A finance lecturer at Queen’s University has branded cryptocurrency a Ponzi scheme as he hit out at the “get rich quick” mentality associated with it.
r William Quinn specialises in financial ‘bubbles’, short selling, and manipulation of the markets.
He is the author of 2020’s Boom And Bust: A Global History Of Financial Bubbles.
He is highly critical of digital currency, which initially gained popularity through Bitcoin, although there are many other forms now.
He recently labelled the buzz around cryptocurrency and its subsequent downfall over the past year a “stupider bubble than any previous bubble” and “a smarter Ponzi than any previous Ponzi”.
Speaking to the Belfast Telegraph, Dr Quinn said Bitcoin “began as a political project”.
“The idea was that you could have a form of money that wasn’t under government control, and was part of an ideology opposed to it,” he explained.
“People wanted to avoid paying taxes and the perceived high risk the value of money would be inflated away by the government.
“From there, the resistance to government control became the most used case.”
He first became aware of cryptocurrency when aged 21 and studying in Manchester.
He said: “It was used if you wanted to buy guns on the internet, and that’s how it became popular.
“I don’t know if it’s still the case, but in principle, breaking the law is what (crypto) is used for because it’s incredibly hard to trace. The whole area has different types of fraud.”
Users often deny the fraudulent aspect commonly associated with it, while acknowledging its suspicious beginnings.
Bitcoin was established in 2009. Its mysterious founder is unknown, but widely believed to be either a person or group operating under the pseudonym ‘Satoshi Nakamoto’.
“It’s good for breaking the law,” Dr Quinn added.
“It’s a terrible investment. Like anything, the value can go up and go down, but it has really bad features.
“If you compare it to a stock and the stock makes a profit, most people who invest in that stock are going to make a profit.
“Obviously, not everyone makes money, but over time most would come out ahead.
“But Bitcoin is unusual. I would describe it as a ‘negative sum’ — the price can go up and down, but while all this is going on and the market is operating, there are mining costs.”
Bitcoin ‘mining’ is the process in which users can ‘mine’ the system or ‘blockchain’ — the ledger where transactions made using crypto are stored — by solving complex cryptographic puzzles.
It allows users to obtain Bitcoin, but is heavily criticised due to the amount of energy needed by the systems used to operate it.
He pointed out: “Those energy costs can only be paid in traditional currencies.
“Bitcoin can’t be used to pay your energy bills. This means there is a continued strain on the finances coming out of the system.”
One of the other criticisms is the culture surrounding crypto. The main users are young men, who invest in what Dr Quinn described as essentially a “get rich quick scheme”.
He said it’s reminiscent of a Ponzi scheme.
This is a scheme in which earlier investors are paid profits using funds from later investors. It’s named after Italian con artist Charles Ponzi.
He added: “Crypto itself isn’t actually a fraud; it’s like a fraud because within it there are multiple genuine frauds, and we’re only seeing the start of those involved being prosecuted.”
One of the most notorious cases of alleged fraud involves Bitcoin ‘It-Boy’ Sam Bankman-Fried.
One of the youngest tech billionaires in the world, he amassed a fortune through his companies FTX and Alameda Research by the age of 30.
Both have since collapsed after it was alleged funds from one was illegally used to pay the other.
Bankman-Fried was extradited to the US from the Bahamas and is currently out on $250m bail.
Dr Quinn said: “Legislators have been slow to act.
“These kinds of faults have been around for years and are not shut down until it’s too late, until something like FTX explodes.
“It’s good you can maybe prosecute, but not good for those who lost their money in it.
“There is a whole culture of, really, disrespect for convention. You know there are traditional ways of doing things, and there are lots of things done unethically in crypto.
“I mean, it’s how a lot of investment banks operate as well.
“I’m not someone who defends finance as a whole, but the culture is distinct in crypto and it doesn’t produce anything of value.”