Consider this, from Charles Mackay's 19th-century classic, "Memoirs of extraordinary popular delusions and the madness of crowds", talking about the South Sea Bubble:
But the most absurd and preposterous of all, and which shewed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled "A company for carrying on an undertaking of great advantage, but nobody to know what it is." Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could have been duped by such a project.
Bitcoin, anyone? As the bizarre unregulated "currency" seems on the point of unravelling, with the collapse of the Mt. Gox exchange, it's worth asking how on earth anyone ever fell for such a thing. A means of exchange with its own argot, including miners and brokechains? Just a glance at the gibberish on the bitcoin.com website ("Much of the trust in Bitcoin comes from the fact that it requires no trust at all") should have warned off all but the most foolish and venal. Yet as countless examples throughout history show us, there has always been a market for such schemes.
In what was surely a harbinger of impending doom, it was only earlier this month that the lovable Winklevoss twins launched something modestly dubbed Winkdex, a bitcoin price tracker. The brothers have been playing around in this particular sandbox for some time, even launching a bitcoin ETF during 2013. At the time of the launch, one of the business commentators on Slate commented that the prospectus read like something out of Harry Potter.*
There's a rather sad photo in the media today, with a couple of forlorn looking individuals sitting on a low wall outside the Mt. Gox offices in Tokyo. One of them has a placard saying "Mt. Gox -- are you solvent?" It's impossible to put any conventional meaning on that term in the context of bitcoin. What the poor guy is really asking is, "can I have my real money back, please?' I fear he already knows the answer to that.
Let's return to Charles Mackay for the end of the South Sea Bubble anecdote:
The man of genius who essayed this bold and successful inroad upon public credulity, merely stated in his prospectus that the required capital was half a million, in five thousand shares of 100l. each, deposit 2l. per share. Each subscriber, paying his deposit, would be entitled to 100l. per annum per share. How this immense profit was to be obtained, he did not condescend to inform them at that time, but promised that in a month full particulars should be duly announced, and a call made for the remaining 98l. of the subscription. Next morning, at nine o'clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o'clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2,000l. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.
The founder of Mt. Gox has vanished off the radar, and nobody actually knows who started bitcoin in the first place. Sounds like history is repeating itself.
*Which turns out to be quite apt. Although "Mt Gox" gives an impression of solidity, it is in fact just a set of initials, and the M stands for....magic!
UPDATE -- February 28: It's being reported that Mt. Gox has now filed for bankruptcy in Japan. That certainly seems to provide a definitive answer to that placard waver's plaintive question. It appears that the bankruptcy filing was made in response to pressure from US regulators. Anyone with any exposure to other bitcoin exchanges should probably be guided accordingly.
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