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15 August 2017
Bitcoin Is Not a Pyramid. Coinbase Is.
In September 2016 I paid Coinbase $1,222 for two BTCs, $611 each. Seven months later, in April 2017, they paid me back $2,490, which was $1,245 for each BTC. My profit before tax was $1,268, over 100% of the investment, in just seven months. Moreover, if I had waited until today, I would have made $6,800 profit instead. Actually, I still have a few BTCs in my Coinbase account and I can make that 750% profit, if I sell now. Should I? The BTC price is over $4,000. Will it go up? Or down? What would you do?
Where did that profit come from? How can Coinbase pay me eight times more now than I paid them less than a year ago? Where did they get that cash?
Obviously you know what a Ponzi scheme is, right? If you don't, watch Episode 16 of the 8th Season of Two and a Half Men. In a nutshell, I'm getting my investment and my profit from other people, who are paying Coinbase for my BTCs. If there were no demand, my entire investment would disappear and I would only have the BTC bits and bytes in my virtual wallet. I would lose my $1,222.
Some recent articles call Bitcoin and other altcoins, like Etherium or Litecoin, Ponzi schemes, for example, The Rise of Cryptocurrency Ponzi Schemes in The Atlantic and Bitcoin passes $1,000 but only number that matters is zero in the Financial Times.
Indeed, the key attribute of a pyramid scheme is right there: the product being sold has no value aside from the demand-generated one, just like Twitter stocks (it's a joke). Should we blame Bitcoin for that? I don't think so.
I think that what Coinbase (and similar traders like CoinMama or CEX.io) are doing is definitely a pyramid and must be stopped by the government, sooner rather than later.
Imagine, I start a company tomorrow. I call it YegorBase. It will buy and sell YegorCoins, which I will also create. The price will be $100 a piece. Some of you may buy that, especially because it will be possible to sell them the next day, when the price will be $101. Initially I will create some fuss to promote the product and the trading will begin. I will make my commission.
Will this be legal? I seriously doubt that Stripe, for example, would approve my account if I told them my business plan.
And the problem is not the YegorCoin itself—there is nothing wrong in creating your own crypto-electronic-whatever-product. The problem is that I'll be trading something that has a very questionable value, being completely unregulated by the government. The trading of my YegorCoin, just like shares of stocks, bonds, options, gold, and Bitcoin, must be regulated by the people we're paying our taxes to—the police.
You may say that Coinbase is not issuing those Bitcoins and only trading them—and that's why it's not a pyramid. Not true. In my YegorBase shop I won't need to issue my YegorCoins for very long. As soon as the total volume of YegorCoins is big enough, the situation will control itself and the price will jump and fall somehow. I will make profit on the trading commission and the owners of YegorCoin will hope that they can manage to sell everything before my shop gets busted.
Why the police are still closing their eyes to what Coinbase is doing, I simply can't understand. Maybe because NYSE and A16Z are among their long list of investors?