For Unicamp professor Jorge Stolfi, virtual currencies such as bitcoin do not generate value. And their trade benefits only those at the top of the system. In 2014, at the onset of the cryptocurrency craze, computer scientist Jorge Stolfi was surprised by a provocation. “Is Bitcoin the new Telexfree?” asked one of his Twitter followers.
The question asked the Unicamp and Ph.D. professor of Stanford University to start an almost solitary investigation into the functioning of blockchains and the essence of cryptocurrencies.
Currently, Stolfi is among a growing number of critics of virtual currencies, which today have among their major investors heavy names such as billionaire Elon Musk. But, for the Brazilian professor, bitcoin, Ethereum, Thether or USD Coin, for example, have no intrinsic value and are also useless for making transactions.
And, in answer to the question posed eight years ago, Stolfi has no doubts: for him, just like Telexfree – one of the biggest financial frauds in the history of the country – virtual currencies are nothing more than pyramid schemes.
“All bitcoins in circulation amount to $400 billion. But this is imaginary, because there is nothing anywhere that is really worth it. One of these times people will notice and sell everything before anyone else realizes it.” count”, says Stolfi.
In an interview with DW Brasil, he explains why cryptocurrencies do not generate value and their trade only benefits those at the top of the system, what is their relationship with other Ponzi schemes and a certain type of political ideology. And because they are destined, one day, to collapse.
DW Brasil: You argue that cryptocurrencies are pyramid schemes. Because?
Jorge Stolfi: When you invest in cryptocurrencies, the only way to get your money back is with another investor who puts money into it, because there is no source that can get it back.
It’s very different from a stock. In this case, the company creates wealth, provides services, generates money, and the resulting profit belongs to the shareholders and investors. This is the basic idea of productive investment.
In the financial pyramid you have a structure where your name goes up and when you get to the top you make a lot of money, but because it comes from others who have invested in the pyramid.
Suppose you buy a bitcoin for $20,000 and sell it for $50,000. You have won 30 thousand dollars. But why? Because someone bought your bitcoin for $50,000. That $30,000 didn’t come from a manufacturing business; in the case of a system, it is purely transfer.
The bitcoin network has absolutely nothing. A company has factories, logistics, products, patents, all these things belong to the shareholders, any profit belongs to the shareholders. In the case of cryptocurrencies, there are no commodities, products, nothing.
All the money you put into buying bitcoin immediately goes into the pocket of the investor or miner at the top of the pyramid.
And has anyone noticed this pattern yet?
Those who understand investment, when going to invest in a company’s shares, the first thing they ask is how the company’s finances are, how many products it sells and what the profit has been in recent years.
Investors who understand what they are doing make this account. But anyone who invests in bitcoin is not that type of investor. It’s the people who don’t understand this logic, they can’t even understand that there are productive investments and there are Ponzis or pyramid schemes – and that it is worth investing in the former, but that one must stay away from the latter.
There are those who are aware that it is a pyramid scheme, but think they can get out of it at the right time and make money. Many of the big investors certainly understand this and think they are being smart and profiting from it.
So if people stop playing this game…
The price of bitcoin is a random number, because long-term investors have no idea what the real price is. The bitcoin chart has things you don’t see in company stocks.
People who trade buy and sell, buy and sell, so the price moves randomly. Then suddenly, someone makes a big buy, and the price goes up, and the players, instead of going back to that old price, continue trading at that new price, simply because they have no idea what the price was. right. The same happens with someone who sells a lot and the price goes down.
You don’t see it in stocks, because when there’s a big buy and the price goes up, investors see that the price is too high and they sell, and the stock value goes back to normal.
There are times when inventories dwindle too, if, for example, a defect is discovered in an automaker’s cars and the company will incur a loss to fix them. In bitcoin there is no such price reference – it is a random number. The price goes up because there are many people who say the price will go up more.
But one day every pyramid scheme collapses, because there’s nothing in there. Today, all bitcoins in circulation amount to $400 billion. But it is imaginary, because there is nothing that is worth anything real. One of these times, people will realize it and burn out before anyone else notices.
According to cryptocurrency miners, the ballast of bitcoin and other virtual currencies would come from the amount of energy expended to mine them. Doesn’t add value? Or is it just an empty topic?
This energy expended by miners is negative, not positive. To keep the system running, miners have to spend nearly $20 million a day on electricity. And the ones who give them this money are investors, who buy bitcoins. If you divide that amount by the number of transactions the system has made, the result is approximately $50 per transaction.
Now, the person using the system to send money doesn’t pay for it, they pay $1 or less – this is because the cost of the system is subsidized by bitcoin investors. For now they are burning investors’ money. If they ever make a profit, maybe it’s justified. But in the case of bitcoin it will never make a profit, because there is no company, there is nothing behind it.
What about the argument that cryptocurrencies have value because they are limited in number?
There are people who say that there will only be 21 million bitcoins until the end of the world and that is why they are valuable. The fact that they close does not make them valuable. In addition to being rare, it must have consumer demand. The toothpicks I used are rare, they won’t be more than a thousand toothpicks, but they’re worth nothing, because nobody wants them, there’s no point in being rare.
But people believe this story of how the rare asset will be valuable, they tell a lie that gold is only valuable because it is rare, but gold is excellent for making jewelry and other things. There is no substitute for this metal, so two thirds of all gold mined is used in jewelery and for gilding. Bitcoin is useless.
But doesn’t it even serve as currency for transactions?
Some cryptocurrencies have larger capacities. But bitcoin, for example, can only make 400,000 transactions a day. The company that manages bitcoin has promised it will never increase that number — it says it’s a plus.
These 400,000 transactions per day mean that if the system has 4 million users, they will only be able to make one transaction every ten days.
Furthermore, more than 80% of the transactions made by the system are not payments. Payment is when a person gives a person a coin in exchange for goods and services, but the vast majority of bitcoin transactions are simply miners who have to pay a lot of people who have mining machines and do pool systems, payments that are not services and they are simply part of how the system works, i.e. it is an internal cost of the system.
There are many people who deposit bitcoin on bitcoin exchanges or take it from there, this is also not a service, as they are not transferring it to someone else. And so on.
So if maybe just less than 20% of all transactions are payments, they’re not done every ten days — if you have 4 million users, it’s every 100 days or three months. So there is absolutely no chance that bitcoin will ever be useful in commerce.
But aren’t there other faster cryptocurrencies?
There are coins that have ten seconds, such as Ethereum, it is possible to change these parameters. But these kinds of similar coins have a problem: they have to guarantee that, once you’ve paid for the goods, bought something, and made a payment to the store, you won’t reverse the payment after you receive the goods.
But, on the other hand, if someone steals or takes your money, sells merchandise you don’t order, or the merchandise is flawed and wants a chance to reverse it… Companies like Visa and PayPal need to have employees who decide whether a chargeback it is authorized or not. And when you try to defraud a business, they have lawyers hound you and sue you. But a decentralized system, which all cryptocurrencies can have, does not have this kind of service.
Is the fact that transactions are made anonymously a risk?
All criminals love bitcoin because it’s the definition of anonymous: it’s untraceable, it’s anonymous, and the victim can’t reverse the payment. Before bitcoin, they had the problem of how to collect ransom money from victims: if they ask for a bank deposit, the police catch them, for example.
This is why ransonware didn’t exist before bitcoin. It is now the largest form of cybercrime. This used to be the theft of business or credential information, such as card data, but that’s gone and now the damage is between $5 and $10 billion, not counting the inconvenience. And there are also the drugs in the mail, which the boy pays for in bitcoins and receives at home.
This is another problem for which, sooner or later, governments will have to open their eyes and see that it is not possible to let this business go free. In the United States, there is no agency that regulates cryptocurrency. Not even in Brazil.
The result is that, if there is no one to regulate it, bitcoin sellers can tell the biggest lies they want, about how valuable it is because the number is limited, that every cryptocurrency has a ballast which is the energy it is been spent on it. However, if it was an action and they said so, they would go to jail. What will happen is that sooner or later the deal will have to close, and then the price will go down and everyone will lose.
But why are there so many enthusiasts? Can we say it’s a bubble that hasn’t burst yet?
The bubble can be a stock that should be worth R$10, rise to R$100, burst, and then go back. Bitcoin is a bubble that has come out of zero. The day it breaks, it doesn’t go to R $ 10 or R $ 1,000, it goes to zero.
The enthusiasm is explained, firstly, because, while other investments promise 10%, 30% annual profit, bitcoin promises 10,000% annual profits. This means that a guy who has only R $ 1,000 to invest can suddenly buy a car with the profit, and this drives people crazy.
Another thing is that even those who do not understand how finance works have a vague idea that the price will rise only if more people invest. So every guy who invests in bitcoin becomes a potential seller.
There are some people who like bitcoin because of its ideology, they think the world would be better off if it didn’t have a government, so they love the idea that it would be a means of payment that they have no control over. But 99% of investors are convinced it will get them out of their misery.
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Source: Terra
Camila Luna is a writer at Gossipify, where she covers the latest movies and television series. With a passion for all things entertainment, Camila brings her unique perspective to her writing and offers readers an inside look at the industry. Camila is a graduate from the University of California, Los Angeles (UCLA) with a degree in English and is also a avid movie watcher.
