Bitscam And Other Extraordinary Insanities
The Market Ticker - Commentary on The Capital Markets
2017-12-06 11:59 by Karl Denninger
in Corruption , 2211 references Ignore this thread
Bitscam And Other Extraordinary Insanities
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If you're too short in attention span to listen to my interview from Monday I guess I can lay it out in text for you.

Not that anyone will read more than the first two sentences that's in the first category.....

Any scheme that shares the following single essential element is a ponzi scheme whether recognized formally in the law at any given moment or not.

That is, the first people who perform some action get a given reward.  The scheme is designed, intentionally, so that the amount of effort for that same unit of reward rises, usually exponentially.  In addition it is usually the case (but not required) that the original effort's starting point is extremely small relative to the reward.

Let me remind you of the mathematical facts surrounding two exponential curves where one exponent is larger than the other.  I will use an extreme example; a "spend" in effort that starts at $1 and goes up at 5% for each iteration and a fixed reward of $100.

If you're one of the first to participate this sounds great!  You spend $1 worth of effort and get $100 in reward.  This scheme is an illegal Ponzi scheme because by the time the 100th iteration takes place each further iteration must produce an inevitable -- and ever-larger from that point forward -- loss.

Note that it does not matter what the compound growth rate of the "spend" portion is nor how far apart the "spend" and "reward" are at the beginning, so long as the "spend" growth exceeds the growth in "reward" value.

The only difference is how long it takes before you get screwed, not whether you get screwed.

Every scheme that has this characteristic is a Ponzi scheme because it is inevitable that the two lines will cross and that later people who participate will inevitably lose money to the founders (and early adopters.)

It is a mathematical certainty that this outcome will occur.

If you have read Leverage (look to the right) you know that I made quite a big deal out of this mathematical relationship early on in the book, because it features in what our politicians have done since roughly 1980 when it comes to revenue, spending and the trajectory of deficits.  The reason governments undertake this, and people design schemes like this, lies in this graph; a very similar graph appears in the book:

 

This represents a "spend" of $1.00, a "reward" of $10.00, and a growth in "spend" of 5% while "reward" growth (e.g. GDP and thus taxable funds, etc) is 2%.

Notice the "belly" in the early periods.  That is, while cost and reward both go up it looks like you're getting a free lunch.  That is, the "gap" (reward less spend) starts at $9.00 and starts to expand immediately; the second period it's $9.15, then $9.30, etc.  In the 9th period it costs $10.00 which exceeds the original reward entirely, so the idiots in the public (that's you, by the way) believe all the talking heads on TeeVee that tell you "the tax cuts paid for themselves", "the economy will grow its way out of this" and similar.

Every single one of these people is peddling an intentional fraud that has been designed to screw you and deserves to be fed to feral pigs.

In fact the fraud and your willingness to buy it goes on for a long time; the maximum spread is not reached until the 50th iteration, when it has become $15.47!  You believe these people are damned geniuses {Reagan, Trump, Greedscam, Yellen, Cramer, etc}.

Unfortunately on the 52'd period, just after you proclaim that these people have achieved the state of Godhood the reward ratio starts to fall.  You still feel good; after all, $15 is MUCH more than the original $9, right?

Alas, by the 73rd period the spread is now under $9 and falling rapidly; in just nine more periods it goes negative and is continuing to accelerate.  About this time you realize that while the "spread" is still close to the original level your cost has gone from $1 to $32; in other words your expenses have expanded by thirty-two times!

By the 100th period the reward is a full $49.64 cents less than the cost and will continue to accelerate until it bankrupts you and everyone else.

Every scheme that has these features is a fraud.

There are no exceptions because the laws of mathematics do not contain exceptions.  An exponentially-increasing difficulty with a fixed reward, or one that increases at a lower rate of growth than the difficulty, where there is no fixed terminus, is by definition a mathematically-proved fraud and everyone involved in creating or promoting such has committed a crime in each and every case.

That we no longer have a Rule of Law allows these people to walk free instead of being imprisoned but that their actions were mathematically-provable frauds is not open to question.

In the case where there is a fixed terminus (e.g. some maximum number of "coins") there is a further consideration.  If the costs rise beyond the reward by design (that is, the exponent makes "reaching the terminal point" impossible) then the above applies unaltered.  If, however, this is not the case (usually by accident, incidentally) but some cost is born by those continuing to participate that is essential to the scheme then you also have a fraud because there is no way to pay for that essential element beyond the terminal point.  As such the viability of the scheme will, as a matter of mathematical fact, collapse when that essential component disappears.

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