World Bank Report: Bitcoin is Not a Ponzi Scheme

By Inside Bitcoins Jul 17, 2014 7:15 AM EDT

NEW YORK (InsideBitcoins) — Bitcoin may be a demand-driven “bubble,” but it is no Ponzi scheme, says Kaushik Basu, World Bank chief economist and author of ‘Ponzis: The Science and Mystique of a Class of Financial Frauds.’

“Contrary to a widely-held opinion, Bitcoin is not a deliberate Ponzi. And there is little to learn by treating it as such,” Basu writes in the recently released report.

However, Basu says the cryptocurrency has been the subject of broad market speculation.

“One can buy Bitcoin the way one can buy euros and trade freely with others having euros. Trouble started when people began speculating that the value of Bitcoin would rise, thereby raising the demand for Bitcoin and making the value-rise a self-fulfilling prophesy. In other words, what we witnessed recently in the Bitcoin phenomenon fits the standard definition of a speculative bubble,” Basu says.

Basu served as chief economic adviser to the government of India and is currently on leave from Cornell University where he is professor of economics and international studies.

“The main value of Bitcoin may, in retrospect, turn out to be the lessons it offers to central banks on the prospects of electronic currency, and on how to enhance efficiency and cut transactions cost,” Basu concludes.

  • itsdsmurrell

    It will teach them a lesson in economics… a fatal lesson.

  • itsdsmurrell

    I would actually agree somewhat with Dark_Laser. Maybe you aren’t paying for the transaction right now, but anyone using the network to store their value is paying for everyone’s transactions through inflation. Luckily, this isn’t an issue for too much longer (, and it will shift to the people that are making the transactions paying for them. Hopefully there are so many transaction being made (as you say with the block size limit increase) that this cost is kept low.

  • itsdsmurrell

    Your concerns are somewhat valid. My hope is that Bitcoin scales fine and that the real transaction costs (which include the current inflation) come down as it sees more use. So, I don’t think it’s broken at all. Other coins compete directly with Bitcoin’s value proposition so if another manages to overcome Bitcoin’s current network effect (anything is possible), then trust in that one would also be greatly reduced as what has happened once can much more easily happen again. In a way, it’s Bitcoin or bust and Bitcoin remains malleable enough that I think that bust is quite a low probability outcome.

  • Berga

    It doesn’t cost $40 to process a Bitcoin transaction. That is yet another fallacy that circulates because people don’t fully understand Bitcoin. I validate every single Bitcoin transaction on my crappy old laptop for near zero cost, and so do thousands of others around the world running full node software. The cost you are referring to is the cost to mine a block. The cost to mine a block is automatically and deliberatelly adjusted so that the rate of new coins is steady according to Bitcoin’s pre-determined coin generation schedule. If people start investing double the money to mine, blocks will become twice as expensive to mine. This natural competition for new coins is driven by the market’s demand and has nothing to do with the intrinsic cost of transaction validation and storage (essentially free).

    Secondly, the 7 transactions per second limit is currently a hard coded consensus rule in the software. Raising the transaction rate is as simple as raising the maximum block size, which will require a hard fork. This will certainly get done some time in the next year or so.

  • vortex

    “The main value of Bitcoin may, in retrospect, turn out to be the lessons it offers to central banks on the prospects of electronic currency, and on how to enhance efficiency and cut transactions cost…”

    ..and stop laundering drug money, funding cartels, starting wars, and robbing people through inflation in their fiat currencies.

  • Dark_Laser

    “Bitcoin is efficient even though it costs $40 to process 1 transaction and the network can only handle 7 transactions per second. Every coin that’s not bitcoin is a scam even if it manages to fix things about bitcoin that are broken because reasons.”

  • itsdsmurrell

    Central banks don’t need to work on enhancing efficiency. It’s there. Don’t reinvent it in the form of another scamcoin or centrally controlled coin. Just buy up and issue bitcoin to your population.

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