Dan McCrum, the Capital Markets Editor at Financial Times, published another column declaring bitcoin a pyramid scheme destined for zero. This marks the supposed 118th time commentators have called fo
Dan McCrum, the Capital Markets Editor at Financial Times, published another column declaring bitcoin a pyramid scheme destined for zero. This marks the supposed 118th time commentators have called for bitcoin's death, yet critics persist in repeating the same argument no matter how many years bitcoin demonstrates utility in global commerce and finance.
McCrum's latest column makes a case for buying bitcoin, the opposite of what he intended. He reveals his limited knowledge of the topic when he mistakes Blockchain—the most well-known bitcoin wallet provider—for "Bitcoin Info," a basic error that undermines his entire analysis and credibility.
Bitcoin remains tiny when compared to government currencies in both market capitalization and total liquidity available. McCrum gets this fundamental point right in his opening section. Yet the fact that a digital cash experiment can hold its own against the currencies of sovereign nations at all is remarkable. The scale of such a development deserves recognition, even if only to acknowledge how far digital currencies have come in such a short time.
McCrum's argument falters when he addresses bitcoin's role as a medium of exchange. He wrote: "Except treating bitcoin as an investment means it can't be a currency, and vice versa. The problem is that a medium of exchange prone to collapsing or quadrupling in price is useless as a practical currency, whatever the cryptographic elegance of its creation."
This contains multiple flaws. Bitcoin has become less volatile since people began trading it on exchanges. The world's first digital bearer cash should be volatile in its early years—that's the natural order for something so new to markets. More than that, people already use bitcoin as a medium of exchange, regardless of McCrum's skepticism. Ransomware operators brought in $1 billion during 2016 alone. Darknet market listings show over $300 million in estimated trade volume. McCrum and others may object to these use cases on moral grounds, but that doesn't make them any less real or common. McCrum himself has written about bitcoin's necessity for darknet payments and access to schemes like MMM Global, creating a contradiction in his current stance.
Bitcoin faces a challenge that McCrum misses: too many people want to use it as currency. Demand for transactions on the blockchain approaches the network's capacity limit. Users now compete against each other for space in each block of transactions. LocalBitcoins saw its volume grow 85 percent over last year, evidence that bitcoin's appeal to those seeking alternatives to traditional banking only grows.
McCrum reaches back to 2011 to find his final argument, resurrecting the pyramid scheme claim. He states: "As a phenomenon bitcoin has all the attributes of a pyramid scheme, requiring a constant influx of converts to push up the price, based on the promise of its use by future converts. So the ultimate value for bitcoin will be the same as all pyramid schemes: zero."
Critics invoke the pyramid scheme accusation with regularity. The weakness in this argument lies not in whether bitcoin resembles a pyramid scheme, but in the inconsistent application of the logic. Gold prices move in similar patterns to bitcoin. Both assets trade at values that exceed their utility as stores of value alone, yet neither qualifies as a pyramid scheme. The US dollar itself began with gold backing. Apply the pyramid scheme logic consistently: if bitcoin is one, then gold is too. If gold is, then so is the dollar.
What differentiates a true pyramid scheme from bitcoin, gold, and the dollar is the presence of underlying utility. American citizens need dollars to pay their taxes. Drug users need bitcoin to conduct transactions on darknet markets. Bitcoin offers utility as a censorship-resistant medium of exchange and store of value. That utility changes the equation. Bitcoin's modest liquidity and market cap represent opportunity rather than weakness—room for adoption and growth.
