Over time, there have been many pyramid schemes that have left many without money. There are important voices claiming that Bitcoin is one of them. Economists are skeptical of this cryptocurrency. Despite the momentary success, it is possible that everything is just dust in the eyes. However, there are also pro opinions. Let's see what is the case with the most famous cryptocurrency and how safe is an investment in such a financial instrument.

Bitcoin started the year somewhere at $ 7,300. The cryptocurrency market has already reached over 130 billion dollars, but much smaller than the peaks reached during 2019. It is an extremely volatile market, which is also admitted by the opponents and defenders of the virtual currency.

The truth is, however, that 2019 proved to be a good one for those who have invested in cryptocurrencies. The increase throughout the year was over 85%. It's a great value, but you have to look at how this growth came about. Because it actually meant a resettlement after a heavy fall.

Bitcoin had gone to almost $ 19,000 in January 2018. It was the tip of the cryptocurrency and is now worth almost three times less, as you can see in the chart below :

Bitcoin evolution - 2017-2020

Some say it would be a speculative bubble. But, like any bubble, it only shows its true face when it breaks. Until then, no one can say for sure what this is about.

Bitcoin, a pyramid scheme?

So there has been talk that Bitcoin is actually a speculative bubble. But some economists go even further and talk about a pyramid scheme in the true sense of the word. And the main feature of such a scheme is that some (few) gain from those (many) who throw themselves headlong and suffer huge losses. 

One of these economists is Tendayi Kapfidze, representative of Lending Tree.

"It's a pyramid scheme. You can make more money just by relying on those who invest in you. It has no real use in the world. It has been trying to create a use for Bitcoin for ten years. It is a solution to a problem and he has not yet found such a problem to solve. "
Tendayi Kapfidze

It's a thought-provoking statement. However, the defenders of the virtual currency reacted immediately.

And they came up with their own arguments.

Pro-Bitcoin arguments

Those who defend Bitcoin come with many explanations on the sites associated with these transactions. It shows that in the last 11 years, it has become the most famous cryptocurrency in the world. That should be something, right?

The defenders of the virtual currency dismantle the explanation of the chief economist from Lending Tree, showing that, every year, Bitcoin attracts more and more investors and traders. The system is decentralized, perfectly secure and offers fast transactions in any corner of the world. Bitcoin is not a perfect currency , its defenders claim, but it is able to prove its usefulness. And those who challenge it would be scared, in fact, of the idea that such a tool could destabilize traditional payment and transaction systems.

As for the accusation that it is, in fact, a pyramid scheme, the pro-Bitcoin camp claims that it involves earning money from recruiting participants in a certain type of program. Which, of course, is not the case with the cryptocurrency system.

In other words, Bitcoin attracts investors who want to make a quick profit, but the project does not involve inviting them to invest for a specific purpose.

Short technical parenthesis: what is blockchain, the technology associated with cryptocurrencies

Blockchain is indeed a technology associated with cryptocurrencies, but that does not mean that it can only be used there. Because its use can be done on a large scale. In short, blockchain is a distributed database.

The records in each block are verified by unique algorithms that assign each block a hash - a unique combination of letters and numbers. It is the hash that makes the information protected and encrypted in the common register. If any information is changed en bloc, the algorithm will no longer produce the correct hash.

The hashes are continuously checked for correctness, and the individual blocks are combined to form the blockchain. Due to the interconnection of these hashes, the information stored in the blockchain cannot be changed, unless an entire chain is re-written before a new block is inserted. This would require an unprecedented amount of processing power, which is not currently economically or technically possible.

The big plus of this technology: customers have full transparency and assurance about the transactions that are made on their behalf. The big downside: it's an energy-consuming system. Mining a cryptocurrency requires huge amounts of energy.

And, in a world where global warming is a risk and alternative energy sources are being sought, the blockchain seems to need a miracle to be widely used.

Cryptomania on the internet

The interest in Bitcoin and other virtual currencies can be summed up in one word: cryptocurrency. As I told you, the market is extremely volatile, and the explanation behind this volatility is exactly the interest of market players.

An extremely conclusive moment in support of this statement occurred in the first half of 2019, more precisely in April.

Then, there was an accelerated growth of Bitcoin, an increase that lasted for several days. But economists quickly realized what it was all about. At that time, the virtual currency was again going for $ 5,000, after reaching historic lows. Interest has grown strongly in the market.

Only those who wanted to take advantage of the naivety and gullible attitude of those who thought they could get rich overnight had entered the thread. Then, there were a few traders who had bet on the decline and liquidated their positions when Bitcoin had gone to $ 4,200. But there was also some false information, thrown on obscure sites, that the US authorities had approved the trading funds in Bitcoin on the stock exchange. Nothing more false.

It was just an April Fool's trick, but a few swallowed the bait.

Bitcoin, a currency backed by nothing

When Bitcoin had a high value, some said it was the currency of the future, that it was the best investment. When it collapsed, the same people came to say that the cryptocurrency frenzy is a speculative bubble and that, now, it is breaking. The short time from excitement to disappointment has led many to say that what is happening in the cryptocurrency market is similar to tulip mania - or the madness of the tulips of the 1600s.

Closer to home, there were also comparisons with the dotcom bubble , which exploded in 2000, after several years in which investors threw money… into nothing.

Nowadays, what can be said, for sure, about cryptocurrencies is that the market is extremely volatile. It goes up and down just as fast, precisely because the market value of a cryptocurrency is given, in fact, only by the enthusiasm of the players. It does not yet have any reference in the real economy. Many speculating players know this.

But this was exactly the idea from the beginning: blockchain technology, the one used to mine cryptocurrencies, arose precisely from the desire to circumvent classical systems. These transactions are far from the eyes of governments.

How real are the numbers you read on various sites

There are many sites that talk about the value of Bitcoin transactions. At the moment, it would be in the order of trillions of dollars, that is, much more than the volume of the much better known PayPal.

Sounds awesome, doesn't it ? You think money is flying around you and you're wasting your time. But there are experts who claim that these figures are very inflated, especially through the so-called "wash trading".

In Romanian, it would mean that there are traders who sell and buy each other's digital currencies, in order to create the impression of an impressive volume of transactions. If you have a Bitcoin, that is, say, 7,000 dollars and you sell it and then buy it back, there are two transactions: that is, a volume of 14,000 dollars, when, in reality, there was always a Bitcoin coin in the middle and that's it. That's only $ 7,000.

The US Department of Justice has even launched an investigation into a possible price manipulation. Estimates show that approximately 95% of the volume traded in Bitcoin is artificially created.

How risky an investment in cryptocurrencies is

Experts have shown that no more than 21 million Bitcoin coins can be mined. Yes, that's right, you have the source HERE. 

That's all the system allows, because the math problems behind mining will reach their full potential. A limited amount of Bitcoin worldwide can make the currency as valuable as gold. So say those who encourage investment in cryptocurrencies and who are, from a certain point of view, right. You can say that what is little is valuable.

But, as in the case of gold, you can only speak of value if someone is willing to offer money in exchange for what you own. The value of what you have is given by the interest of the other. So will Bitcoin. Virtually everyone who throws themselves now to buy virtual coins wins or loses depending on market fluctuations, at a time when they are still mining.

Once the miners have stopped, Bitcoin holders remain captive to the price dictated by the real economy.

And only then will we see whether or not Bitcoin is a winning bet.