin gets superseded by another asset. That's one way that I would see my thesis being wrong. The second is that the reason why people hold a currency on their balance sheet is to hedge future uncertainty. And so, if future uncertainty were to go to zero, then people would no longer need to hold a currency, and then I would revisit my thesis. I don't think either are going to happen, and so that's why I'm confident that we won't see this overnight, everyone trying to sell their Bitcoin theory. And it's implausible to me that uncertainty will go to zero. That's probably only if the world ends. I think uncertainty is a constant in this world. Thanks a lot for participating. I think that was a great discussion, guys. Thank you. Thank you for the invitation.