IOP3708 Ass 2.
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Ogundipe O.T
Investor Psychology (IOP3708)
Question 1
Given the current economic and financial conditions following the COVID-19 pandemic
since December 2019 and the aftermath of the global recession, which is frequently
referred to as ‘the new normal’, it i...
Given the current economic and financial conditions following the COVID-19 pandemic
since December 2019 and the aftermath of the global recession, which is frequently
referred to as ‘the new normal’, it is not surprising that many individual and
institutional investors are interested in new alternative financial assets that could
provide a higher level of returns. Since many investors are currently having a hard time
finding financial assets that could yield a high level of returns, Bitcoin quickly gained
the interest of investors as an alternative investment vehicle. Another quick alternative
investment vehicle for generating income has been a Ponzi scheme, named after Charles
Ponzi. What is the difference between Bitcoin as an investment vehicle and a Ponzi
scheme? Is Bitcoin a speculative asset or not? Discuss.
(a) The difference between Bitcoin as an investment vehicle and Ponzi scheme
Bitcoin is explained as like a commodity because it is a scarce digital object that does not
provide cash flows or dividends, whilst at the same time it does have utility according to
Schwartzer (2021), and it is also said to be only worth what someone else will pay or trade
you for it. Nieman descripts it as decentralised peer-to-peer payment network that is powered
by its users without the involvement of central authorities or middlemen, Niema (2015).
The investment returns are not promised, which means that Bitcoin was not found on
basis of promising potential Bitcoin holders returns, as compared to other virtual
currency investments to maintain its credibility.
There is an open source principle which means that there is no secrecy, for an
example in the process there is a pierce of open source software that requires majority
consensus for it to be changed, every line of code is known, and there is no central
authority personnel can change it and it is highly recommended that people must
adhere to Bitcoin tenets that advising to verify rather than just trusting in Bitcoin
business as Schwartzer (2021) elaborates.
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, There are no pre-mines as the first innovator of the Bitcoins Sotoshi Nakamoto never
gave himself a unique advantage in acquiring coins faster or more easily than
anybody else which was very crucial in the early stages to keep the network running
as Nieman (2015) explains.
Unregistered investments and unlicenced sellers are one of the features Bitcoin holds,
and that this is a red flag that Bitcoin has but this does not associate it with Ponzi
Scheme, and only shows that Bitcoin business holders must be very cautious in their
dealings, and this serves as sign that there is high risk associated with it as Baur, Hong
& Lee (2017:179) are reflecting in their empirical data analysis.
There is no leader that serves as a guider of Bitcoin growth, which implies that
Bitcoin growth is self-sustaining and there is one that is important in its ongoing
developments and operations as Schwarter (2021) holds.
The Bitcoin’s correlation of returns to other assets returns is weak which shows that
Bitcoins is different from any of the traditional asserts that exists except the fact that
there are minor differences when compared to Gold as Nieman (2015) details.
Ponzi Scheme is an investment fraud that is characterised by paying existing investors with
funds collected from new investors and the organisers of the scheme often promise to pay the
money and generate higher returns with little or no risk as Schwarter (2021) details. For an
example Ponzi Scheme is categorised and an outright fraud given its structure and formations
and it is doomed to failures.
The scheme promises higher returns with little or no risk which is quiet contrary with
the basics of investment that shows that if the returns are higher the risk too is higher
as per Schwarter (2021). This is a suspicious signal. For an example economic theory
always measure returns with risks and once there is no risk then one must be very
sceptical and worrisome and understand that there is a potential hazard associated
with the scheme.
Unregistered investments and unlicenced sellers are one of the main characteristics
like that of Bitcoin but the difference is that Bitcoin is a speculative asset it does not
have intrinsic value compared to Ponzi Scheme that is opposite.
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