Guest post by Giacomo Zucco, founder of BHB Network and Educator at Bcademy

The following is not intended to be a response to the article “Lo schema Ponzi dei Bitcoin” by Alessandro Guzzini, published last Saturday in the Italian newspaper La Repubblica. I’m just going to take a cue from that (very bad) article, using it as an example for a more generic discussion regarding the problem of Bitcoin-themed journalism.

Journalism, true or alleged, has always been problematic when dealing with specific topics, mainly because us humble readers are faced with a dilemma: to trust whether the writer is actually an expert or to invest time, resources and energy in becoming experts ourselves. 

The first option would be preferable, due to a simple matter of division of labour: we cannot all be specialists in everything. Our very civilisation is based on individual expertise and the division of roles. But how do we decide whether the writer is actually an expert? 

Very often, we rely on a network of public reputation, which, however, suffers from a serious problem of circularity: some groups of pseudo-specialists tend to legitimise each other, often across the various subjects and with logic very distant from the competence in the matter. This method’s poor results can be seen in the (necessarily rare) cases in which “journalists” deal with a subject in which we have happened to become truly competent: most of the time we shudder in the face of the accumulation of inaccuracies, ambiguities, exaggerations, misunderstandings or even lies that are written about “our” field of competence. 

We then turn the page and instinctively tend to forget the lesson learned, deluding ourselves that competence improves on other topics that we have less knowledge of. The famous American physicist Murray Gell-Mann has given the name (thanks to the writer Michael Crichton) to this type of phenomenon, called “Gell-Mann Amnesia effect“: when we leave our field of competence we tend to trust journalists again, even if whenever we were in our field of competence we have always verified their absolute unreliability.

If this effect has more general importance, in the case of Bitcoin the unreliability in question is even more serious, accentuated, relevant and rich in consequences. There are a number of reasons why this is the case:

  • Bitcoin represents something absolutely new, with little relevance to what exists and is familiar to us, it has arrived on the scene such a short time ago that it has not allowed the opportunity for mechanisms of authority and reputation (although they themselves are often fallacious) to form and consolidate;
  • Bitcoin is incredibly multidisciplinary and simultaneously involves topics such as applied cryptography, game theory, computer security, precision electronics, open-source software development practices, monetary history and theory, distributed systems engineering and more, in such an intricate way that even a renowned expert in one of the above fields often and willingly does not understand the context brought by other fields;
  • Bitcoin touches (and threatens) important interests, from the monetary policies of the central banks to those of financial monitoring of the national regulators, from the business of payments to that of credit, so much so that even people able to understand the phenomenon often have very strong incentives not to understand it.

So how can we overcome this circularity, learning to judge, in substance, the opinion about Bitcoin of some journalist (or alleged one)? 

If I were to simply assert, as an expert, that the article we are using as a “guinea pig” is full of inaccuracies, errors and factual falsehoods, it would simply be a case of “my word against his”, where I am the classic Mr Nobody, while the other party is apparently an alleged financial genius

There is no magic formula, but there are at least three methods to identify possible “alarm bells “, each of which requires considerable resources and efforts.

The first methodology concerns an assessment of the internal logical coherence of what has been written. It is an a-contextual verification, so to speak, that does not require any direct competence on the issues dealt with. The laws of logic are in fact universal and independent of the individual areas of specialisation. 

If the writer logically contradicts himself, we can use it as a red flag, a possible indication of a lack of reliability, or at least of a certain need to create a rhetorical position that often goes hand in hand with a lack of facts. In the article we are using as a guinea pig, we can easily find such clues. The author presents the following statements: 

“What would happen if the number of new bitcoin users was to slow down? Simple, the price would be doomed to fall. If, in fact, the possibilities of profit from bitcoin are all virtual and linked to the entry of new followers, the cost of the infrastructure is completely real and increases as the number of users and the unit price of bitcoin increases”.

Let’s try to logically analyse the sentence. It is stated that the cost of the Bitcoin infrastructure increases with the number of users (a false statement on the technical level, but for now let’s ignore this part to remain on the pure analysis of logical consistency) and with the unit price of the asset (a quite honest statement on the technical side, although it would require some further details). 

It follows that if “the number of new users slows down” (a number cannot slow down, let’s do some free work for the proofreaders of La Repubblica, replacing the incriminated sentence with “the growth of the number of users slows down”, which is more reasonable) the price should fall. 

This is clearly what is logically defined as a non-sequitur: on the basis of the premises used it could be assumed that the slowdown in user growth would eventually lead to a slowdown in price growth, not to its decline, let alone to its collapse. 

Even leaving aside this logical leap, the logic of the premises leads us to say that such a collapse, even if it were to occur, would also lead to a collapse in infrastructure costs, not to their maintenance, or to their growth, as hypothesised. In short, confusion and self-contradiction reign supreme. It is not, of course, a refutation of the author’s theses, but an alarm bell that provides a very useful heuristics. 

Similar logical contradictions, verifiable in an a-contextual way, can be found not only within the same article but also between different articles by the same author. If, in fact, the piece under consideration is based on the fact that Bitcoin has no real utility, apart from being a blind speculative expansion of a pyramid scheme, other previous contributions of the alleged expert base their alarmist thesis on the fact that Bitcoin is actually used by users in flesh and blood to “carry out untraceable transactions, even for large amounts“.

The second methodology concerns a verification of the author’s statements on more general themes and, hopefully, more familiar to the experienced reader.

One case concerns the anomalous definition of Ponzi scheme used by the author: in fact, he identifies with this expression any economic good whose price growth occurs due to an expansion of demand, for the same supply. It is unfortunate that this concerns substantially all the economic assets, from financial securities and national currencies to commodities and collectables. 

If the price of an asset rises with the supply being equal, or remains stable with the increase of the supply, it is precisely because of an increase in demand, or, as the author defines it, “the presence of a flow of buyers able to sustain the price”. 

Some particular asset classes are considered suitable for an investment because they remunerate the risk with financial flows (annuities, interests, dividends, etc…) but many others, from gold, wheat, to national currencies traded on forex markets, generate profits for the investor exclusively for the increase in demand in the face of supply: the dynamics that Guzzini identifies as typical of a Ponzi scheme.

In fact, anyone who knows the subject knows well that the expression indicates a specific fraudulent scheme in which the proceeds of the sale of a financial right to new investors are used to fake an annuity for previous investors, in a cycle of lies that is usually short-lived, requires a precise central direction and works mainly by simulating those types of financial instruments that, unlike bitcoin, gold or other commodities, should ensure financial flows of some kind, instead of a simple appreciation in the market. 

One could consider as an amusing intellectual provocation, the one according to which all economic assets (including therefore the main currencies whose price rises and falls with the demand) are actually Ponzi schemes that do not collapse. 

In fact, some national public pension schemes that are considered legitimate, institutional, respectable and safe are based precisely on the use of new participants’ payments to simulate imaginary revenues for previous participants.

But to identify bitcoin as such a single commodity, while excluding all other assets that follow exactly the same dynamics of appreciation (or depreciation), is simply intellectual dishonesty, not provocation. 

A second case concerns monetary history: the author clearly suggests that only collateral securities that can be converted to something can act as money. Anyone who is familiar with the subject knows that this is doubly false. 

First, because, for the great part of the history of monetary instruments, the function of money has been carried out continuously (in the case of precious metals even for millennia) precisely by economic assets that were not convertible into nothing, and did not represent any collateral: Rare shells, spices, beads, salt, votive medals, livestock, gold and silver (someone, in these cases, starts talking about “intrinsic value” as a part that differentiates a silver token from a Bitcoin output, forgetting that commodities whose direct consumption value was lower have always prevailed over those for which it dominated over monetary value, as two uses are generally mutually destructive). 

Second, because in the history of the last few decades, after the definitive termination of the Gold Standard decreed by Nixon, the main national currencies in force, including the Euro and the Dollar, are not convertible into anything, and do not represent any collateral even though they maintain, under normal political conditions and in the short term, a good stability of their purchasing power thanks to the demand generated by the laws on the legal tender and on the prohibition of monetary competition, in the face of a supply politically controlled by the decisions of the central bankers. 

Again: the criticism that the author makes of bitcoin could be substantially valid for Libra or for other convertible representative titles, as well as for any other form of money in history, including the collateral at the base of these representative titles.

The third methodology, the most demanding and expensive, is based on the possibility for the reader to become himself somewhat more “expert”, verifying the statements with the main sources available on the subject. Even this test would be blatantly failed by the article in question because anyone who knows the subject can confirm that it is full of “red flags” in terms of verifiable facts.

Some of them are rather banal, but in any case indicate very little familiarity with the field, such as the fact of confusing the name of the Ethereum platform with the name of the Ether token (an objectively intelligent distinction at the marketing level, made by the Bitcoin clone in question, which unfortunately does not exist in the case of Bitcoin and Libra, where the name of the asset and the name of the platform often intertwine in an ambiguous way).

Much more substantial ones, such as the amateur error of adopting long-forgotten falsified metrics that naively connect Bitcoin addresses with individuals: in reality, the richest addresses on the blockchain mainly represent the markets, called exchanges, on which hundreds of thousands of individual users hold and exchange bitcoins for other assets. 

In fact, this enormous difference between the number of rich addresses and the number of actual owners derives from a still technically immature use of the system, which would require, for security reasons, never to reuse each address more than once and not to leave the funds deposited on third parties beyond the time strictly necessary for trading: if these best practices were actually followed, the number of addresses would far exceed that of users, as opposed to what happens today, but in any case the two distributions would remain absolutely unrelated.

Some statements on price dynamics also reveal a profound lack of knowledge of the sector: for example, a supposed (and decidedly imaginary) causal link between the presentation of Libra’s whitepaper and Bitcoin’s current bullish cycle (the umpteenth, with characteristics similar to the previous ones in terms of dynamics, but carried on increasing orders of magnitude) was presented as factual data, or the statement referring to “the collapse suffered by bitcoin in 2018 seemed to have decreed the victory of the bubble thesis”, when, in reality, it too was clearly part of the continuous dynamic of periodic rises and corrections that characterises the price-discovery process of this digital asset, which at the end of 2018 had seen an increase in capitalisation, even if only considering the two previous years, unimaginable for the majority of traditional asset classes, and which at that point had by then irreparably compromised the credibility of the many premature “crocodiles“.

In conclusion, the reputation of many journalists in the Italian press today can only grow or be preserved thanks to the continuous influx of readers who take their articles seriously, who are in turn confused by the aforementioned “effect of Amnesia Gell-Mann” and consider the authors credible only in view of the fact that they are present in newspapers traditionally considered authoritative. This is a very difficult bubble to maintain, and it could burst disastrously. 

Basically a sort of intellectual Ponzi scheme. The undersigned does not provide financial advice, but if such an asset available on the investment markets had such a reputation, he would stay far away from it.