Could this Massive Institutional Embrace of Bitcoin Be a Ponzi in Disguise?

Godfrey  |  Dec 29, 2020

Among the biggest headlines particularly in the last two quarters of this year was that that highlights the massive investments into Bitcoin (BTC) by big Wall Street firms. For years, corporate firms have watched the digital currency space with Bitcoin with keen interest, but motives to be a part of the revolution that the digital currency ecosystem brings did not come until much recently.

The big money guys including Square Inc., MicroStrategy Inc., and PayPal Holdings amongst others have made a significant investment in Bitcoins lately and to a very large extent, the involvement of these firms contributed to the pump in price of Bitcoin. For most firms that invested in Bitcoin particularly MicroStrategy, the Chief Executive Officer, Michael Saylor has taken up the position of a Bitcoin evangelist, all in a bid to gear everyone to catch in on the fast-moving train.  

According to an earlier statement by Michael Saylor who noted that;

“Money is flowing out of conventional assets into #Bitcoin due to the escalating risks of global currency devaluation, technology disruption, social dislocation & political uncertainty.  This is not a “rally” or “bubble” – it’s a chain reaction spreading like a fire in cyberspace.”

A statement like this implies that the position of neutral users can be significantly tilted as many may see the need to get a hold of Bitcoin in the belief that money will continuously flow into the digital asset, which can help shoot up its price. But is this scenario painted going to hold up forever?

The Bullish Calls on Bitcoin Can Set the Stage for Mass Cashouts

Just like a normal highly valued item, the increase in its demands obvious through its mass purchase can help drive the price of such item higher. Bitcoin does not operate differently from this and the continuous stock up of Bitcoin by these institutional investors as well as retail players can drive the price of bitcoin much higher.

This growth happens by default but when Bitcoin Whales like Michael Saylor deliberately take it upon themselves to induce the price rise, many may see an ulterior motive in their calls. A Twitter user @FlorianManner noted that the words of Michael Saylor as quoted above is a precursor for a Pyramid or a Ponzi scheme.

“a pyramid system works exactly like you doing it. You recruiting new people that buying a thing for a higher price, that you win and they lose when you casing out at some point.”

If this claim is to be profiled, it will be good to highlight the major motives of Michael Saylor and MicroStrategy Inc. The company invested in Bitcoin for two primary reasons, which are to shun the devaluing dollar by storing its excess cash in BTC while also prospecting to make profits for its investors, as it is a publicly-traded company.

For the latter reason, the company can only make profits from their Bitcoin investments if prices go up and prices can only go up if more and more people get to stock up on the coins also, irrespective of the amount. This highlights the workings of a pyramid scheme and when the prices are high enough, the company will take their profits by selling off their stakes, and investors who buy high may suffer more as prices are now bound to be dragged down.

Ponzi or No Ponzi?

Bitcoin in itself is not a Ponzi or a Pyramid scheme as the development and technical tenets of the currency are innovative and futuristic. While this remains true, the trading activities that surround the digital currency may take some hints from Pyramid schemes as regulations guarding the space are not yet comprehensive.

Either way, investors are to take caution in the coming year, as big institutional players will need to make moves that will favor their shareholders, a move that may be at the detriment of other investors in different parts of the world.

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