Gregor MacGregor returned to Britain in 1821 an exotic war hero, a self-styled Cazique (or prince) of Poyais. His stories of this democratic and fertile Latin American land prompted investors to snap up land certificates and £200,000 in Poyaisian sovereign bonds.
MacGregor had fashioned a tale to fit the obsessions of the age - democracy and settlement - and a vogue for exotic investments. He was acquitted, in an early example of failure to prosecute complex fraud, and lesser scam artists imitated his hoax.
It is a tradition that runs from the mania for Dutch tulip bulbs in the 17th century through the stamp scheme of Charles Ponzi in the 1920s. The latest incarnation is MMM, a "social financial network" powered by YouTube and the cryptocurrency bitcoin and run by Sergey Mavrodi, a former Russian parliamentarian and convicted fraudster.
Would-be members of MMM purchase bitcoins and receive a bonus for online testimonials describing their improbable profits. The fad contributed to an explosion in the bitcoin exchange rate, from less than $US200 in September to more than $US500 last week.
The question is whether this marks a resurgence for the cryptocurrency, or merely represents its turn in the long parade of get-rich-quick schemes.
Bitcoin was invented by an anonymous mathematician in 2008, and in the years that followed was championed for its technology. At a time when many were unsettled by the actions of central banks after the financial crisis, bitcoin offered a way to manage a currency through mathematical rules rather than a metaphorical printing press.
It also fit the vogue for technological innovation. With small start-ups earning multibillion-dollar valuations, anyone with a good idea and a neat bit of software could make a fortune.
Bitcoins are created by computers solving mathematical problems, and the total number that can be calculated into existence over time is limited. An open ledger allows the distribution of coins to be tracked.
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 if they had not lost their hoard on a discarded hard drive.
By December 2013 bitcoins traded for more than $US1,200 each. 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 exchange, collapsed. Then the seizure of the Silk Road website prompted a crash in the price to almost $US100.
Such big swings undermine the case for bitcoin's use as a currency. "When a currency has a variable value, the people just switch to a different currency, or just switch to barter," says Eugene Fama, a Nobel Prize winning economist, citing Zimbabwe as an example. "[Bitcoin's] value is so volatile it's not likely to serve as a medium of exchange."
Bitcoin lacks another feature of currencies: the balance sheet of a central bank. A balance sheet has two sides, assets and liabilities. In contrast the bitcoin ledger is a glorified list of liabilities.
Furthermore there are imitators, including Dogecoin, started as 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 flaw of pyramid schemes is that they must suck in new converts to avoid collapse, and exponential growth is impossible to sustain. Bitcoin requires constant evangelism because its value derives from its use. The limited supply becomes a fatal constraint. The more people use bitcoin, the further the price must rise, dissuading its use as a currency.
Bobby Lee, head of BTCC, the largest bitcoin exchange in China, say its use for everyday transactions does make it a currency, and is frank about its price. "The reason bitcoin has value today is scarcity - that is all."
He agrees that bitcoin has characteristics of a pyramid scheme, but compares it to bubbles in housing markets. "It all comes down to what we think of a pyramid scheme. Is that a good thing or a bad thing?"
http://www.afr.com/news/world/bitcoins-liabilities-exposed-by-pyramid-effect-20151110-gkvwkm
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