Unfortunately, Poyais did not exist. MacGregor had fashioned a tale to fit the obsessions of the age, democracy and settlement, along with a vogue for exotic investments such as Latin American bonds. Acquitted in an early example of failure to prosecute complex fraud, he then ran into competition from lesser scam artists imitating his hoax.

The latest incarnation of MacGregor, in a tradition that runs from Dutch tulip bulbs through the stamp scheme of Charles Ponzi, is MMM, a “social financial network” run by Sergey Mavrodi, a convicted fraudster and former Russian parliamentarian, powered by YouTube and the cryptocurrency bitcoin.

New members must purchase bitcoins to join MMM, and then receive a bonus for online testimonials describing their improbable profits. The fad helped to power an explosion in the bitcoin exchange rate, from less than $200 in September to more than $500 per bitcoin last week.

Yet the question prompted by the recent movement in bitcoin is whether it marks a resurgence for the cryptocurrency, or merely highlights its turn in the endless parade of get rich quick schemes, which prompted Walter Bagehot, former editor of the Economist, to write “one thing is certain, that at a particular time a great deal of stupid people have a great deal of stupid money”.

The cryptocurrency was invented by an anonymous mathematician in 2008, and championed in the years that followed for its technology. At a time when many were unsettled by the actions of central banks after the financial crisis, bitcoin offered an alternative way to manage a currency, through mathematical rules rather than a metaphorical printing press.

It also fit the vogue for technological innovation. Bitcoins are created by computers solving mathematical problems, with the total number that can be calculated into existence over time limited. An open ledger allows the community to track the distribution of coins. At a time when small start-ups were earning multibillion-dollar valuations for their power to disrupt industries, anyone with a good idea and a neat bit of software could make a fortune.

As bitcoin attracted more attention, its price rose, attracting more money and attention. Early adopters got rich quick, or bemoaned how they would have done had their bitcoin hoard not gone in the bin aboard a discarded hard drive.

Bitcoins could be used to buy goods and services in the real world, although not usually without a third party intermediating. The attention and limited supply meant that by December 2013 bitcoins traded for more than $1,200 each.

However, in 2014 the cryptocurrency lost three quarters of its value after running into an old world problem, the failure of an overextended broker. Mt Gox, a prominent bitcoin exchange, collapsed.

Then the seizure of the Silk Road, a popular website for trading bitcoins for drugs and other frowned on goods and services, prompted a crash in the price to almost $100.

Such big swings in price undermine the case for bitcoin’s use as a currency. “It’s value is so volatile it’s not likely to serve as a medium of exchange”, says Eugene Fama, the Nobel Prize winning economist.

He pointed to examples such as Zimbabwe. “When a currency has a variable value, the people just switch to a different currency, or to barter.”

Bitcoin also lacks another feature of currencies: the balance sheet of a central bank standing behind it. They might be intangible, but a balance sheet has two sides to it, lists of assets and liabilities.

The bitcoin ledger, by comparison, is just a glorified list of liabilities, keeping track of where the bitcoins are located.

Furthermore, while the number of bitcoins is limited, the number of times the cryptocurrency can be replicated is not. There are a host of imitators, including Doge coin, started as a joke in 2013 at the height of alt-coin fever. Before Mr Mavrodi switched to bitcoins, MMM was operating with Mavros as the unit of exchange.

The inherent flaw of pyramid schemes is that they must always suck in new converts to avoid collapse, and the exponential growth in users is impossible to sustain. Bitcoin shares some of these features. It requires constant evangelism because its value derives from its use.

The limited supply of bitcoins then becomes a fatal constraint. The more people use it, the greater the price must rise, dissuading its use as a currency.

Bobby Lee, head of BTCC, the largest bitcoin exchange in China, argues its use for everyday transactions makes it a currency, and is frank about its price, saying: “The reason bitcoin has value today is scarcity, that is all.”

He also agrees bitcoin has the character of a pyramid scheme, but compares it with bubbles in housing markets, which might also appear pyramidical.

He adds: “It all comes down to what we think of a pyramid scheme. Is that a good thing, or a bad thing?”

Copyright The Financial Times Limited . All rights reserved. Please don't cut articles from FT.com and redistribute by email or post to the web.

(http://www.autoadmit.com/thread.php?thread_id=3535218&forum_id=2#32691803)

For instance, the Bank for International Settlements estimates the amount traded daily for the world’s 180 or so recognised currencies. Last year this ranged from $4.4tn in dollars, down to $1bn for the 37th most actively traded, the Bulgarian lev. In this context, the sum of bitcoin transactions rounds to zero.

Another measure might be the collective value of bitcoins, which stood at $16bn on Tuesday according to Bitcoin Info. Currencies aren’t normally discussed in terms of their overall worth, as they are supposed to be mediums of exchange rather than some absolute store of value. Still, for context, the Central Intelligence Agency put the planet’s stock of broad money — notes, coins, and various forms of bank account — at $82tn as of the end of 2014.

On the CIA figures, the value of bitcoins hashed into existence is similar to the broad money total for Uzbekistani soms. With apologies to Tashkent, the value of soms and bitcoins, and the number of people for whom they are relevant pieces of information in the world of modern finance, both round to zero.

Treat bitcoins as an investment and even if they could all be sold today for $1,000 apiece, they would only be worth as much as the Cerner Corporation, a US company of moderate size and limited profile involved in the management of digital healthcare records.

Except treating bitcoin as an investment means it can’t be a currency, and vice versa. The problem is that a medium of exchange prone to collapsing or quadrupling in price is useless as a practical currency, whatever the cryptographic elegance of its creation.

As a phenomenon bitcoin has all the attributes of a pyramid scheme, requiring a constant influx of converts to push up the price, based on the promise of its use by future converts. So the ultimate value for bitcoin will be the same as all pyramid schemes: zero.

dan.mccrum@ft.com

Copyright The Financial Times Limited . All rights reserved. Please don't cut articles from FT.com and redistribute by email or post to the web.

(http://www.autoadmit.com/thread.php?thread_id=3535218&forum_id=2#32691811)

The New York Times

Search

DealBook

How China Took Center Stage in Bitcoin’s Civil War

Slide Show | Mining for Bitcoin in China A handful of Chinese companies that own vast farms of computer servers dispersed around the country have majority control of the Bitcoin network.

By NATHANIEL POPPER

JUNE 29, 2016

A delegation of American executives flew to Beijing in April for a secret meeting just blocks from Tiananmen Square. They had come to court the new kingmakers in one of the strangest experiments in money the world has seen: the virtual currency known as Bitcoin.

Against long odds, and despite an abstruse structure, in which supercomputers “mine” the currency via mathematical formulas, Bitcoin has become a multibillion-dollar industry. It has attracted major investments from Silicon Valley and a significant following on Wall Street.

Yet Bitcoin, which is both a new kind of digital money and an unusual financial network, is having something of an identity crisis. Like so many technologies before it, the virtual currency is coming up against the inevitable push and pull between commercial growth and the purity of its original ambitions.

In its early conception, Bitcoin was to exist beyond the control of any single government or country. It would be based everywhere and nowhere.

Yet despite the talk of a borderless currency, a handful of Chinese companies have effectively assumed majority control of the Bitcoin network. They have done so through canny investments and vast farms of computer servers dispersed around the country. The American delegation flew to Beijing because that was where much of the Bitcoin power was concentrated.

At the time of the meeting, held at the Grand Hyatt hotel, over 70 percent of the transactions on the Bitcoin network were going through just four Chinese companies, known as Bitcoin mining pools — and most flowed through just two of those companies. That gives them what amounts to veto power over any changes to the Bitcoin software and technology.

China has become a market for Bitcoin unlike anything in the West, fueling huge investments in server farms as well as enormous speculative trading on Chinese Bitcoin exchanges. Chinese exchanges have accounted for 42 percent of all Bitcoin transactions this year, according to an analysis performed for The New York Times by Chainalysis. Just last week, the Chinese internet giant Baidu joined with three Chinese banks to invest in the American Bitcoin company Circle.

But China’s clout is raising worries about Bitcoin’s independence and decentralization, which was supposed to give the technology freedom from the sort of government crackdowns and interventions that are commonplace in the Chinese financial world.

“The concentration in a single jurisdiction does not bode well,” said Emin Gun Sirer, a professor at Cornell and a Bitcoin researcher. “We need to pay attention to these things if we want decentralization to be a meaningful thing.”

The power of Chinese companies has already come to play a major role in a civil war that has divided Bitcoin followers over the last year and led to the departure of one of the top developers of the virtual currency. The dispute has hinged on technical matters as well as on bigger questions of what Bitcoin should look like in 10 or 20 years.

Network Bottleneck

The American companies whose executives journeyed to the Grand Hyatt — including venture-capital-funded start-ups like Coinbase and Circle — are fighting to make Bitcoin bigger. They hope to expand the capacity of the Bitcoin network so that it can process more transactions and compete with the PayPals and Visas of the world.

The current size of the network goes back to the early days, when Bitcoin’s founder, Satoshi Nakamoto, limited the amount of data that could travel through the network, essentially capping it at about seven transactions a second. As Bitcoin has grown more popular, those limits have caused severe congestion and led to lengthy transaction delays.

The American delegation in China had a software proposal, known as Bitcoin Classic, that would change all that.

The Chinese companies, though, had the ultimate decision-making power over any changes in the software, and they did not agree with the American delegation. The Chinese had thrown in their lot with another group of longtime programmers who wanted to keep Bitcoin smaller, in part to keep it more secure. The Americans hoped to persuade the Chinese to switch sides.

In a hotel conference room, the American team of about a half-dozen people cycled through its PowerPoint slides, in English and Chinese, arguing for expansion of the network, most notably pointing to the long delays that have been plaguing the system as a result of the congestion. The Chinese representatives listened and conferred among themselves. The group took a break for a lunch of lamb and dumplings at a nearby mall.

Racks of computers at a server farm mining Bitcoin and Ethereum.

GILLES SABRIE FOR THE NEW YORK TIMES

“We kept coming back and saying, ‘For better or worse, you have this leadership in the industry, and everyone is looking to you to show some leadership,’” said Brian Armstrong, chief executive of Coinbase.

Ultimately, Mr. Armstrong said, “We were unable to convince them.”

Some Bitcoin advocates have complained that the Chinese companies have been motivated only by short-term profit, rather than the long-term success and ideals of the project. Bobby Lee, chief executive of the Bitcoin company BTCC, which is based in Shanghai, bristled at that — and at the notion that the Chinese companies represent any sort of united front. He attended the April meeting and pointed out that the Chinese companies had disagreed among themselves on how urgent it was to make changes to the Bitcoin software.

He said the American companies failed to understand the power dynamics in the room that day. “It was almost like imperialistic Westerners coming to China and telling us what to do,” Mr. Lee said in an interview last week. “There has been a history on this. The Chinese people have long memories.”

A Mining Powerhouse

The mysterious creator of Bitcoin, Satoshi Nakamoto, released the software in early 2009. It was designed to provide both a digital coin and a new way to move and hold money, much as email had made it possible to send messages without using a postal service.

From the beginning, the system was designed to be decentralized — operated by all the people who joined their computers to the Bitcoin network and helped process the transactions, much as Wikipedia entries are written and maintained by volunteers around the world.

Jihan Wu, the founder of Bitmain, which is often described in China as the world’s most valuable Bitcoin company.

SIM CHI YIN FOR THE NEW YORK TIMES

The appeal of a group-run network was that there would be no single point of failure and no company that could shut things down if the police intervened. This was censorship-free money, Bitcoin followers liked to say. Decision-making power for the network resided with the people who joined it, in proportion to the computing power they provided.

The allure of new riches provided the incentive to join: Every 10 minutes, new Bitcoins would be released and given to one of the computers helping maintain the system. In the lingo of Bitcoin, these computers were said to be mining for currency. They also served as accountants for the network.

For the first few years, aside from its use as a payment method on the Silk Road, an online drug market that has since been shut down, Bitcoin failed to gain much traction. It burst into the world’s consciousness in 2013 when the price of the digital money began to spike, in no small part because Chinese investors began trading Bitcoins in large numbers.

Mr. Lee said the Chinese took quickly to Bitcoin for several reasons. For one thing, the Chinese government had strictly limited other potential investment avenues, giving citizens a hunger for new assets. Also, Mr. Lee said, the Chinese loved the volatile price of Bitcoin, which gave the fledgling currency network the feeling of online gambling, a very popular activity in China.

There has been widespread speculation that Chinese people have used Bitcoin to get money out of the country and evade capital controls, but Mr. Lee and other experts said the evidence suggests this is not a significant phenomenon.

“No Chinese person is pushing for Bitcoin because it’s libertarian or because it’s going to cause the downfall of governments,” said Mr. Lee, who moved to China after growing up in Africa and the United States and studying at Stanford. “This was an investment.”

The extent of the speculative activity in China in late 2013 pushed the price of a single Bitcoin above $1,000. That surge — and the accompanying media spotlight — led China’s government to intervene in December 2013 and cut off the flow of money between Chinese banks and Bitcoin exchanges, popping what appeared to be a Bitcoin bubble.

The frenzy, though, awakened interest in another aspect of the currency: Bitcoin mining.

Peter Ng, a former investment manager, is one of the many people in China who moved from trading Bitcoins to amassing computing power to mine them. First, he mined for himself. More recently he has created data centers across China where other people can pay to set up their own mining computers. He now has 28 such centers, all of them filled with endless racks of servers, tangled cords and fans cooling the machines.

Mr. Ng, 36, said he had become an expert in finding cheap energy, often in places where a coal plant or hydroelectric dam was built to support some industrial project that never happened. The Bitcoin mining machines in his facilities use about 38 megawatts of electricity, he said, enough to power a small city.

The people who put their machines in Mr. Ng’s data centers generally join mining pools, which smooth the financial returns of smaller players. A popular one, BTCC Pool, is run by Mr. Lee’s company. This month it attracted about 13 percent of the total computational power on the Bitcoin network. The most powerful pool in China — or anywhere in the world — is known as F2Pool, and it had 27 percent of the network’s computational power last month.

Because the computations involved in mining Bitcoin are so intense, the most important factor in determining the profitability of a mining operation are the electricity costs.

GILLES SABRIE FOR THE NEW YORK TIMES

The Politics of Pools

Big pool operators have become the kingmakers of the Bitcoin world: Running the pools confers the right to vote on changes to Bitcoin’s software, and the bigger the pool, the more voting power. If members of a pool disagree, they can switch to another pool. But most miners choose a pool based on its payout structure, not its Bitcoin politics.

It was his role overseeing BTCC Pool that got Mr. Lee invited to the meeting with the American delegation in Beijing. The head of operations at F2Pool, Wang Chun, was also there.

Perhaps the most important player in the Chinese Bitcoin world is Jihan Wu, 30, a former investment analyst who founded what is often described in China as the world’s most valuable Bitcoin company. That company, Bitmain, began to build computers in 2013 using chips specially designed to do mining computations.

Bitmain, which has 250 employees, manufactures and sells Bitcoin mining computers. It also operates a pool that other miners can join, called Antpool, and keeps a significant number of mining machines for itself, which it maintains in Iceland and the United States, as well as in China. The machines that Bitmain retains for itself account for 10 percent of the computing power on the global Bitcoin network and are enough to produce new coins worth about $230,000 each day, at the exchange rate last week.

Mr. Wu and the other mining pool operators in China have often seemed somewhat surprised, and even unhappy, that their investments have given them decision-making power within the Bitcoin network. “Miners are the hardware guys. Why are you asking us about software?” is the line that Mr. Ng said he often hears from miners.

This attitude initially led most Chinese miners to align themselves with old-line Bitcoin coders, known as the core programmers, who have resisted changing the software. The miners wanted to take no risks with the money they were minting.

But lately, Mr. Wu has grown increasingly vocal in his belief that the network is going to have to expand, and soon, if it wants to keep its followers. He said in an email last week that if the core programmers did not increase the number of transactions going through the network by July, he would begin looking for alternatives to expand the network.

However the software debate goes, there are fears that China’s government could decide, at some point, to pressure miners in the country to use their influence to alter the rules of the Bitcoin network. The government’s intervention in 2013 suggests that Bitcoin is not too small to escape notice.

Mr. Wu dismissed that concern. He also said that as more Americans buy his Bitmain machines and take advantage of cheap power in places like Washington State, mining will naturally become more decentralized. Already, he said, 30 to 40 percent of new Bitmain machines are being shipped out of China.

For now, though, China remains dominant.

“The Chinese government normally expects its businesses to obtain a leading role in emerging industries,” he said. “China’s Bitcoin businesses have achieved that.”

(http://www.autoadmit.com/thread.php?thread_id=3535218&forum_id=2#32691852)

166425038

Photo courtesy: George Frey — Bloomberg/Getty Images

Bitcoin

Bit Con? Veteran fraud expert sets his sights on bitcoin

Chris Matthews

Oct 24, 2014

Jeffrey Robinson has made a name for himself investigating fraud on the grandest scales.

His books on international money laundering and the pharmaceutical industry pulled back the curtain on the nefarious behavior of some in the banking and pharmaceuticals industries. Now, he is turning his attention to bitcoin, with a new polemic called Bit Con: The Naked Truth About Bitcoin.

Of course, unlike the schemes of felonious bankers, bitcoin—the technology and the currency—wasn't conceived as a malicious scam. But Robinson is convinced that when all is said and done, it will become the vehicle for hucksters to trick both innocents and bitcoin's ideological backers out of millions.

Fortune spoke with Robinson about the year he spent researching bitcoin and why he thinks the currency will ultimately dissolve into worthlessness. The interview has been edited for length and clarity.

Fortune: What drew your interest to bitcoin?

Robinson: About two years ago, given the books I've written about money laundering, people kept telling me that bitcoin was the next big thing in money laundering. So I thought I really should find out about it, and I looked at everything that was being said, and none of it added up. Actually, it's not good for money laundering to start, but it's also not what it claims to be in other ways. It's not a real currency and it's not a real commodity. When you heard the hype coming from the community, and ... that people were spending money on this stuff, they needed to know the truth.

Your career has been spent writing about various frauds and cons. If bitcoin is a con, who is the con man?

It's a con in that it's not a real currency, but let me back up. There are actually two bitcoins. There's the blockchain-technology bitcoin, which I think is fantastic, and the future, and all sorts of businesses are investing tens or hundreds of millions of dollars in Silicon Valley and around the world to build businesses on the back of the blockchain technology because it's so wonderful and can move assets frictionlessly. But then there is this aspect of the pretend currency and the pretend commodity. Part of the con is in the pretend commodity, because this is a completely shallow, liquidless market. When you know that there's, what, 13 million coins in circulation, and more than 50% of the them are owned and managed by about 950 people, you realize how shallow the market it is and how subject the market is to manipulation.

Bitcoin

Market Intelligence

Bitcoin Just Hit a 3-Year Peak Amid Approval Talk

U.S. Banks Post Near-Record Profits In Second Quarter Of 2014

Bitcoin

Trial Set Over Bitcoin Exchange Linked to J.P. Morgan Hack Probe

Bitcoins As Digital Currency's Rally Crushed Every Other Currency in 2016

Bitcoin

Bitcoin Markets Slide as China Steps up Regulatory Scrutiny

Bitcoin

Bitcoin

Florida Bitcoin Exchange Operator’s Dad Avoids Prison

China flag

Technology

Chinese Banks Want to Use Blockchain to Combat Fraud

Bitcoins As Digital Currency's Rally Crushed Every Other Currency in 2016

Global Forum

This Bitcoin Firm Was Approved to Operate in Switzerland

Chart shows Bitcoin value since June 2016

Market Intelligence

Here’s What Drove Bitcoin’s Big Comeback

Market Intelligence

Why Coinbase’s Cofounder Is Moving On

It's essentially a pump and dump scam. And then I see these snake oil salesmen like the Winklevoss twins get on TV and tell people that bitcoin is going to be worth $40,000 per coin. And nobody is challenging them, asking, "What are you smoking?" Bitcoin isn't an investment, it's a slot machine. Or, more accurately, a loaded roulette wheel.

But it's not a classic pump and dump because there is a base of ideological support for bitcoin. At the very least, there is a motivated group of people who want bitcoin to succeed, and aren't just speculating.

Right, there is the libertarian faction that drives the support for bitcoin. For example, Jon Matonis of the Bitcoin Foundation has suggested that bitcoin is signaling the start of a post-legal-tender era. Where? In what country? It's not accepted as legal currency anywhere on the planet. There's not a legitimate economist of any note on the planet that thinks it's a real currency. The anarchist, libertarian wing of the bitcoin party tend to believe in Austrian economics, but the three most prominent descendants of [Austrian economists Ludwig von] Mises and [Friedrich] Hayek, say it's not currency. So while the most enthusiastic supporters of bitcoin say Austrian economics matters, actual Austrian economists say that bitcoin doesn't matter.

Furthermore, these people are very attached to the concept of decentralization as a matter of ideology. But I would guess if you walk down the street and ask 100 people if they care about decentralization, they'd say, "What are you talking about?" The ideologues say it should matter, that you don't want the government or corporations in the middle. But what evidence is there that anybody besides a small, small group of people care about this kind of stuff?

Do you think someone like Marc Andreessen, who has been a vocal public advocate for bitcoin, is acting in bad faith?

I think Andreessen is not terribly interested in the currency. He has no interest at all in the delusional wing. He says that he's interested in practical solutions to real problems.

Bitcoin

Bitcoin Exchange Employee Pleads Guilty in Case Tied to Hacking

But it's not as if Andreessen is taking your position, which is that bitcoin is a terrible currency but an interesting technology.

People believe you cannot separate the two. Of course you can. There are businesses that are trying to use blockchain technology to create smart contracts, the idea of putting copyrights on the blockchain: suddenly there's an irrefutable copyright worldwide. And with the speed of technology, we really should be expecting not that bitcoin will solve our problems, but that bitcoin is a stepping stone to something better. If you talk to people in Silicon Valley, that's how they think, that this is all just a process. The blockchain will develop, but bitcoin as a currency is just a step along the way.

What will be the end game for bitcoin?

Businesses will continue to experiment with the blockchain, proving that that innovation is separable from the bitcoin the currency. At the same time, there's all these people out there who bought into bitcoin as a tinker toy, thinking they might make some money on it. Maybe they bought $100 when it was worth $10 bucks a coin, and now they're sitting on $4,000. Many of them will treat themselves to a vacation or a new computer with their bitcoins, and they don't buy back in. There's no evidence that people who spend down their wallets buy back in. Little by little it will just atrophy, because nobody is really using it. The big kids will get out, and the little guy sitting on one, two, or, sadly, many more bitcoins will lose it all.

(http://www.autoadmit.com/thread.php?thread_id=3535218&forum_id=2#32691861)