Bitcoin in the Headlines: Financial Times Ruffles Feathers

Bitcoin in the Headlines is a weekly analysis of industry media coverage and its impact.

Boring weeks in bitcoinland are far and few between.

Last week's headlines – predominately dominated by the digital currency's dizzying price spike – gave way to a different form of narrative as journalists from the mainstream media sought to discern its meaning and implications.

In so doing, the coverage arguably shifted from largely positive articles to more controversial explorations of bitcoin that were sometimes found to be at odds with common consensus among the technology's observers.

The Financial Times was even called out by industry insiders, who were unhappy with the way the publication linked both bitcoin and its recent price increase to an alleged online pyramid scheme run by a convicted Russian fraudster.

Elsewhere, the possibility of Satoshi Nakamoto winning a Nobel Prize for his contribution to economics caught the attention of reporters from across the globe, with the news reverberating even among foreign-language news outlets.

A bitcoin pyramid

Writing for The Financial Times, Dan McCrumwrote a piece that set out to explore bitcoin's connection with the underworld of pyramid schemes.

McCrum set the scene by introducing the reader to General Gregor MacGregor, who returned to Britain in 1821 a war hero. His stories, the journalist explained, promoted investors to purchase land certificates and £200,000 in Poyaisian sovereign bonds.

Unfortunately, though, McCrum noted that Poyais did not actually exist.

The article then continues, perhaps controversially, to note that MMM – a "social financial network" – run by convicted fraudster Sergey Mavrodi and powered by YouTube and bitcoin was the most recent example of a pyramid scheme.

He said:

"New members must purchase bitcoin to join MMM, and then receive a bonus for online testimonials describing their improbably profits. The fad helped to power an explosion in the bitcoin exchange rate, from less than $200 in September to more than $500 per bitcoin last week."

"Yet the question prompted by the recent movement in bitcoin is whether it marks a resurgence for the cryptocurrency, or merely highlights its turn in the endless parade of get rich quick schemes, which prompted Walter Bagehot, former editor of the Economist, to write 'one thing is certain, that at a particular time a great deal of stupid people have a great deal of stupid money,'" continued McCrum.

Then, McCrum went on to list what he perceived as the digital currency's faults, criticising its decentralised nature.

"Bitcoin also lacks another feature of currencies: the balance sheet of a central bank standing behind it. They might be intangible, but a balance sheet has two sides to it, lists of assets and liabilities.The bitcoin ledger, by comparison, is just a glorified list of liabilities, keeping track of where the bitcoins are located."

Furthermore, he said, although the number of bitcoin is limited, the number of times that the digital currency can be replicated – or mined – is not.

"The inherent flaw of pyramid schemes is that they must always suck in new converts to avoid collapse, and the exponential growth in users is impossible to sustain. Bitcoin shares some of these features. It requires constant evangelism because its value derives from its use," he concluded.

Industry reaction

Unsurprisingly, McCrum's piece did not go down well with various industry executives.

Brian Armstrong, co-founder and CEO at Coinbase, took to Twitter to express his concerns with McCrum's opinion.

.@FT normally outstanding journalism e.g. @muradahmed 's reporting on Bitcoin, how'd this opinion piece sneak in? https://t.co/R4c0NtaK2b







— Brian Armstrong (@brian_armstrong) November 11, 2015

Armstrong, however, was not the only pundit unhappy with the portrayal of bitcoin. Fred Ehrsam, co-founder at the San Francisco-based firm, was also quick to weigh in on the debate.

1/ The @FT masterfully conflates bitcoin, a ponzi scheme, and every scary event into a single uninformative piece: https://t.co/nu7hfqAOJu — Fred Ehrsam (@FEhrsam) November 11, 2015

Bitcoin, it seemed was under attack as its viability as a digital currency was also brought into question by Bloomberg's Zeke Faux.

Faux began:

"This was looking like the year that bitcoin would finally move beyond its sketchy reputation as an anonymous way to buy drugs and stolen credit cards. Banks had started to study how they could use the six-year-old currency to update the world's outdated money transfer mechanisms; and its price swings were becoming less extreme, making it less risky for ordinary folks to use."

Then, the journalist added, came bitcoin's price spike, which saw it shoot past the $500 on some exchanges, before subsequently falling in value.

"That's the kind of unruly fluctuation you might expect in a penny stock, not an invention that's been hyped as a trustworthy replacement for unreliable government-issued money," he said.

Noting the difficulty of determining the real reasons behind bitcoin's most recent value spike, like others before him, Faux highlighted that it had taken place around the same time that a possible pyramid scheme was discovered.

In hindsight, Faux argued, bitcoin seems to have been intrinsically designed to encourage speculation, noting how the market has routinely seen wild fluctuations in value in connection to events such as the closures of online black market Silk Road and early bitcoin exchange Mt Gox.

Continued defense

Despite the criticism, however, The Financial Times kept up its work on the event, issuing a fourth article on the connection between MMM and the bitcoin price on 13th November.

In the piece, writer Izabella Kaminska continued to defend the media outlet's conclusion that MMM was behind the price spike. Yet again, there was no blockchain data given to better illustrate the connection between the two events, though statements from exchanges were again provided as evidence.

Kaminska nonetheless remained confident that MMM, and its increase in buy-side pressure in the market, boosted activity around the globe.

"After soaring more than 100% in 30 days to $500 per bitcoin last week, this week it was back near $300. It seems much more likely that the growing popularity of MMM Global, an investment outfit targeted at people in China that bears many of the hallmarks of a pyramid scheme and requires new members to purchase bitcoins, was behind the spike," she wrote.

Kaminska's most glaring criticism, though, was to the drawbacks of the censorship-resistant nature of the bitcoin blockchain, long touted as its core use case.

Toward the end of her piece, she highlighed how the MMM scheme is representative of its drawbacks.

"Now that the latest MMM Global scheme runs exclusively on bitcoin, there are far fewer checks and balances in place, meaning if fraud is discovered there is not much anyone can do about it," she wrote, adding:

"This makes it easier for fraudsters to take advantage of the financially naive."

A Nobel for Satoshi

Positive news came in the form of Satoshi Nakamoto's potential nomination for a Nobel Prize in economics, however, the validation will potentially be short-lived.

Sparked by UCLA finance professor Bhagwan Chowdhry who detailed his plans to nominate the creator or creators of bitcoin to the prize, commentators soon questioned whether the academic had violated the nomination rules by publicly disclosing his intention to support Nakamoto. The prize committee responsible for that award is now set to weigh the issue.

In a piece for Quartz, Ian Kar wrote:

"On paper, Nakamoto might be an odd fit with past winners such as Robert Shiller, a Yale professor known for his work on housing prices, or 2015 winner Angus Deaton of Princeton University, whose understanding of consumption patterns has great significance to global development. And compared to conventional payment networks like Visa and MasterCard, bitcoin is still much smaller in terms of transaction volume. But Chowdry argues that bitcoin and the potential it unlocked is 'revolutionary'."

Still, the event was widely covered both in the US and internationally, with most of the coverage highlighting the benefits of blockchain technologies as touted by investors and enthusiasts.

"Not only are transactions involving the digital currency faster and more secure than those made with fiat currencies, but the technology behind it, called the blockchain, could change the way we deal with financial contracts and keep information, as well as assets, secure," he concluded.

Pete Rizzo contributed reporting.

Pyramid image via Shutterstock