Hickling: Gary North on Bitcoin ‘The Second Biggest Ponzi Scheme in History’

“I hereby make a prediction: Bitcoins will go down in history as the most spectacular private Ponzi scheme in history. It will dwarf anything dreamed of by Bernard Madoff. (It will never rival Social Security, however.)
“Here is the central fact of money. Money is the product of the market process. It arises out of an unplanned, decentralized process. This takes time. It takes a lot of time. It spreads slowly, as new people discover it as a tool of production, because it increases the size of the market for all goods and services. No one says, “I think I’ll invent a new form of money.
Bitcoins are not an alternative currency. They are something you buy in the midst of a mania, and you will sell at some point in order to get back your money. You are thinking of buying Bitcoins, not because Bitcoins will serve as a means of exchange, as originally argued, but because you want to get back lots more money than you paid for them. In other words, Bitcoins are not money; dollars are money. There has been no challenge from Bitcoins to the reign of the dollar.
“Anytime that anybody tries to sell you an investment, you have to look at it on this basis: “What are the future benefits that this investment will give final consumers?” In other words, how does it serve the final consumer? If it does not serve the final consumer, then it is a Ponzi scheme.

“Bitcoins cannot serve the consumer. There is nothing to consume. The only way that Bitcoins can work to the advantage of the consumer is that they provides the consumer with increased opportunities, based on Bitcoins’ function as money. But the fundamental characteristic of money is its relatively stable purchasing power.

“Bitcoins will never achieve this. It is a mania going up. It will be a mania coming down. It will not increase the division of labor, because people will recognize it as having been a Ponzi scheme, and they will not again buy it. They will not use it in exchange. Companies will not sell goods and services based on Bitcoins. Bitcoins have to have stable purchasing power if they are to serve as money, and they will never, ever achieve stable purchasing power.”

This is the kind of Catch-22 element, I think, to the argument many Bitcoin aficionados make about the surging price being a vote of confidence in their project. As North says, 99% of Bitcoin buyers now aren’t intending to use it as currency. They’re buying to make a quick buck. Nothing wrong with that of course, and good luck to them in timing their exit before the bubble bursts. The problem is that this price action and people’s motive for buying are undermining the supposed reason* for its existence: that it can be a form of money to rival the dollar, pound et al.

Bitcoin can be a speculative thrill ride, or it can be money. Not both.
*Assuming Bitcoin’s creator, the mysterious “Satoshi Nakamoto”, didn’t design it with cynical intent. And isn’t it strange that many of the very people who automatically believe the worst about western governments and central banks are so uncurious about this man, and take his good intentions for granted?

One comment on “Hickling: Gary North on Bitcoin ‘The Second Biggest Ponzi Scheme in History’

  1. Simon Roberts
    December 3, 2013 at 11:00 am #

    He may be right about a Bitcoin bubble, but I would dispute one of his assertions – dollars are NOT money, they are currency.

    There are many properties that an item requires in order to be described as money and one of them is retention of value.
    The dollar has lost 90% of its value since 1913.

    The dollar does not enjoy this property because it’s value retention (largely determined by its scarcity) is at the whim of politicians and bankers.

    I know this must seem pedantic, but it does matter as the main thrust of the article is that Bitcoin has no inherent value and that, by implication, the dollar does.

    While we are on the subject of Bitcoin, I believe that it’s enjoying popularity because at the moment its market value is determined by actual demand. This will stop as soon as the major banks find a way to make the price dependent on “paper Bitcoins” (in the same way that gold is in demand but the price doesn’t rise because it’s determined by the price of “paper gold” – which the banks control).

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