Bitcoin Attacks The Ultimate Ponzi Scheme
Who Is Running The Ultimate Ponzi Scheme, And How Do We Stop It?
The Ponzi scheme is a simple concept.
“A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.
“With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.”
If we replace investors with lenders, we can look at a similar type of Ponzi. Let’s look at an example: Let’s say Acme Corp takes out a $1 million loan for one year against their $10 million in assets. They spend that $1 million, but they still need to pay back the bank $1 million plus 5% interest. So, Acme takes out another loan for $2 million plus, pays back the first loan, and keeps another $1 million to spend in the second year. In the third year, Acme owes that $2 million plus with interest, so they take out $3 million, plus enough to cover last year’s loan payment, with $1 million to spend in the third year.
As long as a lender is still willing to lend to Acme, this can technically go on as long as Acme’s interest rate is lower than the growth rate of their assets. Acme can even use borrowed money to buy more assets, further fueling this machine.
As you can see from the chart, the downside is that each time Acme takes out a new loan, their total debt load grows and approaches the total value of their assets. If Acme’s debt load ever exceeds the value of Acme’s assets, Acme’s creditors will demand their money back and Acme’s value — their entire existence and all investments in them — will go to…
