Years ago, when Robert Kiyosaki was asked what he thought of a multi-level marketing (MLM) business, he replied, “I have heard rumors that these network marketing businesses are just pyramid schemes and are illegal” (Robert Kiyosaki, The Business School For People Who Like Helping People, TechPress, 2001, 5 & 6). Judging from social media comments, today there are still many who think MLM and pyramid schemes are synonymous. Needless to say, the folks who make such comparisons have a negative opinion of MLM. Network marketing/MLM has its defenders (Kiyosaki, for example, changed his mind about MLM and now embraces it), but no sensible person is going to admittedly support a pyramid scheme. If the young Kiyosaki had been correct, and MLM is a pyramid scheme, then one wouldn’t need to be a lawyer to presume that MLM is illegal. Of course, MLM is legal, so it’s doubtful that it is indeed just a pyramid scheme. Especially since the crash in the values of crypto-currencies, all of the usual detractors (“progressives,” leftists, etc.) have been hurling abuse at “crypto,” its investors, and the celebrities who promoted it. Bitcoin has, for a while, been accused of being no better than a pyramid scheme. The charge that it is also an MLM scheme is either new or redundant, given your prior views about MLM. It’s fashionable to hate MLM businesses, so the comparison between Bitcoin and MLM is troubling enough. Even more disturbing, if I deny the charge against Bitcoin, there are those who will conclude that I have been duped myself. I’ll, therefore, try not to deny or confirm any specific accusation. To the best of my ability, I’ll lay out some facts, and I will let the reader make up his own mind.
First, let’s discuss what Bitcoin is. A book that called Bitcoin “tomorrow’s currency” admitted that Bitcoin “is largely an imaginary piece of code, with no intrinsic value” (Daniel Forrester & Mark Solomon, Bitcoin Explained, n.d., 13). Although Bitcoin has been called “digital gold,” the authors of the book contrasted it with e-gold, a failed* attempt to remonetize gold and silver. Unlike e-gold, Bitcoin is a currency that isn’t backed by anything. As the authors explained, “Bitcoins, like all currencies today, are worth what they are exchanged for. There is nothing backing Bitcoins. There is no gold, silver, or value of any kind supporting a bottom level for them” (Bitcoin Explained, 20). When people, such as Bobby C. Lee, say that Bitcoin is like virtual gold, they can point to the fact that Bitcoin is “mined” and, more importantly, has to be “mined”: “Gold and silver are mined into existence…. Bitcoin has a similar set-up, though not as costly or involved. The key difference is that mining for Bitcoins involves solving codes or cryptographic mathematical puzzles” (Bitcoin Explained, 57). According to the authors, “Bitcoins, gold, and silver all share one crucial aspect in common. They are all relatively rare…. [R]arity is the idea backing Bitcoins” (Bitcoin Explained, 13 & 21). As mentioned, Bitcoin is virtual gold. It is also considered to be an alternative currency. Potentially, it could be a substitute for both fiat money and, with caveats, gold. It’s worth noting that experts were skeptical about gold, even in its demonetized form, being supplanted by something else: “There is … little evidence that mankind, especially in times of economic or political crisis, is as yet keen to substitute a different metal, a manmade substitute, or paper money … for the accustomed gold” (Rudi Weisweiller, How the Foreign Exchange Market Works, 1984; New York: New York Institute of Finance, 1990, 86). Despite the similarities between Bitcoin and gold, people just aren’t accustomed to Bitcoin. Also, gold has at least some nonmonetary uses that apparently have nothing to do with its historic role as money. The authors of Bitcoin Explained erroneously referred to these nonmonetary uses as “intrinsic value.” Regardless, the authors, who nonetheless embraced Bitcoin, conceded that Bitcoin doesn’t have a nonmonetary use. Of course, neither does paper money. Early in their book, the authors pointed out that people can buy some items with Bitcoin (Bitcoin Explained, 14). When hardly any merchants accepted Bitcoin as payment, it was much easier for people to accuse Bitcoin of being a pyramid scheme. If no one used Bitcoin for anything, then buying it wouldn’t even be speculation, in the strictest sense of the word. Instead, one would invest (gamble?) in the hopes that others would invest later. Certainly, some of the big Bitcoin investors do try to recruit others in some sense, but their “recruits” are future investors. MLM involves recruiting people who will try to sell a product or service. Speculating in Bitcoin is more like speculating in gold or in foreign exchange than it is like a MLM scheme, but there might be a grain of truth in the critics’ attacks on Bitcoin. We’ll take a moment to explore that possibility.
MLM businesses can make ordinary people wealthy, but normally, being very successful is dependent on an ever-growing network of recruits. Some evidence suggests that Bitcoin’s success depends on an ever-growing number of people being recruited. Consider the following passage from Bobby C. Lee’s book The Promise of Bitcoin: “Bitcoin itself isn’t a for-profit enterprise. It is a decentralized network that has created an alternative to our current monetary system. Its goal, as much as you can say the Bitcoin platform has any goal, is to win converts, not profitability” (73). The use of the word “converts” seems innocuous, but it is troubling. One MLM business that I won’t name has been called a cult, so Lee’s words are arguably a “smoking gun” if you are an opponent of Bitcoin. We, however, shouldn’t base an objection to Bitcoin on something so superficial. There are many goods that are not worth anything unless they are used by several people. A fax machine or phone is not useful unless other people have them. It’s understandable that early adopters of a new technology would want others to also adopt the technology. The value of the new technology is thereby increased, but we are talking about use-value, not pecuniary value.
Lee acknowledged that Bitcoin is “still an unknown for much of the world” (Promise of Bitcoin, 23). Obviously, a large holder of Bitcoin such as Lee stands to gain financially if more people learn about Bitcoin and invest 2% of their wealth in Bitcoin. Although it’s anecdotal, I’ve read about people trying to talk their family members into buying Bitcoin. Similarly, people involved in MLM are notorious for bothering family members and co-workers in an attempt to recruit them into the MLM business. In both cases, the person already in the network (Recall that Lee used that term too) will financially benefit (or increase his chances of benefitting). It makes you wonder, but even if we assume the worst, the key difference is: MLM recruits you so that you can sell or ultimately recruit a seller; Bitcoin recruits you so that you can be a buyer. If the Bitcoin “recruiter” then sells his Bitcoin, there’s a term for that kind of “recruitment”: “pump and dump.” When crypto crashed recently, celebrities who promoted crypto were accused of pumping and dumping at the expense of many small investors. Whether the accusations are true or not doesn’t concern us here. The takeaway should be that, even if we assume that Bitcoin is a scam, MLM appears to be a different kind of enterprise.
Perhaps, the differences don’t really matter though. The MLM business that I’m familiar with, the one that was labelled a cult, did require people to pay a membership fee before they could join the network. How is such a transaction all that different from buying a small amount of Bitcoin? Even if we ignore the membership fee, people in the network will have to either sell the product or recruit someone who will if they ever want to earn any commissions. Bitcoin, on the other hand, being a financial asset, could go up in value even if the investor doesn’t try to get his peers to buy it. He could just be lucky. Now that’s what I call passive income. I suspect though, based on what Bobby C. Lee wrote, that the long-term growth in the value of Bitcoin depends on new people joining what even Lee called the network. In that respect, Bitcoin does resemble network marketing. As I wrote earlier, I’ve tried to address concerns with just the facts. I’ll leave you to decide whether Bitcoin and MLM are just two versions of the same scheme.
*The U.S. government essentially shut it down.
Comments