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Cryptocurrencies - Pyramidal Schemes?




Skeptics are calling cryptocurrencies "pyramidal schemes", while enthusiasts and strong believers maintain the idea that the digital currencies have a bright future ahead of them, thus they continue investing in them.

Recently, economist Nouriel Roubini pointed out at Bitcoin as pyramidal game, by no means can it be considered real currency.

Although the cryptocurrencies are great inventions and unique concepts, there are several major backsides to them, let's call them "limits":




 Cryptocurrencies - Pyramidal Schemes or Currencies?

The 2013-2014 price chart of Bitcoin, Litecoin and many other digital currencies shows the characteristics of a typical asset bubble. If that's true, then Bitcoin (and many of its rivals) should crash during this year - according to the analogy.

The price of Bitcoin has fallen from above 1,000 USD in late 2013 tremendously and, has been trading above 600 USD in March 2014.

Economist Peter Schiff has pointed out in multiple interviews to the fact that Bitcoin is only good until someone else wants it. Therefore, it's strongly affected by demand and therefore, it's extremely volatile.

This is one of the main reasons why we cannot consider Bitcoin a stable currency.



 Digital currencies behave more like speculative "products" than means of trade

A currency should primarily behave as means of trade, but in fact - Bitcoin, Litecoin and others - behave as "products" themselves. Financial products, that is.

As Peter Schiff has pointed out - the cryptocurrencies requite demand to keep them at a high enough value. This means that if they are less bought, their price drops. This negatively affects the transactions in which a cryptocurrency should act as an intermediary (like when it's used as a means of exchange between the seller and the buyer of goods/services).



 Digital currencies are not as decentralized as they claim to be

The main reason are the exchanges that affect their prices. Major sell-offs can crash any cryptocurrency. Fact proven by such events towards the end of 2013 and early 2014.

Bitcoin was severely affected by the Russian ban and the Mt.Gox bankruptcy. It has somewhat recovered - but without any doubt, the cryptocurrency is strongly linked to 3rd factors (exchanges, for instance), it's not so much "peer-to-peer" as it might seem by design.



 They are not backed by anything:


Among others, Alan Greenspan has also underlined that Bitcoin has absolutely no real backing.

It's not just the hard assets, but also petrodollar systems and a solid banking system that can attribute power to a currency.

Because cryptocurrencies don't have this, they are very vulnerable to sell-offs. The short-selling of a substantial amount of Bitcoins is enough to crash it from let's say 600 dollars to 1 dollar only!

The strongest power behind cryptocurrencies is demand for them. And demand fluctuation creates instability.



 Transactions are being fed by speculation


Most people who buy cryptocurrencies acquire them in order to speculate on the price. They wait until it reaches a certain level and then they make a sale. And big investors can make big sales.

Obviously, a major sale will affect the exchange rate more than in the case of a fiat currency.

Otherwise said: people tend to buy digital currencies not in order to use them for buying goods and services, but in order to make a profit. This is why digital currencies can be (somewhat) compared to ETF's.

However, they're mostly speculative and therefore cannot be considered commodities - contrary to what some have called them.





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