Bitcoin is becoming something that most people have at least heard of by now. If everyone took the time to read about the technology behind it and understand the value and power of cryptocurrencies, a lot more people would be on board. So until you take the time to read about how Bitcoin and other cryptocurrencies work, the next question many ask, is Bitcoin a ponzi scheme?
The answer is probably not but you can't answer that without explaining the value of Bitcoin and why it's not a fad where if it was a fad, then of course it would be a complete ponzi scheme.
The value of Bitcoin and why cryptocurrencies are here to stay
The principles of Bitcoin or any cryptocurrencies are the nature of security, transferability of value and control. The best way to think of any of this is that you are really your own bank. With Fiat currency, you could choose to store say $100,000 USD of your money at home, or keep it protected in a bank. Any banking transactions are recorded by the bank and your bank has some control or ability to help you pay for things or transfer money.
Inflation Factor, USD drops while Bitcoin gains
Say you took that same $100,000 USD and either kept it at home or transferred it into Bitcoin. What would happen? Fiat currencies are subject to inflation and are always at risk of a currency collapse. If you think about situations like the collapse of the economy in Argentina, their currency has suffered hyperinflation and it saw people trying to empty their bank accounts and buy other currencies. In Venezuela with their current crisis, their Bolivar currency has been completely zapped of value in the past 3 years.
It is such a major issue in Venezuela that is caused many people to dump their money into Bitcoin and that has probably been the best thing for anybody to do. It's got to the point where even mining in cryptocurrencies has become popular.
You can better thing of Bitcoins as something like gold: it's a finite resource and something people trust to hold it's value. Maybe many people don't trust Bitcoin but they operate on similar principles where you can't simply just create more Bitcoins, there is a limited supply.
Of course, if you take out the idea of the Blockchain then it would have put Bitcoin closer to the ponzi scheme territory. Here is a TED talk explaining how the blockchain works and that it doesn't just apply to Bitcoin, but it's a means of ensuring that not just data, but historical changes of data are recorded and made nearly impossible to mess up. To put that into perspective, imagine that 2000 years ago, all world events and news were put onto the blockchain. As long as the blockchain was maintained and not compromised then truth would have been preserved.
So blockchain is not just a fad and it's being discussed in implementing at all banks, hospitals, schools, governments and basically anywhere that has a ledger for recording data and date stamping it.
So if you skipped over the video, basically every block of data is connected to the next block, which is connected to the next block making the whole thing a chain. Each block is secured to the next block such that if you were to go back in time and manipulate the first data block, it would either reproduce a completely different chain or you would have a mismatch at those 2 points which is an alarm that they are not connected. Every Bitcoin transaction is made public on a ledger so every transaction can be looked up. By making it public, it makes it difficult to manipulate the blockchain.
What is Bitcoin Mining?
Essentially, Bitcoin mining is the principle of verifying every transaction and recording it on the ledger, which is public. Bitcoin miners are incentivized by maintaining the ledger and processing transactions. So every transaction that is made, a small fee is attached and the information is recorded which can never be undone or reversed. There are no recalls in sending money once it's been recorded on the ledger.
Is Bitcoin a ponzi scheme?
Now that you know the value behind cryptocurrencies, does that answer if Bitcoin is a ponzi scheme or not? The answer is possibly no but either way, Bitcoin looks like it has promise but doesn't mean Bitcoin or any cryptocurrency is immune from a crash.
If Bitcoin were to rise where a Bitcoin was worth a million USD, I think most people would think this is too big of a gain in a short period of time. Of course there is a risk that everyone would want to withdraw their money from the system, but the thing is, it's not like everyone empties it at the same time. Everything is considered like a giant exchange. You need more people to accept to transfer these currencies so in this case, you might find it difficult to sell your Bitcoins at $1M USD where too many people would want to sell.
The true power of CryptoCurencies
So you know what Bitcoin mining is, you understand the blockchain. The real power of cryptocurrencies are the idea that you are the bank. You can choose to store your cryptocoins on an exchange, an online wallet, a wallet on your computer, a physical wallet and you can even print it all off on paper. You might not be using Bitcoin to pay for some relatively meaningless transaction like buying a bottle of water for $1.00 because the transaction fees on Bitcoin are variable and increasing. But it's not worth paying the fee for this meaningless transaction.
If you had 100 Bitcoins and assume they were worth $5000 per BTC then you would be able to quickly transfer $500k to anybody in the world, very quickly for a fraction of the fees a bank would charge you. You could easily transfer that $500k onto a piece of paper or store it on USB key and give it to someone which is the equivalent of transferring that much money to them.
The downsides of Bitcoin
If you ask people that are involved in cryptocurrencies of the downsides of Bitcoin, some might be honest about the risks. Most would tell you Bitcoin is volatile and as much as they get a big kick for every high that's made, they are aware of crash potential so it's not a guarantee that you'll be investing your money in the wisest way if that is the purpose of getting into cryptocurrencies.
There are many groups, organizations and individuals that would like to assert more control over Bitcoin and when this happens, the end result seems to be a split in the currency, or a hard fork. Bitcoin recently has been forked to create BTC and BCC (Bitcoin Cash). There is another expected fork happening around the corner in November and it's possible that these forks can continue to happen. When they do, it forces people to make a decision if they want to keep their assets in one currency over another. Also, governments and banks are fairly keen to be part of this control and the core people that helped to create Bitcoin are not really keen to see these groups get involved. They can try to but it might cause people to stay away from these groups.
Another downside of Bitcoin has to do with the dark web. Even though all Bitcoin transactions are recorded and public on a ledger, it is still possible for people to be anonymous in receiving these transactions or making them. Hackers are now using Bitcoin as their means of accepting payments because really, a hacker is not going to give you their bank wire details or PayPal.
Bitcoin far from it's potential
Bitcoin hasn't really hit it's potential and it's only a matter of time before Bitcoin becomes more mainstream that more people get on the bandwagon. If you look at all the reports of people getting on board and more investors signalling that Bitcoin is real, then it says quite a bit as some have been against it before they have done their research and with the Bitcoin chatter happening for too long, it's hard not to look into it. Once you do and educate yourself on it, you'll realize that with Bitcoin, Bitcoin Cash, Ethereum or any other cryptocurrency becomes the biggest, cryptocurrencies are the future of banking.