Why bitcoin is looking more like a pyramid scheme - and central banks must act

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Bitcoin is looking more like a pyramid scheme every day since the recent launch of a US bitcoin exchange traded fund. ETFs have the potential to lure billions of dollars into bitcoin, allowing investors and speculators who got in at the bottom to get out at the top, before the pyramid collapses.

This renders the case for official regulation of bitcoin and other cryptocurrencies, and the launch of central bank digital currencies such as China’s proposed digital yuan, all the more urgent and compelling, before too many people become casualties of the prospective collapse.

Whatever the true provenance of this most cryptic of cryptocurrencies – whether the brainchild of Satoshi Nakamoto (assuming he even exists ) or others – there is no denying that bitcoin is an ingenious moneymaking device for its founders.

The market value of all the bitcoin mined so far, digital or physical, is estimated at around US$1 trillion (S$1.4 trillion). But the amount of money that bitcoin ETFs could attract, now that the world’s biggest equity market has given it a lead, could run into multiples of that amount if cryptomania persists.

This means that – in a reversal of Gresham’s Law that bad money drives out good – good money rushing into bitcoin via ETFs could replace the bad or quasi-money represented by bitcoin, and early investors could sell out, leaving the unfortunate others holding dross.

And, since the total number of bitcoin that can ever be produced is supposedly capped at 21 million, with just over 2 million left to be mined, ETF-fed demand for the cryptocurrency could soon outstrip supply, driving prices even higher.


Great illusions are not unique to bitcoin. There was the 17th-century tulip mania that pushed tulip bulb prices to absurd highs, the South Sea Bubble a century later and the dotcom bubble that burst in 2000 – and, now, we have the bitcoin bubble . It might better be called a chase after fool’s gold, a reference to pyrite and its superficial resemblance to gold.

Some even argue that bitcoin could become a store of value or an inflation hedge on a par with gold, a claim that stretches credulity given cryptocurrencies’ wild price swings . True, these could be attenuated by inflows of new money but comparisons with gold are facile, even fatuous.

Gold has held its value for centuries, and is a virtually indestructible asset. Beat it, burn it or recast its form, gold retains its value as a quasi-monetary or precious asset in a way that no symbol of a digital blockchain could ever hope to do.

So why do bitcoin and other cryptocurrency assets gain credibility to the point where a bitcoin ETF has been launched on the world’s biggest equity market, allowing (as the Financial Times put it) mainstream investors to hold a listed bitcoin-linked security alongside traditional financial assets?

The US Securities and Exchange Commission allowed the ProShares Bitcoin Strategy ETF launch to go ahead ostensibly because it holds bitcoin futures contracts traded on the regulated Chicago Mercantile Exchange. But the strong lure of cryptocoins suggests that other traded investment vehicles will follow.

The rise and rise of bitcoin and its peers (which might as well be termed “cryptotrash”) is yet another manifestation of a monetary madness that began with quantitative easing in the wake of the 2008 global financial crisis and which accelerated dramatically in the Covid-19 pandemic.


In this permissive environment – greatly augmented by the fiscal stimulus approved within modern monetary theory – rivers of liquidity have flowed into equities, bonds, real estate and now cryptocurrency assets, pushing valuations to extremes. It may not be too long before we see tulip ETFs being launched.

Bitcoin purports to be more than a cryptocurrency asset. It was created in 2009 to be an electronic peer-to-peer cash system when faith in sovereign currencies had been shaken. That was before it attracted the attention of cryptocurrency-curious investors as an asset.

It and other cryptocurrencies act as conduits for money transfers outside the banking system and, as such, they promised to avoid the high costs charged by banks. According to some analyses, however, the high fees associated with the bitcoin network make remittances impractical for most.

The only real value of cryptocurrencies, therefore, derives from market transactions and not from savings made on money transfers – although monetary authorities fear that money laundering may add additional and illicit value for some cryptocurrency holders.

The best way to avoid this is for them to issue central bank digital currencies, tied to the value of a national currency that does not gyrate. The digital yuan should launch next year and while it might not have the speculative lure of bitcoin, it will be a lot safer.

This article was first published in South China Morning Post.

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