Is SteemIt a Scam? It’s Complicated

I’ve seen loads of posts considering whether SteemIt is a Ponzi scheme, pyramid scheme, some type of financial scam, or whether it is legit, but none have really gotten to the nub of the issue and followed the money trail.

I came across SteemIt a while ago in an interview article on the TheCreativePenn.com. At first glance, a platform that pays you for writing blogs and articles seems beyond belief, and usually, when something looks too good to be true… it is a scam.

However, I was intrigued, for reasons I will go into later.

I looked on line for details of the scam or something to give me confidence. The best I could find was an article from a Steemian saying, ‘Yeah, it looks like a Ponzi scheme, but it isn’t.’ That didn’t exactly instil confidence.

Having worked in finance, and designed a few investments myself, I’m always happy to give new finance schemes the benefit of the doubt (lots of scams out there, but some really great legit peer to peer schemes too – real gems), particularly one that on face value looks to have so much potential.

I decided an in depth investigate was required - so let’s take a journey into the money trail.

The keys to evaluating any financial scheme are:

1. Who is making money?
2. Who is losing money?
3. What happens when new investment ceases?
4. Identifying the risk factors
5. Evaluating the risks

If the answer to test 1 is ‘Also me’ I move to test 2. If the answer to 2 is also ‘Me’, I move on to evaluate the next scheme, but if the answer is ‘Not me’ I move on to test 3.

If the answer to test 3 is ‘nothing’ or ‘continued growth’ I start to identify the risk factors – the catches, the fees, diversification, and real growth rates.

Finally I evaluate if the risks are worth me getting involved.

Since I’ve joined SteemIt and am posting his evaluation on the platform, I’m sure you can guess it passed tests 1 - 3 – well almost. But when it comes to risk factors and the real reasons I am here, things become more complicated.

This needs some explanation and a detailed examination of the above tests – this may require more than one post.

Test 1: Who is making the money?

By money, I mean real world money (fiat). Clearly, some people are making money out of Steem, in a few cases a considerable amount of money. Their ability to make money, however, is dependent on the willingness of others to convert their Steem tokens into cash. This transaction is a matter of both trust and confidence.

Why confidence? Well, what exactly is money? The plastic note in my pocket is nothing more than a token I can exchange for real goods – food, fuel, shelter, etc. We call this token, money.

Money has taken some strange forms throughout history: five foot stone circles, cocoa beans, birch sticks (a staple of Medieval European credit transfer), cheese, salt, fur, beads, bottle tops, goats, camels, teeth, quantum superpositions (ok so that one is still to come, but it isn’t far off, and is no more daft that using ones and zeros).

No one would consider exchanging goods for this piece of plastic in my pocket, which has no intrinsic value of its own, unless they were confident they could also receive goods of equal value in exchange. If enough people have confidence in a particular token, it becomes widely tradable, and we call it ‘money’.

For a while, in the early 2000’s, packages of sub-prime mortgage debts became tradable between financial institutions. These financial instruments, for a short while, were treated as ‘money’.

What happened when confidence collapsed in sub-prime financial instruments, in 2007, is exactly what happens to any token when confidence evaporates: the system collapses. Traders retreat to exchanging goods directly for other goods (barter) or look for an alternative token in which they still have confidence – gold is always popular – though these days it’s usually the US Dollar.

Confidence is also required when one type of token is exchanged for another type. There has to be confidence in both currencies and their relative value to each other. As the amount of confidence required to trade in two tokens is intrinsically more risky that just using one, the person who deals in tokens normally charges a fee in recognition of the risk they are taking. The more conversions a token has to make before it becomes usable real money, (such as Steem to Bitcoin to US Dollars to Sterling) the larger the risk the agent takes, therefore, the higher the conversion fees.

Some of these money traders charge more than others, some charge extortionate rates, some put other stumbling blocks in the way of would be investors, such as minimum trading amounts.

So the token we call Steem only has value, outside of itself, if enough people have confidence in its relative value to other types of tokens (currencies).

If no one is willing to convert Steem to any other currency, it has no value, which means no one will make any real money.

Now, I realise SteemIt can have value without necessarily creating any real world money - Steem Power is a transparent recognition of this, but to pass my tests a scheme has to produce real world money.

So test 1, who makes real money out of SteemIt?

1. Money traders.
2. Those who have enough Steem to convert to real world money.
3. Possibly me, if I can make enough Steem to meet minimum conversion requirements.

Yes, there are costs and minimum requirements associated with converting Steem to real world currencies, but 70% (as a random figure) of something is still better than 100% of nothing.

There are not many ways of turning content creation into pure money and SteemIt has the potential to provide just that.

SteemIt therefore passes test 1: I can also make money - eventually.

In the next post I will consider Test 2: Who is losing money. Is SteemIt is a Ponzi scheme or Pyramid scheme or not – the answer, as I said in the title, is it’s complicated.

Image by giphy.com

Other posts in this series:
Is Steemit a scam? Test 2
Is Steemit a scam? Test 3
Is Steemit a scam? Tests 4 & 5
Is Steemit a scam? What I'm really doing here