This column is about bitcoin, but first we’re going to talk about the Albanian Civil War.
Back in 1991, communist governments across Europe fell apart like the engine on a Lada. Albania’s citizens had been even poorer and more isolated during the Cold War than most of their neighbours – they sided with Mao during a dispute between China and the Soviet Union, leaving them as outsiders twice over.
But hey, things were looking up! There were democratic elections, and the chance to transition to an economy not based on bread lines and building hundreds of concrete bunkers.
Then the con artists materialized.
Over the next six years, the entire economy of Albania was slowly consumed by a series of ponzi schemes and pyramid schemes.
Some of them seem to have started as actual businesses – smuggling guns and oil into the former Yugoslavia in violation of wartime sanctions, for example. Others were scams from the start.
But they promised huge returns! Double your money in a year! In six months! In one month!
Money flowed in. A small-town soccer team outside the capital suddenly had the cash to hire a celebrity Argentinian coach. New millionaires flaunted their wealth with cars and new construction.
Then in late 1996, the schemes imploded, over the course of just a few weeks.
In all, two thirds of Albanians invested in one of the schemes. It sucked more than $1.2 billion out of an impoverished country of 3.5 million people.
Then the country went boom.
The “civil war” was a period of unrest that involved conflict between angry locals, the government, opposition politicians, and ruthless gang leaders. Armouries across the country were looted and virtually every adult had a gun and ammo. About 2,000 people died.
That’s the grimmest story I know about raw financial malfeasance.
What does this have to do with bitcoin?
Ponzi schemers were attracted to Albania because of two factors.
First, the population was staggeringly naive about finance or investing, which had been essentially non-existent for the previous 50 years.
Second, because their new government was likewise naive, there were no financial controls or law enforcement agencies capable of putting the brakes on the scams.
Bitcoin is a cryptocurrency – an online money system based on strong cryptography and a distributed ledger controlled through a piece of software called a blockchain.
Cryptocurrencies were created specifically to allow their users to avoid government entanglements, like, y’know, paying taxes or following laws.
Bitcoin was the favoured payment method on a large number of darknet web sites like Silk Road, for instance, where people bought and sold mail order drugs.
So we have a lack of government oversight, already baked in.
Then we saw the astonishing rise in bitcoin – and other cryptocurrenncies dubbed “altcoins” – value over the past few months. That drew thousands of people from around the world to invest. Hey, the value was just going up, right?
(This was happening despite the fact that the more people who want to use them, the more difficult buying and trading with bitcoin becomes, due to software problems.)
And right on schedule, we find that some coin exchanges and even some entire altcoin offerings are being accused of being ponzi schemes.
Last week, bitcoin took a massive hit to its hugely inflated value. It’s now yo-yoing wildly up and down. At one point, it had lost more than 50 per cent of its peak value.
Fortunately, bitcoin and the altcoins are being purchased by a widely distributed customer base. Their increasingly likely fall will not spark gun-crazed ex-communists to take to the streets looking for someone to blame.
They’ll just wipe out the usual suspects – a few rich idiots and a lot of poorer folks who got suckered by the promise of easy money.
In the end, it’s just Albania, all over again.