Photo credits: The Guardian.
Bitcoin is a digital crypto-currency that operates on blockchain technology, making it decentralised, deregulated, and supposedly ‘unhackable’. The value of one bitcoin has grown by about 4000% in a year and a half. It made headlines when it reached $5000. Surely the bubble would burst. It made headlines when it reached $10000. Surely the bubble would burst. It made headlines when it reached $20000. When will the bubble burst? Maybe it’s not a bubble after all. Well, now it’s making headlines again. It’s lost about 45% of its market capitalisation since December 17th. The bubble seems, finally, to be bursting. Will it be trading at zero in a few weeks? Will it climb back up and trade at $100,000 before it reaches zero? I don’t know. And “I don’t care”, to quote Jamie Dimon, CEO of JPMorgan. Whether it bursts in a week, a month, or a year from now, I believe bitcoin is the single greatest scam in the history of our markets.
Bitcoin has no value. It has no utility. There is nothing you can buy with bitcoin that you can’t buy with normal money. And there is nothing to guarantee the value of bitcoin like there is with normal money, like the backing of a central bank. Its only utility is its decentralised and cryptographic nature (by the way, we could easily create crypto-dollars or crypto-sterling, we don’t need to abolish our existing currencies just to go ‘crypto’) which makes it excellent for money launderers and criminals. The only thing is, even criminals aren’t using it. As a percentage of the global money market bitcoin is barely a dot on the map in terms of transactions: its market capitalisation is not even at one trillion dollars. JPMorgan is one bank and it alone moves $6 trillion each day. But I don’t care that bitcoin is a dot on the money market map. I care that ordinarily people aren’t being protected and may have lost up to 50% of their investment on it.
First, however, I want to outline why it was clear from the beginning that there was no future for bitcoin. If we had bitcoin as the mainstream currency then our central banks would be abolished. Governments would lose the power to carry out quantitative easing, or to set interest rates, or to target inflation. Can you imagine governments ever agreeing to the end of monetary policy? The principal tool Western economies used to recover from the 2008 financial crisis was monetary policy. The central bank prints money, and buys bonds, lowering interest rates, thus boosting aggregate demand. In a world of bitcoin, the middle man is dead. There are no central banks. There is no monetary policy. It’s ludicrous. That is why, eventually, even proponents of bitcoin conceded that it has no value as a currency, but only as a “store of value”, or a “commodity”, comparable best to that of gold. And in bitcoin’s defence, this is the view of the Winklevoss twins, and Peter Thiel, who certainly qualify as respected speculators. But that doesn’t mean they’re right. Bitcoin is a ‘commodity’ that loses 20% of its value overnight, and can plummet 30% in a week. That isn’t exactly a good store of value. And unlike gold, it isn’t backed by anything physical. Bitcoin is nothing other than speculation on an intangible commodity, which has no utility or anchored value.
But I will confess something. I don’t completely understand how bitcoin works. The actual cryptographic mechanics of it are complicated. There are 21 million bitcoins that can ever be mined, of which around 16 million have been mined already. What happens when there are no more bitcoins left to mine? I don’t even understand how they’re mined. I don’t understand why there’s a limited future supply, which doesn’t make sense for a currency – let alone one created by anonymous, unaccountable people on the internet. There are plenty of details I don’t understand. But there are three things I do. 1. Bitcoin has no utility. 2. Bitcoin is not a physical commodity, neither is its ‘value’ guaranteed by a third party, like a central bank. 3. The people buying bitcoin also don’t fully understand it. If you doubt the third assertion, ask someone to explain it to you, and you’ll see.
So what to make of it? Just because something sounds modern and cool and new doesn’t make it valuable. Just because other people are buying it doesn’t make it valuable. It’s the first bubble in history that isn’t backed by anything physical at all. This alone makes it interesting, but also, very dangerous. Over the coming weeks and months the speculation will continue. It’s Monday the 22nd of January. One bitcoin now is worth $10,600. Less than a month ago it was worth nearly double that. Be cautious.
By Yannis Gidopoulos