JPMorgan Goes In On Bitcoin: Kolanovic Asks "Are Cryptocurrencies A Pyramid Scheme?"

Tyler Durden's picture

One day after Jamie Dimon slammed bitcoin, sending its price reeling after he called the cryptocurrency "fraud", warning it "won't end well", and threatening to fire any JPMorgan trader caught trading bitcoin "for being stupid" (a move some dubbed diplomatic genius as JPM's 20% guide down in trading revenues got zero mentions yesterday) JPMorgan has released its unofficial guide on bitcoin. While that was perhaps to be expected as we are confident the bank was flooded with phone calls from clients who were long the best performing asset class of the year, if not decade, what is much more surprising is who the author of said report was: none other than JPM's notorious quant guru, Marko Kolanovic, who simply asks "are cryptocurrencies a new asset class or a pyramid scheme?"

While we know how Jamie Dimon feels, Kolanovic's conclusion is less draconian, if mostly along the skeptical lines of his boss' thinking: "While we don’t know whether the price of cryptocurrencies will go up or down in the near-term, the history of currencies, governments and financial fraud tells us that the future for cryptocurrencies will likely not be bright."

Here is the full report from JPMorgan:

Are Cryptocurrencies a New Asset Class or a Pyramid Scheme?


What are Cryptocurrencies? Recently, a number of sell-side market strategies and researchers opined on the merits of investing in Bitcoin and other cryptocurrencies. Some went as far as introducing price targets and making relative value calls on cryptocurrencies vs. other asset classes. The number of cryptocurrencies now existing is in the hundreds (~$150bn total assets), and there are dozens of cryptocurrency hedge funds launched (e.g. here). Developments arounds distributed ledgers and the concept of digital currencies are fascinating from a technological point of view. It is likely that some of these technologies will become very valuable. The supply of cryptocurrencies is not controlled by central banks, and they can be used to avoid capital controls, enable tax evasion, or fund transactions on the dark web. As such, cryptocurrencies may ideologically appeal to proponents of small government (however, a paradox is that distributed ledger technology in principle enables unprecedented centralized access to the digital records of any and every transaction).


In this note, we want to highlight the risks of cryptocurrencies. Cryptocurrencies cannot be reliably valued and they have significant ‘tail risk’ that could come in the form of a regulatory ban. Moreover, the whole cryptocurrency market exhibit some parallels to fraudulent Pyramid schemes.


Are they Currencies? Currently, there are few legitimate reasons to use cryptocurrencies apart from speculation (e.g. any transactions can be done electronically in country currencies such as USD, EUR, etc.). The claim that cryptocurrencies have lower transaction costs is inaccurate as an asset’s transaction cost is almost always driven by its volatility rather than processing fees (e.g. bitcoin volatility is ~100%, or ~15 times the average currency volatility). Valuing cryptocurrencies as traditional currency is not possible as there are no underlying ‘economy’ to assess supply/demand for its goods and services, there is no fundamentally driven inflation, there are no ‘rate differentials’, etc. Perhaps more importantly, there is no organized power behind this currency to e.g. ensure its long term viability, secure trade, enforce its convertibility into other goods and services, or provide investor fraud protection.


Are they Commodities? Of course, having a government behind a currency is not a guarantor for its survival. In fact, on a long enough timeline, all currencies that were not made of a valued  commodity such as gold or possessed exceptional artistic value and rarity became worthless. Should one look at cryptocurrencies as an alternative to Gold rather than country backed currencies? While there is no government to back up either gold or cryptocurrencies, gold has a track record of outliving governments and being use as a store of value going back to the beginning of civilization (at least ~7,000 years). Unlike gold, cryptocurrencies are not engrained in human psychology and backed up by the longest possible backtest. The claim of scarcity of cryptocurrencies via specific code implementation that limits their production is bogus as well. There is no scarcity as virtually anyone can create a new cryptocurrency, and existing algorithms can be modified (e.g. hard forks) to increase the amount of cryptocurrencies.


Can they ‘Default’? If the use of cryptocurrencies were to increase to an extent that they start competing with traditional ‘country’ currencies (e.g. start interfering with the ability of central banks to control money supply, governments to collect taxes, impose sanctions or capital controls, etc.) they would be quickly regulated or outlawed. While similar attempts were made historically on the use of precious metals, cryptocurrencies don’t have multi-millennial track record and place in human history to ensure survival. Even if the cryptocurrencies don’t threaten governments’ primacy on monetary issues, their use may be irritable enough (e.g. avoiding capital controls, evading taxes, dark web, etc.) to prompt a government crackdown. We are already seeing this with recent developments from China and this trend is more likely to continue.


Are they Pyramid Schemes? another worrying aspect of cryptocurrencies are some parallels to fraudulent pyramid schemes. Initiator of a pyramid scheme often ensures ownership of a disproportionally large share of future profits. For instance, in the case of bitcoin, it is believed that an unknown person (or persons) known as ‘Satoshi Nakamoto’, before disappearing, mined the first 1-2M coins or ~10% of the coins that will ever exist ($4-8bn USD current value).  While initial mining requires a negligible effort, the benefits for subsequent participants start diminishing. Mining becomes progressively more difficult, and eventually unprofitable, marking the likely end of a scheme. A way around this in Pyramid schemes is to bypass the original chain and start a new one of your own. The cryptocurrency analogy would be to start a new coin if it is more profitable than mining the existing one. This can work as long as there are enough willing and uninformed buyers.


While we don’t know whether the price of cryptocurrencies will go up or down in the near-term, the history of currencies, governments and financial fraud tells us that the future for cryptocurrencies will likely not be bright.


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Raffie's picture

Asking bankers what they thing of cryptos? ROFL

Gee what would these big bankers have to say about Bitcoin that would be anything but highly toxic.

Guess we could ask what did Hitler think of the Jews.

nope-1004's picture

I agree.  I don't like BTC, however asking a banker his thoughts on an alternative currency, who meanwhile is technically insolvent and reliant on a printing press to stay alive (as long as other nations still accept the USD), is so gay.


ShorTed's picture

They're late to the party and trying to get a better entry point...strictly talking their book.

realmoney2015's picture

They may not be pyramid schemes, but they aren't real money. Gold and silver hold their value over the years, decades and centuries. 

What will Bitcoin be worth in 2050? My guess is 0!

realmoney2015's picture

We need a sound monetary system based on real money. We need to end the Fed and have gold and silver be legal tender like the us constitution states. 

To help raise awareness and spread the message of sound money, we make candles with silver coin prizes inside.

They help spread the message and help people start their silver stack!

End the Fed! Until we do, no major positive changes will happen. 

MillionDollarButter's picture

The future of all currencies will be blockchain.  Whether Bitcoin remains viable depends on if it is manipulated out of existence.

I suspect if the bankers are hating on it, they've decided it must go.

eforce's picture

I think the problem with the establishment correctly labelling them IMO as (or similar to) pyramid schemes and to avoid them is people have so little trust in them that they may just do the opposite.

CH1's picture

I heard it causes acne too!

Gaius Frakkin' Baltar's picture

It's funny how they didn't care about financial fraud until cryptocurrencies became mainstream and started challenging (((their))) financial system.

Just like how they didn't care about identity politics until White nationalism became mainstream and started challenging (((their))) political system.

Occident Mortal's picture

The cryptocurrency universe is holed below the water line.

Block chain is a useful tech and banks will probably adopt using block chain. But they will use it for sovereign currencies like USD, RMB, EUR and GBP.

Block chain will just be another form all of these currencies use including... bank notes, cheques, VISA, BACS, CHAPS, SWIFT, etc, etc.

BTC is worthless when it merely acts as catnip for FBI and GRU.

RedDwarf's picture

There will always be a place for decentralized blockchain money.  The lack of 3rd party counter-risk and secure anonymous transactions are too useful.  Attempts to ban this will fail because said ban is unenforceable.  All they can to is go full totalitarian in a futile attempt to ban them and in doing so they will destroy the economy anyway and lose their own power base.

Capital goes where it can grow the fastest.  That is going to be those places that have greater liberty and free markets.  That means less restraint and laws on things like decentralized crypto.  Elites that attempt to maintain their power through force of arms will find they are rulers of an ever weaker and irrelevant 3rd world nation.

silverserfer's picture

Blockchain encryption is a pathetic attempt at creating finite supply within a set parameter. Since anyone can now create one of there worthless sets of codes why would they be worth anything. And as for governments using them, that would apply a constraint on supply of Fiat, who is that stupid to think governments are going to constrain their spending by adopting blockchain?  IF they were that is the purpose of the GOLD they hold.  

This FAD will end when enough of the crypto fools have been parted with their money.

mpnut's picture

Let them say that to Venezuelan's whos currency is as good as toilet paper.  Gov't are scared and rounding up BTC miners in Venezuela..  As long as gov't and Central Banks control Money, there will always be demand for currencies that aren't controlled by them.  Why do you think Gold has lasted this long?  Gov't CANNOT make GOLD.. Remember that folks..  BTC is just one of the many currencies out there that have limited supply and its why you are seeing the value go up. Perhaps ICO's are 98% scams, but most will fall victim to progression anyway.  Eventually the fittest survive, and it will just be a handful.  Crypto coins are in the early stages, and BTC being the oldest at inception in 2008 is relatively still young.  A bubble is when you start to see more institutions trying to hype this sector up while trading it.  Right now though, I think they missed the boat.

OCnStiggs's picture

And "painful rectal itch!"

peddling-fiction's picture

Did he just bad mouth the US Dollar?

Nostradumbass's picture

The future of all currencies will be blockchain

If this be true then:

The future of free people will be barter

slightlyskeptical's picture

You are fucked. Adapt or face a shittier life. i don't like it either, but the future isnt going to wait for us. You have to adapt to the times we are in. it is a certianty that before long there will be no paper money and everyone will have a new biometric ID and Trump will demand everyone's gold so he can gold plate the White House walls and everywhere else. 

tmosley's picture

>90% of people will choose to starve to death trying to use inefficient barter rather than use the turnkey solution provided by cryptocurrency


Nostradumbass's picture

To be chipped or not to be chipped - that is the question...

Croesus's picture

Just because banksters like the JP Morgue are a bunch of creeps, does not make them stupid.

The end sentence says it all.

There are simply too many powerful interests involved, and the only way they'll say "We Love Crypto", is if they're talking about THEIR crypto.

That's not to say you can't do okay trading it on the greater fool theory, but to look at it as a long-term holding is penny wise and pound foolish.

Creepy_Azz_Crackaah's picture

No! Buy shit from me, Zhers!!!

(Comment before my advertisement would have taken too much time and energy to type)

Rhetorical's picture

 gold is gold is only worth the energy that it requires to mine it

Asteriid mining however far fetched isnt more than a decade or 2 away and will crash metaks prices. A far fetched idea you say? So is 30000 times returns in 3 years from crypto. I own silver dont get me wrong but it is money you can buy anything life included with crypto. Though most 90% or more are scams

BallAndChained's picture

Asteroid mining for gold is assinine. It would be too expensive to build a rocket and go into space for it.

You can't tell if an asteroid is full of gold just by looking at it. Those are fake news stories. On earth can miners know where gold is just by looking at it? lol They need to drill deep underground and do an assay to know there is enough economical gold.

Asteroids are not all shiny and colored like gold, all smelted and refined for you lol Only a tiny fraction of the rock is gold.

tmosley's picture

>It would be too expensive to build a rocket and go into space for it.

It will cost a hell of a lot less to get a few mining robots into space than it costs to take water into space, which will be the first mining target.

Gold and other PMs will be a byproduct which will develop into an industry of their own. Asteroid mining will make PMs cheap enough to use in regular industrial applications. Get ready for a new generation of awesome materials contianing gold, platinum, palladium, and silver. Such uses will be facilitated by DRAMATICALLY LOWER PRICES.

But don't take my word for it. Hold your buggy whips until the last work horse dies of neglect.

BallAndChained's picture

Your response shows you are totally ignorant of how much it cost to explore and extract gold on earth (notice i used your favorite pet word ignorant that crypto pumpers always use? lol). Not all rocks contain gold. You're not going to get gold as byproduct of any rock and all the precious metals won't conveniently be all together for you. It cost a lot on earth for exploration and drilling just to find a deposit. You think it will be cheaper to carry out exploration and drilling on asteroids? It cost over $100 million to build a processing plant on earth to crush the tons of rock and extract the tiny few grams of gold. You think it will be cheaper to build that in space? Metals that are rare on earth aren't suddenly going to be common in space.

The earth is already in space you fool. The earth is typical of what you will find in the rocks in space. You are living in a fantasy.

Txpl9421's picture

What was your silver going to be worth in ten years--back in 2007.

All of this worship of metals is just as useless as bitcoin.

Jimmy Jimmereeno's picture

You lack historical perspective and therefore your question paints you as a fool.  I am no silver bug but it is a fact that a 1964 (or earlier minted) U.S. quarter has a melt value today of about $3.25.  The purchasing power of the coin has been maintained -, if not increased, over the long-term whereas, in that same time frame, the purchasing power of fiat has decreased by 97%. 


Blue Dog's picture

But Bitcoin could be worth $10,000 by the end of the year.

Creepy_Azz_Crackaah's picture

Cryptos aren't pyramid schemes. The correct term is Ponzi.

Whomever gets in first wins the most - until it all collapses.

BallAndChained's picture

It has features of both Pyramid scheme and a Ponzi.

Bernie Madoff would be proud.

CH1's picture

Do you understand that other people are not remaining in ignorance?

Creepy_Azz_Crackaah's picture

We are all in bliss. Do you understand this?

CH1's picture

I understand Bitcoin. And like most people who do, I like it.

BallAndChained's picture

Read the article The Rise and Fall of Bitcoin

Satoshi was telling people not to use bitcoin in the beginning because he wanted to easily mine millions of bitcoins first.

"I make this appeal to Wikileaks not to try to use bitcoin. Bitcoin is a small beta community in its infancy. You would not stand to get more than pocket change, and the heat you would bring would likely destroy us at this stage.”

At the top of the Pyramid, it is vastly easier to mine because:

1) It is easiest to mine when there is only 1 miner. The math puzzle gets harder and harder as there are more and more miners. And the mining rewards need to be split between more miners. Satoshi as the only 1 miner got all the rewards to himself.

2) The mining reward gets cut in half as time passes, artificially creating scarcity. The people at the bottom of the Pyramid get less and less.

Satoshi is laughing at you at the top of the Pyramid.


Pyramid Schemes and Ponzis are illegal according to the FTC (Federal Trade Commission)

If you hate scams and scammers, and are sick of all the cryptocrap pumping, file a complaint with the FTC:


CH1's picture

LOL... did you even notice that the article was from 2011?

(And I'll just ignore the remaining mis-characterizations and ignorance.)

BallAndChained's picture

Are you an idiot? Of course i knew it was an old article. That doesn't change the facts. You crypto pumpers always accuse people of ignorance, trying to hide the scam behind techno babble to fool the masses, but can't face the facts that this is a Pyramid/Ponzi. 

Satoshi was mining before 2011. That article is a history of how easy it was to mine bitcon early on. People now think it is so scarce. It wasn't so scarce in the beginning at the top of the Pyramid. The scarcity is all contrived. Designed and programmed into the code.

If Satoshi was so caring of the common man, he would have made the mining fair where you get the same reward at the beginning and at the end. Instead he didn't and made the mining the easiest for himself to profit the most from it.

A requirement for a good currency is that it needs to be fair for everyone, not for the top 1% to profit the most from it. This Pyramid/Ponzi scheme is obviously not equally fair.

3rdWorldTrillionaire's picture

Mining was easier in the beginning because the math problems were simpler... it's like solving for the next prime number, the first 100+ are easy, it's once you get past that and they get further and further apart...

RedDwarf's picture

"Cryptos aren't pyramid schemes. The correct term is Ponzi.

Whomever gets in first wins the most - until it all collapses."

List the properties of a Ponzi scheme, then show how bitcoin maps to those properties.

Creepy_Azz_Crackaah's picture

Property 1: Whomever gets in first wins the most - until it all collapses. Same for bitcoin.

Property 2: Nothing real backing Ponzi schemes. BTW - "Rarity," like the rare dung of the Northern Hairy Nosed Wombat, doesn't make it valuable. Same for bitcoin.

The list goes on...

mangosandsativas's picture

math backs bitcoin. you've heard of math right? the universal language that is encoded in everything in the universe? it's kind of a big deal.

Creepy_Azz_Crackaah's picture

Math backs ALL crypto, building designs, financial vehicles, etc. Not exactly a shocking statement.

BallAndChained's picture

> math backs bitcoin. you've heard of math right? the universal language that is encoded in everything in the universe? it's kind of a big deal.

Math is extremely rare, once you use it, it is gone forever. Buy math and electrons before they become extinct!

I have some very scarce math and electrons to sell you. Only $10,000 a piece. It is a bargain, buy it now before math goes to $1 million!


Creepy_Azz_Crackaah's picture

As are all https interactions. Your point?

tmosley's picture

Ponzi schemes pay early investors via a DIVIDEND, moron. Not through capital appreciation.

If you can't be bothered to learn the meanings of the words you use, you have no place in civil society. Drop from helicopters with the commies. Same bullshit perversion of language to justify the same idiocy.

Creepy_Azz_Crackaah's picture

LOL! Well, now that you've called me a moron I see your point. /s

Keep pumping your speculation vehicle. And, yes, calling people stooooopid **really** is the best way to convince them to buy into your Ponzi scheme.

"What??? I'm stoooopid you say? OK then... yes, I'll buy some."

Buckaroo Banzai's picture

Is BitCoin a pyramid scheme? Obviously not, as a pyramid scheme must be able to expand infinitely to absorb as much incoming money as possible, while the supply of BitCoin is locked down thanks to iron-clad cryptography.

How about let's ask, is JPM a pyramid scheme? The answer is obvious on its face: absolutely yes.

Pleb_From_Windsorstan's picture

Janet can put a bid of 100,000/BTC and that is that. It's a pyramid scheme relying on CONfidence.

I dare Janet or any bankster to put a bid of 100,000/Oz of Gold. So, which is the pyramid scheme?

Txpl9421's picture

Gold and silver are fine for exchange face to face. Try paying for a shipment from Asia to America with gold. It would take weeks.

It takes about 15 minutes with crypto.

BallAndChained's picture

> Obviously not, as a pyramid scheme must be able to expand infinitely to absorb as much incoming money as possible

Bitcon is absorbing as much incoming money as possible. Massive pumping and giving new suckers a smaller and smaller fraction of a fake coin for higher and higher exorbitant prices.

Obviously a huge Pyramid.

Satoshi and his buddies at the top of the Pyramid are laughing at you after they easily mined millions of bitcon for free, while you pay $5000 per electron bit.