Is cryptocurrency a Ponzi scheme?

Cryptocurrency is never far from the headlines at the moment as it continues to gather traction, and, more recently, see certain tokens reach record trading highs.

Even football club Manchester City is getting in on the act. Last week Stephen Cieplik, the senior vice president of Global Partnership Sales, City Football Group, said: “We are excited to partner with 3Key in their journey to simplify the decentralised finance (DeFi) trading analysis user experience through the power of football to engage with our fans with a range of content and activations.”

Putting aside the fact that no-one is quite sure quite who is behind 3Key, or the mangled English, such a tie-up suggests that cryptocurrency and the world of DeFi is very much now mainstream.

Elsewhere, hedge funds are trading Bitcoin, which has big-name banks starting to offer them services around it. PayPal lets users buy crypto on its app, while Twitter helps people show appreciation for tweets by tipping their creators with Bitcoin.

Yet I remain sceptical about the crypto world. Why? Well, it might not be as obvious as a Ponzi scheme but there are some similarities. For a start, the people who bought into digital currencies have a keen interest in recruiting others to continue purchasing these currencies. Put simply, the more people that become involved and buy into a particular crypto currency, the higher prices will go.

What these mean is that those at the top, the early buyers, will invariably become even wealthier. We all hear the success stories, but the reality is that those who have profited from prom particular cryptocurrencies have really been those who have been early investors- and these are quite a select group. As a whole, I guess that relatively very few people are actually getting seriously rich from crypto.

Of course, it’s not just me. Speaking to BBC Radio 4’s Today programme this week Sir Jon Cunliffe, the Bank’s deputy governor for Financial Stability said that while cryptocurrencies weren’t currently a risk they are “growing very fast” and becoming more integrated into traditional financial systems.

He added: “So the point at which they pose a risk is getting closer. I think regulators and legislators need to think very hard about that.” Indeed, Sir Jon previously discussed the potential risks to financial stability from cryptocurrencies at a speech in October in which he said regulation needed to be looked at as a “matter of urgency”.

I concur wholeheartedly.

Enjoy the read,

Marcus Alcock,

Editor, Emerging Risks

Follow us on twitter: @risksEmerging

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