I have started getting doubts about cryptocurrencies even in Bitcoin isn’t it a Ponzi scheme? Even if we ask Chatgpt it says it has some elements of the Ponzi Scheme, like let’s for a second think of it if today these big companies start selling bitcoin it will eventually fall and who will be at a loss? These new investors similarly this chain keeps on going these new investors will wait for the next bull run to exit in profit but how again newbies will come and the cycle repeats. Now people compare crypto with stock I think if we own shares of a company XYZ even if nobody buys or sells them their value will increase or decrease depending on the company’s performance just because the company makes a profit but in crypto let’s think there was only 1 BTC in the whole world how will its value increase? Again just because of the hype and trends.
This was just my opinion and I want some very authentic answers to this please guide me as I am actually making profits but many of the times I get confused
Salam Bro,
You’ve asked a few questions so to be clear I’ll focus my response on “is bitcoin a ponzi” which hopefully addresses most.
To establish if Bitcoin can be classified as a Ponzi scheme, we first understand the characteristics of Ponzi schemes and how they differ from Bitcoin.
What is a Ponzi Scheme?
A Ponzi scheme is a fraudulent investment scam that promises high returns with little risk. It operates by using funds from new investors to pay returns to earlier investors, creating the illusion of a profitable business. The scheme relies on a continuous influx of new participants; once this flow diminishes, the scheme collapses, leaving later investors with losses.
Key characteristics include:
- Promise of High Returns: Ponzi schemes typically guarantee unusually high returns with minimal risk.
- Dependence on New Investors: They require a constant stream of new investments to pay off earlier investors.
- Lack of Transparency: Transactions and operations are often obscured from investors and regulators to maintain the facade of legitimacy[1][4].
Why Bitcoin is Not a Ponzi Scheme
- Decentralisation and Transparency: Bitcoin operates on a decentralised network using blockchain technology, which allows anyone to verify transactions in real time. This transparency contrasts sharply with the secrecy inherent in Ponzi schemes, where information is deliberately hidden to prevent scrutiny.
- Market Volatility: Unlike Ponzi schemes that promise consistent returns, Bitcoin’s price is highly volatile, fluctuating based on market demand and supply. Investors may experience significant gains or losses, which is typical in speculative markets but not characteristic of Ponzi schemes that provide guaranteed returns.
- Ownership and Control: When individuals purchase Bitcoin, they own their assets outright and can manage them through digital wallets. This autonomy differs from Ponzi schemes, where investors have no control over their funds once invested, as their money is pooled into the scheme.
- Legitimacy and Regulation: While there are scams that utilise Bitcoin (such as those falsely claiming to invest in Bitcoin for guaranteed returns), Bitcoin itself is not an investment scheme but rather a digital currency. It is legal and regulated in many jurisdictions, further distancing it from the illegal nature of Ponzi schemes.
Bitcoin-Based Ponzi Schemes
While Bitcoin itself is not a Ponzi scheme, it has been used as a medium for various scams. Some criminals have created Ponzi schemes that promise high returns based on Bitcoin investments, exploiting the cryptocurrency’s popularity to lure unsuspecting investors. Examples include:
- PlusToken: This was a significant Ponzi scheme that promised high returns through investments in cryptocurrencies like Bitcoin but ultimately defrauded many investors.
- Bitcoin Savings & Loans: Another example where scammers used the allure of Bitcoin to attract investments under false pretenses.
- “Islamic” coins: There are many claiming to be islamic and even have the word Islam in their names, with no substance behind them so be careful.
These scams leverage the cryptocurrency’s reputation but do not reflect the nature of Bitcoin itself.
To sum up, Bitcoin cannot be classed as a Ponzi scheme due to its decentralisd nature, transparency, ownership structure, and market behavior. However, it is crucial for investors to remain vigilant against scams that misuse Bitcoin’s or even Islam’s name. Understanding these differences helps clarify misconceptions surrounding cryptocurrencies and their legitimacy in the financial landscape.
May Allah guide us all to make wise and ethical investment decisions. If you have any further questions, please don’t hesitate to ask.
It’s a bit unfair to bucket all crypto’s into one ruling as there is a huge difference between them individually so you have to assess them on their own merit. It’s a bit like saying stocks are haram, which we know is not the case. Some are halal and other are haram, and we need to assess them individually.
Crypto is not speculation, but there is a lot of speculation within the crypto market. This is the same for every market, just as you have compared against gold. Buying gold is not haram, but speculating on the price of gold using sophisticated instruments, leverage/ margin etc is not the same as just buying gold.
We need to look at the transaction we are doing and the way we are making that transaction.
You may want to read up on uncertainty or “gharar” which we have written about at https://cryptoummah.com/is-day-trading-haram/.
Thankyou for answering. Chatgpt gave me the same reasons but my question over here is, crypto isn’t just speculation? I mean one is selling the other one is buying and there’s nothing else going on just like a ponzi scheme.
But at the same time I think Gold is doing the same and it is permissible in Islam.
So I am kind of confused between both of these sometimes I think it is permissible sometimes I think it is impermissible