A Ponzi scheme or a new version of Multi-level Marketing, the Herbalife for money? And why the greatest danger is that the crypto pyramid does not collapse, for the future of our business models and the future of money.
For full disclosure, I hold small amounts of ETH and BTC in the quite unlikely chance that it will someday decouple from the fiat system.
The milk’s gone bad
It’s very bad.
The mainstream perception of Bitcoin and the wider crypto industry as a Ponzi scheme was given further credence by Nassim Taleb’s excoriating ‘Bitcoin Black Paper’ last month. And as Jordan Belford, the Wolf of Wall Street himself recently, the fraud going on in the industry makes him look sheepish: Crypto exchanges are the penny stocks bucket shops of the 21st century.
The death knell ringing from Nassim Nicholas Taleb’s paper debunking Bitcoin as a Ponzi scheme and its true value as ZERO must have hurt many fans of the crypto cult classic The Bitcoin Standard as Taleb also retracted the foreword he wrote for the original version of the book.
This article documents how, over the course of a year, the industry and its information ecology has rapidly degraded since C-19 when thousands of crypto companies with no viable business model doubled-down to promote vacuous products and how the industry now operates on a form of Multi-Level Marketing (MLM) for money.
The MLM business model is most closely associated with the supplement and self-help industry, which (in marketing history) has evolved over the century from the travelling ‘snake oil’ salesman. Like it, demand for crypto is now created mostly through influencer emotive marketing — the pursuit of easy money, financial freedom and a better luxurious lifestyle — to sell products which often have little or no proven efficacy or utility.
Crypto: Multi-Level Marketing or a Ponzi Scheme?
Although MLM companies are legal in most countries there’s only one point of difference between it and a Ponzi. The former recruits recruiters to on-sell real products (often with dubious efficacy), whereas the latter recruits investors with a ‘guaranteed return’ on invested money that isn’t there.
However, MLMs often require the recruiters to buy a minimum amount of the products themselves every month and much of the product is sold between people within its own network, which, in terms of productivity, is not unlike wash trading in the markets. The MLM pyramid model is supposedly self-sustaining through a ‘trickle-down’ wealth effect (which is really ‘trickle-up’) of referral fees from the top recruiters to the newcomers — until it isn’t.
An organization is deemed to be a pyramid scheme if the participants obtain their monetary benefits primarily from recruitment rather than the sale of goods and services to consumers.
— Peter Vander Nat, Senior Economist, Federal Trade Commission
Even the conferences of the two industries have converged to become a notorious raving spectacles of fervent fans, high animal spirits and rallying cries from industry leaders and celebrity influencers.
In my view, crypto has become the Herbalife of money and, just like it, or Bill Ackerman’s failed billion dollar short bet against the Herbalife “Ponzi”, the industry may well continue on and grow in its current fraudulent form.
To me, this represents a much bigger risk to the health of the wider economy than if the crypto pyramid scheme were to collapse.
Legitimising the $1tr pyramid scheme
The supplement and vitamin industry has flourished for over 100 years to become a $130bn industry despite its dubious reputation by cosying up to Big Pharma which, through lobbyists and financial firepower, has itself exploited loopholes across the globe to market innumerable products to people who may otherwise be healthier without them. Supplements have thrived in this legal safe zone created by Big Pharma.
The key players in supplements now include GlaxoSmithKline, Pfizer, DuPont, Reckitt Benckiser Group, Archer Daniel Midland, Dupont, Amway, Bayer, Glanbia Nutritionals and Herbalife International.
Similarly, crypto too is riding the coattails of Big Finance and Wall Street lobbyists in many jurisdictions and will, I believe, embed itself parasitically in the real economy.
While MLM is a legal business model and every industry uses referral schemes, it is important to note the difference with the crypto industry here: the product the industry is selling is “scarce money”, when in reality anyone can create any amount of, and at little cost.
In fact, crypto is also the first asset class and industry ever to have a whole financial ecosystem of tradable derivatives without having a real world use case. It even fits the criteria of the late great anthropologist David Graeber’s definition of a “Bullshit Industry”. I.e. if it were to disappear tomorrow it would have no material effect on the world, just paper wealth loss.
Think about it. If financial derivatives of commodities (grains, coffee) or stocks (GM and WalMart) that provide actual goods and services we use every day are an abstraction of an abstraction of the real underlying service/commodity, then crypto derivatives are an abstraction of an abstraction of an abstraction of an abstraction of an ….anon.
Multi-level Marketing tactics in crypto
The first sign of a pyramid scheme or MLM is that there are no organic customers or natural buyers — they must be lured in and converted. In turn, the users (hodlers/traders in crypto) provide a floor at higher prices and become the next tier of recruiters that bring in new converts.
To demonstrate, no sooner had the price of crypto crashed 50% than the recruiting armies (media, influencers) at the lower ranks started publishing propaganda in the aftermath to suck new investors in with headlines like this, “The Bitcoin Price Crash — 5 Reasons to Buy Now”.
To save you reading the article, it’s a hollow echo within an echo chamber of quotes from crypto gurus justifying reasons to buy. If you look at the URL is an update of an article originally published in 2019 espousing the same content!
Imagine your national newspaper/website makes most of its money from selling advertising space to the real estate industry while concurrently it owns a website that sells house price data, provided by the very same real estate agents who advertise with it. Now imagine it publishes bullish housing articles branded as “news” telling punters to ‘buy now’ without disclosing the conflict of interest (and assets) it holds. Oh, and it also owns a real estate agency.
These undisclosed conflicts of interests are rife in crypto.
How the Crypto Pyramid works
In MLM, what makes the pyramid appear ‘self-sustaining’ are the referral fees recruiters earn from those they recruit, and those recruited beneath them, in perpetuity. The higher up the pyramid you make it, the more people you have below you in your ‘down channels’ — like a family tree — earning you fees from new recruits coming in below you buying products in a trickle-up effect.
The crypto pyramid works like this:
- Startups (every crypto company is a startup) act as their own media agency creating demand for their products through content marketing, referral schemes, podcasts, social media, influencers etc.
- PR and marketing firms that shill exchanges and ‘coin projects’ are given bags of the crypto (or paid in kind) from the company they are promoting.
- New retail investors and traders at the bottom with exchange coins and referral rebates.
- Companies (+ VCs, funds, traders, whales, exchanges), sitting on large stocks of the appreciating asset, use DeFi to earn passive yield by lending it back to new recruits to leverage gamble and keep the scheme running
- Losses at the bottom trickle up to the lenders at the top. Rinse and repeat
A red flag of an MLM is that it has no organic customers, it must manufacture interest often by making false or unsubstantiated claims about its product. Sound familiar?
Unsubstantiated and false claims made about crypto
- It’s a hedge against inflation (I’m guilty of falling for that at one stage)
- Bitcoin is a viable alternative to the current financial system (it is actually a parasite on the USD system)
- Bitcoin/crypto will somehow save you from the fiat system if the US Dollar implodes (exactly the opposite is true; DeFi loans and debt will most likely go the same way as high-yield and emerging market bonds)
- We can finally perfect the ‘science’ of economics and find the price of everything now with a field called ‘tokenomics’ (maybe between closed-system machines!)
- Unlocking liquidity and fractionalizing assets digitally makes them more ‘democratic’ by allowing anyone to engineer their own derivatives (like finance 1.0 financial engineering will be taken advantage of the 1% who understand it)
- That venture capitalists and technology futurists represent and serve the broad interest and needs of the public (WTF!)
- Cryptocurrency promises to replace the Attention Economy with Attention of Token Prices (LMFAO)
- Social media using algorithms to influence people’s behaviour is bad, but crypto influencing people’s behaviour with algorithmic money is good.
The parodies and contradictions are endless.
Exchanges, the 21st century bucket shops
For more on this I recommend The Bit Short article which did a good job explaining the exchanges pyramid business model using trading rebates, creating their own coins, and other gambling gimmicks to lure punters in.
I’ll touch here briefly on the more egregious examples, some of which like the BTSE exchange operate a literal pyramid referral scheme, where a trader can earn a commission “from referees and referees’ referrals to an unlimited extent”.
Just to keep things clean and above board, traders can maximize their referral bonus if they hold 5,000 or more of the BTSE token.
Exchange owners act as the industry’s real estate agents and attempt to influence sentiment. This is epitomized by Gemini Exchange co-owner Cam Winklevoss, when back in April 2020, when things were looking dire, he attributed C-19 to the next crypto bull run without any caveat of systemic risks in the industry.
Before the pandemic broke out, however, the Voss was peddling other viral narratives about bitcoin.
I believe these gambling gimmicks are a sign of desperation in the industry, not confident new demand as they are construed to be. As about 90% of retail traders lose money, we can see the trickle-up effect of a pyramid business model that encourages more trading.
In a world awash with cheap money it’s galling to attempt to sell your own version of ‘money’ to punters for 1000x a nominal dollar unit. The old idiom selling sand to Arabs comes to mind.
You really must make a point of difference to stand out of the crowd and Decred, a heavily VC-backed crypto often shilled by investors Chris Burniske and Meltem Demoirs of Coinshares, has shown a deft hand at network marketing.
If you dig through the Decred governance forum, Politeia, many of the proposals for treasury spending are for marketing strategies, including one ambitious High-Profile Billboard Marketing Campaign, which was subsequently rejected:
“A 4-week billboard marketing campaign targeted at the elite upper-class, those with disposable income and a high risk tolerance for speculative assets. 50 billboards strategically placed throughout Hollywood and West LA to build brand recognition and meaningful growth.”
— Decred Politeia Marketing Proposal
Unsurprisingly, there’s also been a crossover of woke influencers into crypto (after all isn’t crypto the red pill?) as the centralized social media platforms ramp up censorship of ‘conspirituality’ and anti-vax content and those accounts move to ‘decentralized’ social media platforms.
It’s only a matter of time before life coaches start minting their own coins.
Quintessential to every pyramid scheme are the charismatic guru characters whose prescience and online omnipresence perpetuates belief in the mythology of the business.
And crypto has plenty of Tony Robbins characters who work tirelessly to spread the word, from traditional finance gurus like Robert Kiyosaki (Rich Dad) to hedge fund managers and venture capitalists.
It is telling that the most unscrupulous shiller in crypto Anthony ‘Pump’ Pompliano is also a real estate guy. His companion of the Morgan Creek Digital hedge fund is Real Vision interviewee regular Mark Yusko whose Twitter account has turned into a constant stream of pro-bitcoin propaganda — his tag #TwoPointOneQuadrillion presumably referring to his desired BTC market cap.
Former fund manager turned financial media mogul Raoul Pal seems to be on a personal crypto crusade to proselytise through his Real Vision channel.
Raoul is a very smart guy and a great showman who I’ve learnt much from over the years, but the hyperbole of RV has become the stuff of parody, elevating crypto to a cosmic, alchemical status — the key to understanding everything!
I see no difference in this sort of advertising to a spiritual guru at an Ashram telling naive western backpackers, “I’ll show you the secrets to the universe!”
The male-dominated culture of brogrammers, venture capital and finance 1.0 has set the mould for crypto, and this narrow demographic has designed the systems and built it with resultant bias. Anyone passionate about the future of money (and tech agnostic) should be very concerned about this.
We should be questioning the agenda of the techno-futurists, VCs, hedge fund managers, Wall Streeters and private equity, whose work is often contrary to the interests of the general public?
Because crypto gurus have almost infallible status within the community, an orthodoxy has emerged around their teachings. Anyone with a contrary view (and no vested interest in crypto) immediately becomes an outsider, not unlike a cult.
Another cult trait is that the gurus speak in esoteric techno-finance jargon that few really understand and so they are rarely challenged as few are able or willing to falsify their claims.
Why I think the Crypto Pyramid will not collapse and why that’s a bad thing
While Taleb and the author of the ‘Bit Short’ believe the crypto Ponzi is Doomsday Machine and will soon collapse precipitated by the Tether fraud, I’m more concerned that it will continue in its fraudulent form.
Especially since the Coinbase IPO crypto has become more tethered to the USD fiat system and legacy stock markets it was originally supposed to subvert and may continue to thrive in it only because it is a parasite on that system.
Here are more reasons I think it is more likely to continue than collapse:
- Crypto now creates an illusory ‘wealth effect’ for many millennials
- Prices are now more dependent on the fiat system than to Tether
- Fragile US recovery from its worst economic shock in history — crypto is now part of the rebuild, creating employment and a ‘wealth effect’
- A large portion of crypto retail investors are middle class, the stratum most squeezed by govt, losing social mobility and the largest voting cohort
- Influencer marketing is now a multi-billion dollar industry
- Multi-level marketing, or network marketing, is legal and was given a runway by the FDC in its failed case against Herbalife
- The business model in crypto is much the same as in many industries, real estate, advertising, media is not much different: create FOMO through emotive propaganda
- Rise of all in one neobanks like Revolut that offer crypto/stocks and the middle class hunt for yield
- There is currently so much fraud in our business environment that people are desensitized to Tether’s malfeasance
I hazard to guess that the middle class make up more than 90% of retail crypto investors, and the majority millennial, as they’re the cohort with the privilege of time and education to do so.
Combined with runaway house prices in developed countries, the lack of social mobility in the middle classes, flat wages, rising taxes and zero return on cash in the bank, I expect the exodus of the middle class from retail banks to neobanks (Revolut, Monzo etc) and DeFi to accelerate rapidly, seeking any source of yield.
Betting on FOMO
It is not long stocks, short VIX or even bitcoin that is the most popular and overcrowded trade in the world right now, but the FOMO strategy which is being exhausted in every industry.
From self-help gurus, coaches, sports brands, education, insurance and now even money-everyone’s business strategy looks the same: influencer marketing and FOMO tactics. This trend should be of concern to anyone who cares about the future of money and business
Only in crypto could a business model exist wherein the same company acts as an exchange, the issuer of securities on that exchange, a custodian, clearinghouse, investment bank and underwriter all under one roof. And it’s only a matter of time before Binance goes IPO.
We are reaching new highs of fraud across industries but particularly the junction of finance and technology. WireCard and WeWork were probably just the tip of the iceberg, more recently the $2b+ tandem implosion of Katerra and Greensill Capital, two Softbank ventures, is even more telling.
At a $1 trillion valuation crypto has done nothing to resolve the problems it was supposed to address in our systems and in many areas, I believe, it has actually made them worse.
Many say these are “growing pains” but the current state of the industry disproves many of the premises of crypto 1.0 and digital ‘hard money’: it is not decentralized, is not a good store of value, isn’t a real medium of exchange, it’s not equitable, nor is skin in the game a panacea to all human interactions.
Most people involved in the industry turn a blind eye to the pyramid/Ponzi it has become or willfully ignore it to pay the bills, but if you are really passionate about the future of money — and not just crypto — then make a move.
If you want to see better business models and systems of money built in the New Economy then please follow this blog, Future Perspectives, for strategies and ideas to regenerate our business environment.