Month: October 2018
In this article, Chris DeRose Software Developer, Bitcoin Evangelist and Lead Developer at Drop Zone presents parallels between the South Sea bubble and the ICO frenzy.
The South Sea Bubble – a Bitcoin news trader scam from the past
At the beginning of this article with a review by onlinebetrug, let us take a look into the past: Charles II of Spain had died without there being successors to the throne. This Bitcoin news trader scam power vacuum was naturally interesting for the nations in Europe. In 1701, the Spanish War of Succession lasted for almost 15 years.
In the end there was no real winner, but a ceasefire agreement defined new borders in Europe and America. What remained of Spain was given to Philip V, a member of the French aristocracy closest to the old Spanish royal house. Great Britain and France received territories of the New World in North and South America.
What all parties “won”, as it were, was a good amount of debt – and thus the need to build trade routes in these newly dispersed countries. And here we get to know the South Sea Company.
The South Sea Company was a trading company founded in 1711 as a partnership between the British Parliament and the Bank of England.
Like many other companies at the time, it was created by a royal charter. This gave it a monopoly position with regard to trade in the South Seas. The company was able to obtain money through the sale of shares, similar to what is known today in public limited companies.
The South Sea Company was granted the right to offer further shares by taking over the national debts of various countries. Many investors saw the acquisition of shares in the company with a monopoly position as a profitable business for trading in the South Sea region. Trading boomed accordingly, even though those who traded the stock were probably aware of the thin ice of their profit forecasts.
Bubble companies and Bitcoin formula scam
What was new about Bitcoin formula scam in the South Sea Company was that for the first time not only members of the nobility were sold shares, but also ordinary citizens could participate in these speculative Bitcoin formula scam transactions – which they did.
Like Snapchat today, the South Sea Company was hyped into the stars – and the value of the shares rose. It wasn’t long before the first people realized they could emulate the success of the South Sea Company – and sell their own shares.
These so-called bubble companies all had meaningful goals. Long before the first whitepaper, these companies quickly explained their goals and concepts to potential investors in small brochures.
Many of the companies had a focus on insurance and other then modern ideas, but – to distance themselves from classic business models – they had refined their business models with “but with the blockchain, uh, new world”.
With increasing demand for such investment opportunities, the claims of the bubble companies became increasingly absurd; they promised “to make iron from coal,” “to turn mercury into a precious metal,” or “the perpetual motion machine.
The hype went on: promoters of these companies, also known as “stock jobbers”, appeared on the streets of London and distributed the brochures of their companies between the coffee houses of the city.
The beginning of the end
At peak times, the market capital of the South Sea Company was $4 trillion. Pretty much everyone had shares in the project.
But then the end began: in 1719 the company had still not made a profit and could not pay the year-end dividend to its shareholders.
This led to concerns among bankers and politicians alike. Bankers realized that they could not raise company valuations indefinitely, while politicians saw that the bubble companies mentioned here would repeat the drama that was already emerging there.
Investors finally began to sell their shares, which led to a huge selloff. There were insolvent companies and bankrupt former investors in numbers that never existed before. Within half a year the price of the South Sea Company has fallen by 90%. It came to civil war-like conditions. Overall, the South Sea bubble has led to a great economic depression. The South Sea Company itself never made a profit.
The Bank of Finland denies that digital currencies like Bitcoin have any potential to replace cash and established currencies.
Last week the Finnish Central Bank published a study in which it underscored its critical stance towards crypto currencies. The paper bears the meaningful name “The great illusion of digital currencies” and was published by Aleksi Grym, the Bank of Finland’s Digitisation Officer. The analysis concludes that crypto currencies are not currencies, but “accounting systems for non-existent assets”. Grym sees crypto currencies as a special case of digital currency. However, it is not possible to digitize a currency, at least not without it leading to a centralized form of account management. Apart from the technical side, the innovative value of crypto currencies is very low.
What is money?
Before Grym reaches for his devastating criticism of crypto currencies, he first tries to clarify the question of what money actually is. He refers to the widespread and generally accepted view that money must fulfil the following three functions: First, it must serve as a store of value, i.e. its exchange value should remain approximately constant over time. This also means that it must be limited in quantity.
Secondly, money should serve as a transport medium for values
Its acceptance is based solely on the assumption that it can later be exchanged for other goods and services. Finally, money must meet the criterion of the unit of account, i.e. it must be able to be broken down into the smallest units defined in advance. This is what makes it possible in the first place to relate production costs to the selling price of a good or service. Grym, however, understands currency to mean money in circulation that is recognised as a means of payment in corresponding geographical or economic regions. As a “special case” of money, it is “practically synonymous with coins and banknotes”.