Bitcoin: The World’s Largest Decentralized Pyramid Scheme.


Bitcoin has no intrinsic value. Its value is entirely dependent on the greater fool theory and requires a perpetually expanding inflow of capital for prices to rise.

Bitcoin fails as an inflation hedge or safe haven. Bitcoin trades like a highly leveraged risk asset and its price volatility has failed to noticeably decline overtime.

Bitcoin fails as a currency. The vast majority of Bitcoin is used for financial speculation not in merchant transactions.

Bitcoin’s religious appeal to libertarians and promotion as an alternative store of value to gold is clever but deceptive marketing.

Bitcoin’s deceptive marketing, lack of utility, and mostly speculative use resembles a pyramid scheme or chain letter more than a successful currency or prudent investment.

What is Bitcoin?

Bitcoin is a digital token that enables peer-to-peer transactions using blockchain technology in a totally decentralized network where transactions are stored on a public ledger. Fundamentally, Bitcoin is pitched as a currency without a state and free from state coercion. Compared to gold as a “store of value” and as an “inflation hedge,” Bitcoin has ironically been corrupted by the same force it sought to fight: the Fed. As Bitcoin has gained popularity as a speculative risk asset, its price appreciation has become increasingly dependent on dovish Fed policy and endless monetary easing. It drains liquidity from scorching hot financial markets instead of modeling “sound money.”

Why Bitcoin Resembles a Pyramid Scheme

Since Bitcoin is decentralized with a fixed supply, bulls claim that it is impossible for Bitcoin to resemble a Ponzi or pyramid scheme. This is a very nuanced, but important distinction investors should understand because if an underlying asset or product is mostly used to “recruit” new investors instead of legitimate wealth creation or legitimate sales to end users, there is a clear resemblance to a pyramid scheme or chain letter. The only difference between Bitcoin and a traditional pyramid scheme is that there is no centralized promoter and Bitcoin wasn’t created with the explicit purpose of operating as pyramid scheme. However, I argue that lack of central promotion or control doesn’t negate Bitcoin’s dangerous investment structure.

Pyramid Scheme:

Alike the above model, early Bitcoin adopters and miners stand to profit by selling their low cost basis tokens to new participants. Collectively, institutions, financial media, libertarians, and retail investors have marketed Bitcoin to new buyers to bailout their existing investment in a token with an intrinsic value of exactly 0. Alike common pyramid schemes, the product or investment fails independently and is dependent on either new seller recruitment or capital inflows. Bitcoin’s price has risen substantially over the past 24 months and this price appreciation may comfort investors who suffer from recency bias into thinking that there is some support level at which Bitcoin will hold. Furthermore, a stunning level of survivorship bias exhibited by retail investors in particular plays directly into Bitcoin’s pyramid marketing model; implying that Bitcoin is marketed to the investing public as a get-rich-quick scheme masquerading as a decentralized currency and inflation hedge.

For a currency to be successful it must have (4) key attributes:

1. It must be an effective unit of account.

2. It must be an effective medium of delayed payment (lending).

3. It must be an effective store of value.

4. It must be a medium of exchange.

These four factors are what determine the viability of Bitcoin’s use-case. If Bitcoin can’t fulfill all four factors then its utility is restricted to illegal transactions and raw price speculation. Ironically, there are other crypto tokens that are more effective at maintaining privacy and providing safe harbor for illegal transactions than Bitcoin. And as a tool for price speculation, Bitcoin competes with thousands of other worthless crypto tokens and meme stonks for the attention of gambling addicts. Let’s first analyze Bitcoin’s utility as a currency.

Is Bitcoin an ideal Unit of Account?

Bitcoin is not a successful unit of account. Sure tokens can be split into very small units and users have wallets they can store their tokens in and purchasing power can be denominated in Bitcoin. However, to be a unit of account, a currency must be widely used and accepted by merchants and banks as both a form of payment and a way to denominate their assets, liabilities, and revenues. No corporation that I know of uses Bitcoin as the unit of account on their balance sheet or income statement. Bitcoin in this regard is at a huge disadvantage as it has to compete with fiat currencies like the dollar where the government enforces its use as a unit of account by requiring the payment of taxes in dollars and by denominating government expenses and transfer payments in dollars. Currently, the IRS classifies Bitcoin as a commodity not a currency, meaning any gains in purchasing power are taxed as capital gains if realized. If there is deflation and the value of fiat dollars increases relative to existing goods and services, this gain in purchasing power in and of itself is not taxed.

Lack of Regulation

Bitcoin is not a registered security with the SEC. This lack of regulation and clarity by investors is characteristic of pyramid schemes and similar get-rich-quick opportunities adding another element of risk to Bitcoin ownership. Many cryptocurrencies like Dogecoin or Shiba Inu coin mirror most of Bitcoin’s key characteristics, but they don’t pretend to act like legitimate currencies in the way Bitcoin promoters have explained. These crypto tokens are ultimately closer to gaming products than investments or currencies. Wild fluctuations in price, lack of intrinsic value, and a zero-sum structure prevent Bitcoin from ever serving as a valid unit of account or prudent investment.

Are Bitcoin Denominated Loans Practical?

Bitcoin is not an effective medium of delayed payment. Lending is an important feature of any modern financial system and an ideal currency must be stable enough to be used in lending and borrowing. For loans to be amortized over a long period of time, the underlying currency must have relatively stable purchasing power overtime. Bitcoin unlike the dollar can’t be amortized effectively in loans because there is no interest rate practical enough for a borrower to accept that accurately accounts for a lender’s risk in having the face value of their Bitcoin denominated loans decline in terms of purchasing power relative to their unit of account (dollars). If anyone knows of a lender offering a Bitcoin denominated mortgage amortized over ten or more years at a fixed rate please let me know in the comments.

Is Bitcoin a Store of Value?

Bitcoin is absolutely not an effective store of value. This one confuses many investors because they see the price of Bitcoin relative to dollars soaring over Bitcoin’s existence and they conclude that Bitcoin’s outperformance indicates an effective inflation hedge or a solid investment when Bitcoin actually has no value to store and its price is not in any way connected to its intrinsic value. Any value investor knows that price rarely equals value. Fundamentally, the intrinsic value of a bond or stock is determined by discounting future cash flows, dividends, or interest payments back to the present at the investor’s desired rate of return. This is an investment’s utility or use case; you are laying out capital today hoping to recoup it in the future through economically productive means like sharing in a businesses profits, collecting interest on a bond, or renting real estate. Investing is a positive sum game. When a company’s earnings grow and the stock rises and you sell that stock, your gain is not the buyer’s loss because the business has created wealth through productive means. A higher stock price rewards investors with more valuable equity in a more profitable business.

Bitcoin is a Zero Sum Game

Bitcoin alternatively is a zero-sum game. If you sell your Bitcoin at a profit, your profit is being subsidized by a greater fool willing to pay that price; no new wealth is created it is only redistributed. Being a zero-sum game and not an investment, Bitcoin furthermore can’t even resemble an effective store of value because it has no intrinsic value and is extremely volatile. Few vendors accept Bitcoin for their products and the ones that do use services like Bitpay that convert the Bitcoin into dollars and pay those dollars to the vendor at the current exchange rate. No vendor will accept payment in something volatile enough to wipeout their profit margin the next day. Bitcoin’s volatility is a key obstacle to its widespread adoption as a currency and there is no noticeable negative correlation between Bitcoin’s volatility and growth in the network.

Source: Nassim Nicholas Taleb, NYU: Bitcoin, Currencies, and Fragility.

Is Bitcoin a Competitive Medium of Exchange?

Bitcoin’s use as a medium of exchange is not superior to traditional payment networks. The Bitcoin network is currently slower and more expensive that traditional electronic payment networks. The Bitcoin network can currently process less than 7 transactions per second, while Visa can process more than 20,000 per second.

Bitcoin transactions per second:

The Bitcoin network also generates significant negative externalities surrounding the energy use of miners. Bulls argue that as the network grows, transaction costs will fall, the scalability problem will be solved, and energy use will be more in-line with traditional payment forms. However, this is speculation and totally dependent on heavy adoption by the public for use in merchant transactions which has largely failed. Fewer Bitcoins are used in merchant transactions today than in 2017 and the vast majority of Bitcoin’s economic activity is restricted to trading and speculation through exchanges. Bulls like to compare Bitcoin to the growth of the Internet or e-commerce, but at no point in the history of these new industries did growth stop for multiple years. Bitcoin can be used in transactions, however it competes with 10,000+ other cryptos trying to absorb market cap by promising greater scalability, lower costs, and more privacy. In this regard, Bitcoin doesn’t have a first mover advantage, it has a first mover disadvantage relative to other crypto projects. The bottom line is that the vast majority of crypto investors are buying Bitcoin to get rich, not for practical use as a currency.

Since Bitcoin fails at all (4) attributes of being a successful currency, it must represent something else entirely. Its popularity and spectacular price appreciation is not reflective of the token’s underlying value as a currency (which is zero), but as an instrument of financial speculation in a zero-sum game where participants are encouraged to recruit new laser-eyed believers into the community. Although participants don’t generally directly recruit new investors to help them totally cash out of their existing coins as participants do in a Multi-Level-Marketing scheme; more capital inflows creates higher prices and ultimately the potential for early investors to realize capital gains by selling to a greater fool.

Is Bitcoin an Inflation Hedge?

To justify “investing” in Bitcoin, promoters will try to liken Bitcoin to “digital gold,” claiming Bitcoin is a viable inflation hedge. There is no evidence suggesting that there is any link between Bitcoin and inflation. It is entirely possible for inflation to run hot while Bitcoin falls in price. There is no connection aside from a fictitious perception some investors have surrounding Bitcoin. Bulls claim that the fixed supply of 21 million tokens is what gives Bitcoin status as an inflation hedge. However, having a fixed supply of a token with an intrinsic value of 0, negates Bitcoin’s store of value argument as the fixed supply can only act as an inflation hedge if unsustainable capital inflows continue into Bitcoin during an inflationary time period. This is unlikely because of Bitcoin’s clear correlation to ultra-speculative risk assets. Unlike gold or real estate that has end utility creating a defined and stable end demand, Bitcoin has no utility as it is a failed currency and its end demand is fully reliant on the recruitment of new investors.

The Significance of Utility

Unlike baseball cards, beachfront real estate, art, or classic cars, Bitcoin has no utility as a collectible because it is ultimately just lines of code. I argue that something with no utility outside of speculation will never act as an inflation hedge, because its demand can’t be effectively modeled or predicted as its price is based on the false and shaky premise of being a “digital gold.” To be an inflation hedge, an asset must have an end utility with stable demand that can’t collapse as the number of dollars in existence rises. For stocks, this is the underlying business that can raise prices and assuming stable margins, can deliver proportionally greater profits allowing investors to maintain the purchasing power of their invested principal. For commodities like gold, the stable end use through demand as jewelry or industrial components justifies investor perception that gold’s demand remains relatively fixed and any increase in dollars will overtime adjust the price of gold. Gold’s demand stability maintains investor purchasing power over long periods of time. Bitcoin has none of the inflation hedging qualities of either productive investments or commodities.

Every Pyramid Scheme has a Network Effect

Bitcoin is really just a digital token and failed currency with no utility aside from speculation. I agree with bulls in their assessment of Bitcoin having a network effect. Alike a pyramid scheme, a larger network means more participants and a higher Bitcoin price. Because the Bitcoin network effect is really just an open, decentralized pyramid scheme built on multiple false premises, there is no proof that Bitcoin will maintain investor purchasing power. This is because underlying demand is purely speculative, extremely correlated to risk assets, and could collapse while inflation continues to run hot. Alike stocks during the 1970s, overvalued risk assets can be poor inflation hedges as inflation rises, since higher real interest rates effectively put a wet blanket on equity valuations. This is — valuations for businesses with actual cash flows. Bitcoin is highly correlated to meme stonks, pre-revenue SPAC trash, and ARKK stocks trading at insane price-to-sales metrics.

Bitcoin is a Risk Asset

Because of Bitcoin’s correlation to ultra-speculative risk assets, it is very possible that if real rates rise amid a Fed taper, Bitcoin prices will collapse alongside strong inflation. Arguing that Bitcoin is an inflation hedge is like buying in 1999 and arguing that it is an inflation hedge because the huge TAM and potential network effects could insulate your capital from inflation. Ironically, many investors don’t seem to understand that like in 1999, Bitcoin’s price today is a product of aggressive asset inflation spawned by overly dovish Fed policy. A stagflationary environment is the real test of whether an asset is an inflation hedge. During such a time, Bitcoin prices would fall, as capital would divert from unproductive assets towards value stocks or high yield real estate by investors seeking cover from inflation.

Not only is Bitcoin not an inflation hedge, but as a high beta, risk asset, it fails to offer any safe haven attributes. Bulls like to compare bitcoin to gold’s safe haven reputation, but when faced with any significant market pressures, a 13 year-old Bitcoin has repeatedly failed to maintain price stability. Objectively, Bitcoin is a joke when compared to gold’s 2,000 plus year history of adequately providing investors a safe haven from geopolitical and monetary turmoil. During March of 2020, Bitcoin fell by more than the broader stock market. There is ultimately no evidence suggesting that Bitcoin can protect investors from any black swan, monetary, or geopolitical risks.

“Institutional Adoption”

The bulls believe that Bitcoin adoption will be led by institutional buying. The theory being that “institutions are dumping gold and switching to Bitcoin to protect their purchasing power.” An unsupported argument we’ve all heard repeatedly on financial media. The idea being that institutions are smarter than many retail investors and them buying Bitcoin transforms its reputation from a unregulated, energy-intense, decentralized pyramid scheme to that of an innovative, utopian investment opportunity fit for an average investor’s portfolio. Investors have to understand that Wall Street cares more about fees than your performance. Institutions are buying Bitcoin because their clients see the spectacular price appreciation broadcasted all over financial media and they go to their portfolio manager and say, “are you stupid, buy!” Institutions reflect and can often amplify the cognitive biases of their clients and managers as their performance is constantly judged on a quarterly or very short-term basis. This short term bias incentivizes institutions to move from one shiny object to another. Bitcoin is a shiny object today, but will it still shine in the future?

Institutions are buying Bitcoin hoping to profit from their own recency bias. If Bitcoin is at $40,000 or $5,000, nothing fundamentally has changed, only its price accounting for a rise or decline in quantity demanded and change in investor perception. Bitcoin’s intrinsic value of zero is the only constant. The only attractive feature Bitcoin has is that of every get rich quick scheme of the past: the promise of high returns with limited risk. A higher Bitcoin price accomplishes this and creates a self-fulfilling cycle of more media coverage, more buyers, and a higher price. Like every bubble, this party inevitably ends as eventually Bitcoin promoters and their media infrastructure fail to rope in enough new buyers to sustain current prices as their cultish message becomes oversaturated in the financial media. The promoters like to say that by buying Bitcoin you are, “getting in on the ground floor of a monetary revolution,” or some derivative of that. Are you really getting in on the ground floor? I have yet to meet an investor who hasn’t heard of Bitcoin. Like any bubble, the price weakens when promoters run out of greater fools to sell their Bitcoin to. When this happens, the Bitcoin ecosystem will crumble as the market discovers that the Hodlers and “diamond hands club” is much smaller than previously thought. Institutions have no loyalty to Bitcoin’s libertarian cause and will not hesitate to cut losses when Bitcoin inevitably loses its popularity.

Bulls claim that in the three 70%+ declines Bitcoin has faced over its short history (this by itself is significant), Bitcoin has recovered to higher levels again and there is no reason why it won’t do so again. This flawed logic is extremely dangerous. “Past performance is not indicative of future return” holds true throughout time. Bitcoin may or may not be able to replicate its price appreciation going forward, however it will inevitably move closer to its intrinsic value of 0 overtime.

Bitcoin Marketing

A dangerous part of the cryptocurrency ecosystem is the inclination and incentive of existing investors to aggressively promote their coins as viable investments. Massive ad campaigns have bought the support of mainstream financial media outlets like CNBC who relentlessly cover and promote Bitcoin helping whales expand the pyramid scheme to the investing public. This increases the price of Bitcoin and creates a highly efficient wealth transfer mechanism from Hodlers to institutional and wealthy investors who won’t hesitate to sell their Bitcoin to the greater fool for a profit.

A telling sign is that whenever Bitcoin prices stagnate or fall, promoters become even more radical and aggressive in their sales tactics. The drunken sailor, Micheal Saylor, CEO of MicroStrategy, a leveraged Bitcoin holding company has told investors to,

Once you know how it all ends, the only use of time is…how do I buy more bitcoin? But take all your money and buy bitcoin. Then take all your time, figure out how to borrow more money to buy more bitcoin. Then take all your time and figure out what you can sell to buy bitcoin. And if you absolutely love the thing, that you don’t want to sell it, go mortgage your house and buy bitcoin with it. And if you’ve got a business that you love because your family works for the business and it’s in your family for 37 years, and you can’t bear to sell it, mortgage it, finance it, and convert the proceeds into the hardest money on earth, which is bitcoin.

Micheal Saylor, CEO MicroStrategy 2021

This obviously unethical and shameless promotion by Bitcoin “Maximalists” like Saylor has become common and is a vital part of the marketing infrastructure necessary to prop up the world’s largest decentralized pyramid scheme.


Because Bitcoin is a failed currency, its utility is restricted to speculation so it competes with thousands of other crypto projects (many of which have superior utility as currencies), meme stonks, and hyped pre-revenue SPACs. This utility being restricted to speculation combined with Bitcoin’s lack of intrinsic value and zero-sum structure clearly resembles a pyramid or chain letter scheme.

Unlike traditional pyramid or chain letter schemes, Bitcoin has no central promoter, there is no single operator like a Madoff. Instead, the marketing and recruitment of new investors is decentralized and occurs naturally as early investors are incentivized to convince greater fools to pay higher prices for outstanding Bitcoins. This is a redistribution of wealth from the investing public to early miners and investors the same way old investors profit from the entrance of new investors in a classic pyramid scheme.

Bitcoin vs.

Alike common pyramid schemes, the underlying product or investment has poor stand-alone utility and only survives through recruitment of new investors and capital inflows giving investors the illusion of the product’s success or adoption. Investors who bought in 1999 were under a similar illusion that a higher share price signaled the success of the underlying brand when its underlying utility as a business was actually poor. Furthermore, Bitcoin marketing is heavily reliant on elaborate claims of a technological revolution surrounding decentralized currency, peer-to-peer technology, blockchain, and whatever other buzz words promoters use. Ultimately, the tech describes how Bitcoin works as a currency, not the underlying economic attributes of Bitcoin or its practical use within the economy. Bitcoin bulls have cleverly confused the “tech” with the “investment.” Using pictures of gold coins to attempt to compare gold with Bitcoin and elicit the belief the Bitcoin is a “safe haven” or “inflation hedge” is not supported by any evidence and there is actually strong evidence to the contrary. Since Bitcoin’s end demand is totally reliant on speculation, not stable demand like gold, it is possible for Bitcoin prices to collapse while the money supply increases. Because Bitcoin has no intrinsic value, it will fail as an inflation hedge or safe haven asset.

The Danger in Hodling

Bitcoin’s only value is its ability to transfer wealth from cognitively dissonant gamblers blinded by greed to exchanges, miners, asset managers, and whales. Diamond hands and Hodling only helps sustain this decentralized pyramid scheme. Eventually Hodlers will turn into bag holders as Bitcoin inevitably approaches its intrinsic value of 0. Bitcoin has become a cultural phenomenon representing how the Fed has turned financial markets into casinos. Its libertarian goals have helped it gain cultish and religious following by some investors; a common feature of a financial bubble. Emotional attachment to any investment is dangerous. Bulls should at the very least zero out their cost basis to protect their principal from Bitcoin’s wild price fluctuations.

The only opportunity in Bitcoin is the opportunity to sell to a greater fool.

Bitcoin like and all pyramid schemes promoting investments or products with no utility will inevitably collapse.

If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.

Warren Buffet

Disclaimer: the author Kevin Habek is not a registered financial advisor. This article constitutes the opinion of the author and should not be misconstrued as financial or investment advice. Cryptocurrency speculation is highly risky and investors employing these investment strategies run the risk of losing all or more than their original invested principal. The author recommends readers perform their own research and due diligence and consult with a qualified investment professional before entering into any investments. The article in reference: “Bitcoin: The World’s Largest Decentralized Pyramid Scheme.” by Kevin Habek, is designed for entertainment and informational purposes only. The author holds no position in any of the mentioned securities and does not intend to enter into any positions in these securities within the next 72 hours.



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