Tuesday, February 25, 2014

New Currency, New Scam

Anyone with sufficient cash reserves can start up a bank. By the same token, anyone can offer pieces of virtual currency and call it real, with real value, and there are those who will buy up those make-believe coins and see themselves as riding the wave of new technology.

Then the wave crashes against the shore and the investors realize that they are just the newest victims of an old scam packaged in fresh wrappings.

Values climb until the scam runs its course
There has been no end to the hype recently about Bitcoins, the virtual currency that is said to be quite popular among international drug smugglers looking for a place to launder their proceeds. On a more intellectual level, the bitcoin is supposed to replace all the various national currencies with this international token. The value is not set by the Bank of England or any other government-oriented source. Instead, the value is set by the free market. If someone will give you X times 5 dollars for a bit coin and you think it's a profitable exchange, you and your trading partner set the value and it doesn't matter what the LIBOR is or any of that regulatory business.

It is the free market in operation, but like any free market business, it is essential that the buyer beware. In a time when governments regulate and control so much that we are thoroughly accustomed to being protected from our greedy selves, it can be a bit of a shock to discover that currency traded outside of traditional avenues also lacks the traditional protections.

As happens with non-regulated entities, there is no one to turn to when a bitcoin exchange suddenly disappears from cyberspace, taking investor capital with it. Mt. Gox is not to be found, and those who sunk real money into it are out of pocket.

The vanishing of $409 million is said to be due to a hacker, which is the problem with money held in less-than-secured vaults. It is no small feat to break into a bank and steal that much money. Doing it online, where the locks are only so much code, takes far less effort.

There is no government insurance policy to protect investors from the loss. Neither is there a private policy to be tapped. Mt. Gox is, quite simply, gone as if it never existed, and several people are going to have no other recourse than to write it all off as a bad investment. A bit like those who were taken by Bernie Madoff in his prime.

You might think that the perceived value of the bitcoin is a case of well-crafted fiction, in which smart people suspend disbelief long enough to be taken under the spell of the narrative. The story has come to an abrupt halt, with an ending not particularly palatable to the "readers". They can issue bad reviews, but that doesn't recoup the investment gone bad, and it may not kill off the bitcoin genre.

Because there's a sucker born every minute, right?

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