04/21/2014 04:07 pm ET Updated Jun 19, 2014

Is Bitcoin a Ponzi Scheme

You would have to have been holed up in a cave somewhere over the last few years to miss out on all the media attention to Bitcoin. Bitcoin this, Bitcoin that, everybody's into Bitcoin. Perhaps not quite to the level of a media frenzy, but a good bit of attention, none the less.

All of this media attention causes some people to scratch their heads and ponder what all this fuss is about? Is Bitcoin for real? Is Bitcoin some secret plot of the Chinese government to undermine the U.S. dollar?

Perhaps one of the more intriguing questions asked lately about Bitcoin is whether or not its a Ponzi scheme. After all, not too long ago, Bernie Madoff shocked the nation with the size and scope of his scheme. In fact, even to this day, the fallout from Bernie's shenannigans are still being felt. So back to the question of the day: Is Bitcoin a ponzi scheme, yes or no?

No! As you will see in just a minute, the very nature of Bitcoin and its alternates violate the basic definition of a Ponzi scheme. For review, recall that a Ponzi scheme is a special type of fraud. This fraud works on the basis of paying out returns to from new members (investors). One key thing to remember with Ponzi schemes is that they typically involve putting money into arcane investments. In fact, the namesake, Charles Ponzi started by using arbitrage on international reply coupons for postage stamps. However, exotic investments aside, the point to remember is that oftentimes the exact goings on behind closed doors is a bit murky. Nobody is ever really clear what happens behind the curtain.

In the beginning of the Ponzi scheme, the person or organization promoting this so-called super investment may indeed pay out returns along the way. Often the organization will pony up statements showing positive returns and encourage the investors to stay the course or even add in more. The person running this fraud scores really big when his "investors" recruit other members into the scheme. All the while the organization is socking the money away. That is until the scheme falls apart, or like Bernie Madoff and his guilty conscious, who finally turns himself in.

Ponzi Scheme Tests

So, with that in mind, let's take a look at Bitcoin and see if it meets any of the criteria of a Ponzi scheme, even a little bit. Note that one key feature, one that many of its proponents are touting as a primary benefit is its transparency. In other words, everybody around the world can follow what's going on with Bitcoin. Yes, it is true, you may not know the inner workings of the Bitcoin exchanges, but you can know what is going on with Bitcoin at any moment of the day.

Test number 1 results? Fail.

Bitcoin is transparent, thus it does not meet one of the basic tenets of a ponzi scheme.

Moving on, another key difference is that a Ponzi scheme typically involves one person or one organization. Look no further that Bernie Madoff. One person (actually his organization), held all the cards. Bernie did the original recruitment himself. It looks like once he got to a certain size, his "investors" did all the referrals for him. Either way, the key thing to understand is that a Ponzi scheme has all the cards in the hands of one key player.

Test number 2 results? Fail. Bitcoin is not owned or even managed by any one person or organization.

Yes, Bitcoin was indeed originated by a single person. But since then, he has been hands-off. One way you could think of this is that Bitcoin is more like open source software than a currency owned and controlled by any one government or agency.

Conclusion: As you can see, Bitcoin fails 2 of the basic tests for a Ponzi scheme. Whatever you may choose to call Bitcoin, Ponzi Scheme just doesn't fit.