The Financial Times is usually a terrific source for financial news. It’s straightforward, unbiased and most of the time, accurate. Unfortunately, the paper fails to live up to that standard on occasions, such as when it published an article by Dan McCrum yesterday titled “Bitcoin’s place in the long history of pyramid schemes“.
Being an alarmist would be okay, if the facts in the story were straight. But they weren’t.
McCrum started the story off by introducing readers to a social financial network, MMM, run by a convicted fraudster and former Russian parliamentarian.
In order to join MMM, new members must purchase bitcoins, and then write online testimonials describing their improbable profits. Other users will then join, thus pumping the new users’ bitcoins back to the service and those who had praised the service. In other words, a classic Ponzi scheme. While such a scheme is indeed happening, there’s no evidence out there with regards to how MMM and the scheme at large is affecting the bitcoin market. It may be to a minimal, or moderate extent.
No one knows.
In 2013, when the Mt. Gox scandal tanked the bitcoin from its rally-high to just 10% of its former value, it recovered somewhat, after a correction, because people realized that the bitcoins affected in the Mt. Gox scandal were not a huge amount at all. The scandal did not jeopardize the currency. It is, after all, always important to remember that a drop involving rumors or scandalous incidents will always have an outsized influence on the market (more on this below).
When McCrum states conclusively that it is this “fad [that] helped to power an explosion in the bitcoin exchange rate, from less than $200 in September to more than $500 per bitcoin last week,” he is deliberately misleading his readers. The rally could’ve been caused by any number of reasons, including the massive number of trades in China by those wishing to get around capital controls, the increased interest in the underlying blockchain technology by big banks and mainstream investors, the recent positive press surrounding the technology.
The fact is, I don’t know and odds are, neither does McCrum.
Satisfied with crediting the recent bitcoin rally to a single, isolated scandal, McCrum focuses next on the history of the Silk Road — a crowd favorite to invoke whenever someone doesn’t understand the technology behind bitcoins. The Silk Road, in many ways, is perfect for the narrative McCrum wants to focus on: it involves crime, and it involves the downfall of bitcoins. “… 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,” McCrum wrote.
But as Coinbase co-founder Fred Ehrsam pointed out, the cryptocurrency doubled within a month.
There’s a simple reason for this: people realized that the bitcoins involved in the Silk Road only represented around 5% of the nascent network volume and that the scandal would not hurt any potential long-term usability. As I said before, scandalous incidents will always have an outsized influence on the market.
As those who lived through the 2013 bitcoin bull run remember, one of the unique characteristics about bitcoin is its extreme volatility. Here, McCrum invokes a Nobel Prize winning economist to back him up: “It’s value is so volatile it’s not likely to serve as a medium of exchange,” says Eugene Fama. The reality McCrum turns a blind eye to, however, is the fact that bitcoin’s value has stabilized considerably in recent times. Proof: in the last 30 days, bitcoin’s value has shifted by only 3.53%, with an even lower 2.68% fluctuation rate in the last 60 days (source: Bitcoin Volatility Index).
Next, McCrum moves away from the scandals and focuses on the underlying technology of bitcoin: the ledger, more commonly referred to as the blockchain. He describes the blockchain as “just a glorified list of liabilities, keeping track of where the bitcoins are located.” Incredibly myopic does not even begin to describe the statement. Without any network value, of course the blockchain is useless. But it is because of the network value that investors are clamoring to get into the technology, pumping billions in total investment into it.
To complete an article filled with misleading information and cherry picked facts, McCrum compared bitcoins — a technology so complex most can’t even fully comprehend it yet — to… tulips.
The question is, how did this article get published on the Financial Times?