How to answer to whether Bitcoin is a Ponzi scheme? I was asked whether Bitcoin is a Ponzi scheme as I was explaining Bitcoin. In support of the question I was presented with the following scenario. I didn't know what to answer.


  Let's assume Bitcoin started today and had no transactions and no customers. Tomorrow, the first 10 people ever buy into Bitcoin. The price at that time for one bitcoin is $100. So, 10 people bought in at $100 thus there is $1000 in the Bitcoin economy.
  The next day, the price of a Bitcoin doubles and goes to $200 per coin. Now again hypothetically, let's say ALL 10 of these people want to sell their Bitcoin and cash out. The math now says $2000 will have to be paid out. 


How will this be handled as there was only $1000 in the system? I don't believe Bitcoin is a Ponzi scheme, but this particular equation does not add up. What am I missing here?
The Scenario is confused, because it assumes that there is only one side to a trade.
The scenario assumes that the money goes &quot;into the Bitcoin economy&quot; when people buy bitcoins. This is confusing, because it sounds as if there were only one side to the trade. You will find that the scenario doesn’t imply Bitcoin to be a Ponzi scheme, once you take a closer look at how trades happen.
People own bitcoins:
When Alice pays Bob $100 to buy one bitcoin, Bob is the new owner of the $100 and Alice is the new owner of one bitcoin. The money didn’t &quot;go into the Bitcoin economy&quot; – it went to Bob.
What changed was the Total Dollar Value or Purchasing Power of Bitcoin: People see that someone was willing to pay $100 for one bitcoin.
So, in your scenario that should rather be: There are currently 10 bitcoins in the system, and the spot price is $100. This gives Bitcoin a Total Dollar Value, or Total Purchasing Power of $1000.
There is no problem the next day either: When the spot-price increases to $200 per bitcoin, that means that one person, say Alice, was willing to sell for $200, while another, say Carol, was willing to pay $200 for a bitcoin. Apparently, Carol thought that bitcoin was undervalued at $100 and was willing to go higher with her bid. And who would blame Alice for selling her coin for a 100% markup in one day?
Now as described in your scenario, the other nine owners of bitcoins offer their bitcoins as well for $200 each. The question then is, whether there are enough buyers to support the price at $200. This boils down to a balancing of supply and demand: Perhaps, Carol wanted only one bitcoin. Then there will be nine offers to sell a bitcoin each at $200, but no buyers. In order to cash out, the sellers have to find someone that wants to buy though. There is no &quot;bitcoin economy&quot; that stores the value and pays them out when they want to exit their positions.
What's a Ponzi scheme?
In a Ponzi scheme, investors are enticed by promise of fixed returns. The operator manages all funds and uses investments by later investors to pay off earlier investors. As no value is generated, the operator must constantly attract more investors to keep the scheme running.
In contrast, Bitcoin doesn’t pay any returns or dividends, nor is there a central operator that could make any such promises. Each individual manages their own funds. Bitcoin's exchange rate is established by supply and demand. Much like a commodity, its current spot-price is that of the last trade between individuals.

Related reading:

Is Bitcoin a scam? further elaborates on the differences between various fraud schemes, high-risk investments, commodities, and currencies.
How do buy and sell orders work? explores how Bitcoin's exchange rate is established.
What happens to cash used to buy bitcoins? looks at the role of Bitcoin exchanges in people's buying and selling of Bitcoin.