The World Bank, which has largely abstained from commenting on Bitcoin in the past, described it in terms of a bubble in a recent research paper titled, “Ponzis: The Science and Mystique of a Class of Financial Frauds”.
The 15-page paper, authored by economist Kaushik Basu, explores the science and mechanics behind various forms of Ponzi schemes. Included is a class of “non-deliberate” or naturally occurring Ponzi schemes, which are really just asset bubbles. Explained by others under what’s referred to as the “Greater Fool Theory”, people buy into these assets unaware of their fundamental value and only because it is expected that others will drive their price even higher through speculation. “This kind of a spiral, which has nothing more to it than people’s expectations feeding into more expectations, can cause huge price rises.”
Gold is provided as an example. It is argued that gold has “little innate value”, giving rise to “large fluctuations”. The argument can be disputed, however. As discussed previously, the average daily price movement for gold is lower than that of most equities. While the major declines on April 2013 are evoked, these are not typical.
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Bitcoin is then described in how it can facilitate low-cost transactions. It too is assessed as having catalyzed a vicious cycle of speculation for its continued rise, its Ponzi characteristics not necessarily intended. Its innate value, however, may very well be the learnings we gain in how it can disrupt finance:
“Contrary to a widely-held opinion, Bitcoin is not a deliberate Ponzi. And there is little to learn by treating it as such. The main value of Bitcoin may, in retrospect, turn out to be the lessons it offers to central banks on the prospects of electronic currency, and on how to enhance efficiency and cut transactions cost.”
Not mentioned is the fact that even “indeliberate Ponzis” can be hijacked by those intentionally pumping the value of assets through a combination of their own buying behavior and their fabricated praise in the public sphere. While debatable if this applies to bitcoins themselves, it is a well-known phenomenon found in penny stocks and many altcoins.