BitCoin, crypto-currencies & Ponzi schemes.

A Ponzi scam is a pyramid investment scheme that pays its early investors with money raised from later investors; thereby creating an illusion of quick high profits.

Ponzi schemes rely on word-of-mouth as new investors hear about the big returns earned by friends and early investors.

Inevitably, the scheme collapses: the flow of new money slows and it eventually becomes impossible to keep up the payments of alleged profits. Generally, the bigger and more elaborate the scheme, the more difficult it is to identify and expose, and the longer it will endure.

There's a common misunderstanding about money-making-from-sucker schemes that is used by the Ponzi entrepreneurs to promote their operations. A Ponzi scheme must always seem to those they plan to fleece as a high-risk, almost "too good to be true" operations, that offers those with generous business egos a virtually instant, risk-free 'investment opportunity' which is reserved only for the selected exclusive few.

Hard-working wage-earning people who operate at just above subsistence level are not prime candidates for these schemes.

So Ponzi schemes are designed to exist at two or more levels.

At the top-level, is the fleecing scheme which operates best when the investors function on the "Greater Fool theory".
The investors thinks it's worth taking a risk because it promises such high returns -- and they will assume that they are smart enough to detect potential problems earlier than everyone else. They are also usually cynical enough to believe that there is always someone further down the investment line who will be a greater fool than they are. These later suckers will always be available to take the "investment" off their hands if things go wrong.
The initial sales-pitch level. At this level the scheme will be touted by the initiators as being available (supposedly) to only a selected few.
Since this group are usually smart investors, and are naturally suspicious of anything offering very high returns, the scheme will provide a way to test the authenticity -- at least at a reasonable level. This authenticity check is is usually only the experience of friends or business associates who have already made a killing. They need to be friends, because they are willing to include new investors in a get-rich-quick scheme rather than reserve it all for themselves.

BitCoin is an unusually elaborate version. It preys on the current wave of passionate futurism associated with the-internet-is-everything culture which has already taken its hold among many of the more progressive thinkers in the community.

I say that BitCoin is "unusually elaborate", because it caught on so quickly and spread globally so fast, that intelligent analysis didn't ever catch up.

There's not been much outcry because it preys on the egos of the richer and more progressive technophiles in the society, who believe they have a better comprehension than most of the direction of a future technology-driven society. We generally don't have much sympathy for this group of 'intelligentia' ... they can look after themselves.

The better-off in the society were also those who made money from the scheme initially, because they had the ready money to invest. The more-than-well-off also got embroiled early because the concept of being able to launder money and escape the attentions of the taxman was high on their list of priorities.

They believe that they are first in line to make some quick money -- and they often are with Ponzi's, which creates the climate of success that entraps those who come along later.

HOW DO YOU TELL ITS A PONZI SCHEME?

Ponzi is just one of numerous styles of get-rich-quick schemes. Many of these are border-line "smart investments only available to selected friends" opportunities, and some are actual criminal enterprises.

The simplest form of analysis that should make you keep your hand over your wallet, is the fact that, if nothing of any practical value is planned to be produced at the top-level, then watch out.

Since money in your pocket represents your "entitlement to a share" of the nation's goods and services, any scheme enhancing your share must necessarily decrease the share of others ... without contributing to the overall well-being of the society.

In the case of BitCoin, the top-level involves the use of a "Block-chain" mathematical system of checking that the data entered at one end of the information chain, matches the data entered at the other. It is therefore, at best, nothing more than an additional form of balance-checking -- which claims to have the entitlements of money to part of the nation's produced wealth.

If it did work without anyone ripping off profits, then it would naturally be highly inflationary. In other words ... at the very best ... if it were genuine ... it would be detrimental to the society and your personal savings.

Blockchain is essentially a high-intensity, computer-hungry replacement for the internet links between the banks. When you pay at the supermarket with your credit card (lacking any actual physical authentication from coins or banknotes), the banks do a mathematical check with each other to ensure the decrease in figures in one account, matches the increase in figures in the other.

This is an alternative to your supermarket being able to handle coins or banknotes, but it is only half the process of electronic authentication of real money transfers.

'Authentication' in the sense of "who is the trusted entity behind the monetary exchange process" is the Sovereign Authority -- the State and Federal governments. In the case of Australian banks and the credit card system we know that the Sovereign Authority has very strong supervisory control, so real authentication lies here. The banks are just doing their sums.

In the case of BitCoin and block-chain authorisation, all you get is the sums. So all that has been authenticated is the veracity of the numbers -- but not who is the trusted authority who stands behind the entitlements.

Here is what a unit of entitlement looks like without authentication data. You can buy these, reprint them adding your own photo in the middle, and give them to your grandchildren for birthdays and Xmas.

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