Bitcoin – the Mother of All Pyramids?

Bitcoin – the Mother of All Pyramids?

Some people call Bitcoin a Ponzi scheme. I tend to disagree as I do not believe that the inventors of Bitcoin intended to operate a fraudulent investment operation.

But Bitcoin does bear some commonalities with a Ponzi scheme. What is more, Bitcoin has the potential to bring down not only one major investment scheme, but multiple ones. Eventually it may turn out to be the Mother of All Pyramids (MOAP).

Common wisdom has it that a Ponzi scheme requires an initial investment and the incentive for above-average returns. Moreover, the early investors and promoters of Ponzi schemes typically profit from the lack of investor knowledge. As far as Bitcoin is concerned, the anchor investors and supporters certainly benefited from the bandwagon effect they had been creating. Moreover, as a second characteristic of a Ponzi scheme, high returns typically attract new investors.Without any doubt this is also the case with Bitcoin.

Thirdly, existing investors in the Ponzi scheme typically remain loyal to the system as they see their investments growing. If at all, only fractions of the investments are withdrawn. Here, too, I suspect that this is the case with Bitcoin. Hence, whilst Bitcoin may not be precisely a Ponzi scheme, the exponential inflow of money into the system in recent times are highly reminiscent of a pyramid.

If Bitcoin shares some characteristics with a Ponzi scheme, it is worth looking at how Ponzi schemes typically unravel. First, if authorities do not stop the scheme, the promoters of the scheme oftentimes just disappear, pocketing as much of the investments as possible.

A second possibility is that the continuous inflow of investment slows down and that therefore incumbent investors do not make the monetary gains that they were expecting, leading to a larger withdrawal of funds. Thirdly factors external to the scheme, such as an abrupt decline in the overall economy forces investors to withdraw funds, rendering the entire scheme unsustainable.

Again, giving the founders of Bitcoin the benefit of doubt, let us assume they do not suddenly just vanish after swiftly trading their Bitcoins into real assets. However, it cannot be ruled out that we either witness a slow-down in the investment flow into Bitcoin or a downturn in the overall economy. So what is going to happen next then?

The Collapse of the MOAP

Expressed in US Dollars Bitcoin has currently a market capitalization of appr. 134 bn. Given that this sum is larger than the governmental budget of Finland it is quite sizeable. A loss of these funds would represent a severe blow to many investors. But that is “only” Bitcoin. Taken together the twenty largest cryptocurrencies in terms of market capitalization make up an investment sum of more than USD 222 bn. which is appr. the governmental budget of Russia.

But what has Bitcoin to do with these other cryptocurrencies? I would argue a lot: Anyone who has invested in Bitcoin early on must have been positively surprised about the development of his or her investment. It is furthermore likely that these investors have kept a close eye on other initial coin offerings. After learning the rather positive lesson of investing in a cryptocurrency, these investors may have invested parts of the gains they made with Bitcoin in other cryptocurrencies.

So, if we assume that Bitcoin resembles a pyramid with investment inflows at the bottom and only fractional outflows at the top which are reinvested in other Cryptocurrencies, Bitcoin investors are likely to have created “clones” of their Bitcoin pyramid. These clones are likely to exist with other cryptocurrencies.

In other words, the pyramid is most likely not a simple pyramid any longer, but by now it most likely resembles a Sierpinski pyramid. This structure named after the Polish mathematician Wacław Sierpiński, is a showcase example of self-similar sets. In a rather scary fashion it reminds me of what we are potentially dealing with in terms of Bitcoin and cryptocurrency phenomenon. I therefore call this formation the Mother of all pyramids or “MOAP”.

Sierpinski pyramid, Wiki


Being largely an unregulated field only very little solid data is available on cryptocurrency investments. Yet, it is fairly safe to say that the afore mentioned USD 222 bn. invested in the twenty largest cryptocurrencies is not the entire sum that may be at stake. Not only have cryptocurrency ETFs and hedge funds been developed in the meantime, but investors can also put their money behind Bitcoin derivatives, such as options, futures and OTC forwards.

If we bring to mind that during its best times Lehman Brothers had “only” a market capitalization of USD 60 bn., its bankruptcy nevertheless marked a seminal event that intensified what later on became known as the Global Financial crises. This string of events eventually wiped out assets of appr. USD 1300 bn.

What will further fuel this process in the case of Bitcoin is the lack of liquidity: whilst it is unknow who precisely owns Bitcoins it is a fair assumption that the wealth distribution in the world of Bitcoin is even more uneven that in the world at large. In a major downturn the few owners of vast amounts of Bitcoin are unlikely to become buyers, but are more likely to join the selling party for diversification purposes. This lack of liquidity which could also be observed in the recent Bitcoin upswings will intensify the downward spiral.

On a positive note, however, some things are here to stay. The concept of the Blockchain which represents the underlying infrastructure for virtually any cryptocurrency will survive even the worst fallout. Even after Bitcoin and co. are gone, this seminal piece of technology will continue its triumphal procession in virtually any field of business across the globe.

Prof. Patrick Schueffel

Patrick Schueffel is professor at the Institute of Finance of Fribourg’s School of Management. His research interests focusses on the areas of Entrepreneurship in Banking & Finance, Innovation, Strategy and International Business and thus on Fintech. He has published widely in academic as well as practitioner journals in Switzerland and internationally. Prior to his academic career professor Schueffel served as the Chief Operating Officer of Saxo Bank (Switzerland) and was a member of the Senior Management of Credit Suisse

This article appeared first on on Nov. 20th 2017

Bankenverband Newsletter: Die Ich-Bank

Es freut mich zu sehen, dass der Bankenverband meine Ideen zur Ich-Bank aufgegriffen und in seinem Bankenbrief vom 16.10.2017 skizziert hat!

Link zum Bankbrief: hier

Dr. Patrick Schüffel, Professsor, Institute of Finance, Haute école de gestion, Fribourg Chemin du Musée 4, CH-1700 Fribourg,,

The Concise Fintech Compendium

Do you sometimes feel lost in the Fintech jungle? Then this booklet may be the right guide for you:

More than 130 Fintech terms, acronyms and abbreviations explained in plain English.

Download your free copy here:
Schueffel (2017) The Concise FINTECH COMPENDIUM

Author: Schueffel, Patrick
Year: 2017
Title: The Concise Fintech Compendium
Place Published: Fribourg, Switzerland
Publisher: School of Management Fribourg, Switzland
Reference Type:  Book
ISBN: 9782940384440



Dr. Patrick Schüffel, Professsor, Institute of Finance, Haute école de gestion, Fribourg Chemin du Musée 4, CH-1700 Fribourg,,


Fintech Panel – VSV Mitgliederversammlung 2017

Fintech Experten Panel



Auszug aus:
The Swiss magazine of independent asset managers
p. 38 & 39

Dr. Patrick Schüffel, Professsor, Institute of Finance, Haute école de gestion, Fribourg Chemin du Musée 4, CH-1700 Fribourg,,

Asset Managers in the Fintech World – Doomed like Dinosaurs?

Excerpt from:

Tech Magazine
Special Edition 2017
p. 8 & 9


Dr. Patrick Schüffel, Professsor, Institute of Finance, Haute école de gestion, Fribourg Chemin du Musée 4, CH-1700 Fribourg,,

The Plight of the Lemming Robo-Advisor

(c) Nature Picture Library / Alamy, all rights reserved
(c) Nature Picture Library / Alamy, all rights reserved

There is a popular misconception about Lemmings. It is said that they commit mass suicide by jumping off cliffs when their population becomes too dense. However, this is quite far from the truth. Instead of committing suicide Lemmings will seek pastures new when their environment no longer serves their biological urges. As Lemmings can swim, they then may choose to cross a body of water in search of a new habitat. However, when doing so, many may drown as the fjords or rivers are too wide, thus stretching the Lemmings’ physical capabilities beyond their limits.

Financial markets and Lemmings

What is true, however, is that large populations of Lemmings move in one group, and it is this group migration that influences the moves of the individual Lemming. Once a significant share of the group has entered the water, the other Lemmings are likely to follow suit, inconsiderate of the potential fatality of their choice. Financial markets are not so different. Benchmarks are extensively being used and research in the field of behavioral Finance has yielded strong indications that herding behavior is rather pronounced. The broadly hailed Robo-Advisors of the Fintech age are likely to amplify this problem.

Mushrooming Robo-Advisors

Robo-Advisors are sprawling across the globe. A Robo-Advisor can be defined as a self-guided online wealth management service that provides automated investment advice at low costs and low account minimums employing portfolio management algorithms. Clearly, while there are exceptions, Robo-Advisors typically build client portfolios from ETFs, more specifically from equity ETFs. This model has worked fairly well as long as the stock markets were going up.

ETF monocropping

However, what will happen when the markets turn south? Most Robo-Advisors are not older than five years. Over the past five years the Euro Stoxx 50 went up 32%, the Dow Jones soared by 68%, and the S&P 500 grew by 78%. Against the backdrop of these well performing indices it requires no magic to put together a well performing client portfolio. Yet, in declining markets, the index-pegged Robos will just perform as poorly as their benchmarks.

No hedging functionalities

Evidently, the heyday of hedge funds are over. Clients are no longer willing to accept a 2/20 fee structure no matter the performance of their investment. Yet, as soon as markets move down for a prolonged period, many investors will start to liquidate ETF positions. These divestments will fuel another round of decline in indices. In this situation Robo-Advisors will be rather useless as they typically have no built-in hedge functionality. The herd of Lemming-Robos will just follow the rest of the market into deep waters.

Robo-Advisors must evolve

Not all is lost yet. Robo-Advisors need to make the next evolutionary step and get prepared for wider market downturns. Consequently, they should consider incorporating hedging functionalities into their offerings. Gambling on ever increasing stock markets is just too risky of a gamble. However, if the supply side, does not act, then the demand side should swing into action and diversify their ETF portfolios. Clients may therefore want to invest part of their assets into hedged investment structures of different provenance.

No matter the cause of the next financial market downturn, it is safe to say that it will happen. Lemming Robos which will not have enhanced their offerings by then, will not serve their clients well. A broad decline of equity indices may then lead to a true renaissance of the hedge fund industry. Human driven alpha generating strategies will then take back the lead from beta generating Robo-Advisors.

Dr. Patrick Schüffel, Professsor, Institute of Finance, Haute école de gestion, Fribourg Chemin du Musée 4, CH-1700 Fribourg,,