Bitcoin: this is what a bubble looks like

Not if, but when, the bubble will burst.

This is what a bubble looks like:

That's the market capitalisation of Bitcoin, an innovative fiat currency which relies on some fancy cryptography to create a perfectly decentralised and unhackable store of value. The graph shows the total value of all bitcoins in circulation — and it's currently peaking at a little over half a billion dollars.

In a sense, Bitcoins are the ultimate fiat currency. There is absolutely nothing valuable about them except the extent to which others are prepared to take them as payment for goods and services. The willingness relies on a certain level of trust that the currency will stay a useful store of value, measure of exchange and unit of account in the near future; but whereas normal currencies derive the trust from the fact that they are backed up by respectable governments and independent central banks, Bitcoin derives it from a complex, and essentially permanent, set of rules which issue new bit coins at a steadily declining rate until the early 22nd century, when the total quantity of bitcoins in circulation will be fixed forever.

Currently, bitcoin is very useful for fringe-legal transactions, and as a digital-native currency, it has potential to be used in a wide array of web services. But that's not why the value of the total economy has more than tripled since January. For that, look to lessons we learned over four hundred years ago.

The South Sea bubble is one of the most famous boom-and-bust cycles in history. At the peak of the madness, famously, a huckster appeared public advertising stock in "a company for carrying out an undertaking of great advantage, but nobody to know what it is". Naturally, he disappeared soon after.

But looking back at contemporary sources reveals something else which is just as important: very few people caught up in the madness thought that they were buying something innately valuable. These weren't naïve investors spending exorbitant sums on stock which they thought would vest unrealistic rewards; instead, they knew full well the bubble they were buying into, but thought that they could sell out of it at profit before the whole thing came crashing down. Some did; but inevitably, many others failed.

Much the same seems to be at play in the Bitcoin ecosystem. It's not just people like Hugo Rifkind, who accidentally made £41 from his foray into bit coin investing; Timothy Lee, a writer for Ars Technica, holds nearly a tenth of his investment portfolio in bitcoin, having bought in last January and seen a ten-fold increase in value.

But while there's been a massive increase in bitcoin price, there's not been anywhere near an equivalent increase in the currency's use. A glance at blockchain.info, which displays all transactions, shows that the vast majority of bitcoin transactions—by number, if not by value—are made at the site SatoshiDICE, a gambling organisation. In fact, the ever-increasing value of bitcoins is like to act as to depress the bitcoin economy, as people decide to hold on to their money rather than exchange it for services, knowing that it will surely increase in value.

The crash will come. At the heady peaks it's at right now, only the slightest spark will be required to turn the trend negative. In 2011, the previous bubble burst when Mt Gox, then the most popular bureau d'exchange for the fledgeling currency, was disastrously hacked. This time, I doubt it would take that. The peaks are so high, and so many people have so much money "invested" in the currency, that the rush to be the first out of a bear market will be vicious to behold.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Why Podemos will defeat the Spanish Socialists

A new alliance on the Spanish Left will be stronger than the sum of its parts.

On Saturday morning, on a palm-tree lined promenade in the small city of Badalona in eastern Catalonia, a 38-year-old woman named Mar García Puig fanned herself with her speaking notes after taking her turn on the stage.

Until six months ago, Puig was a literary editor with no professional experience in politics apart from attending demonstrations and rallies. Then, in December, her life was transformed twice over. In the national election, she won a parliamentary seat for En Comú Podem, the Catalan regional ally of the anti-austerity party Podemos. Four hours after she learned of her victory, Puig gave birth to twins.

Fortunately Puig’s husband, who is a teacher, was able to take paternity leave so that she could take up her seat. In parliament, Puig “felt like an alien”, she told me over coffee. As it turned out, she had to give up her seat prematurely anyway – along with all the other Spanish MPs – when repeated attempts to form a government failed. So now, in the lead-up to Spain’s first repeat election of the modern era, to be held on 26 June, Puig was on the campaign trail once more in a drive to win a parliamentary seat.

The December general election was as historic as it was inconclusive, ushering in a novel political era in Spain and leaving the country with the most fragmented parliament in its history. Fed up with corruption, austerity and a weak recovery from the global financial crisis, voters punished the mainstream parties, ending the 40-year dominance of the conservative Partido Popular (People’s Party) and the centre-left PSOE (Spanish Socialist Workers’ Party), which have held power since the death of General Franco. Neither group was able to win an absolute majority as new parties from both ends of the political spectrum garnered support from disenchanted voters.

On the left, Podemos, which was only founded in March 2014 by the ponytailed political scientist Pablo Iglesias, won 20 per cent of the vote. Ciudadanos (Citizens), formed in Catalonia a decade ago and occupying the centre left or centre right, depending on which analyst you talk to, secured a 14 per cent share.

Despite having four months to form a coalition government, the two biggest political parties could not reach a deal. The People’s Party, which had implemented a harsh austerity package over the past five years, recorded its worst electoral performance since 1989, losing 16 percentage points. It still won the most votes, however, and Prime Minister Mariano Rajoy was the first leader to be asked by King Felipe VI to form a government.

By the end of January, Rajoy conceded defeat after the PSOE refused to join his “grand coalition”. The Socialists then failed in their own attempt to form a government, leading the king to dissolve parliament and call a fresh election.

Despite the inconvenience of having to campaign nationwide once again – and being away from her twins – Mar García Puig’s enthusiasm for her new career is undiminished. “In Spain there is a window of opportunity,” she said. “There is a receptiveness to politics that there wasn’t before.”

When the repeat elections were called, some questioned whether Podemos and its regional allies could mobilise its supporters to the same extent as in December. Yet Puig believes that the party’s appeal has grown further in the six months that the country has been without a government. “We are still new and Podemos has this freshness – it can still make people join,” she told me.

The following day, as the church bells rang at noon in the Basque city of Bilbao, crowds gathered for another rally. For protection against the sun, Podemos supporters had covered their heads with purple triangular paper hats displaying the party name as it will appear on the ballot paper: Unidos Podemos, or “United We Can”.

In May, Podemos entered into an alliance with Izquierda Unida (United Left), the radical left-wing party that includes the Communist Party of Spain, and which won 3 per cent of the vote in December. Izquierda Unida is headed by Alberto Garzón, a 30-year-old Marxist economist who, according to a poll by the state-run CIS research institute, is the most highly rated party leader in Spain. Unlike Podemos’s Iglesias, who can fire up a crowd and is seen by some as divisive, Garzón is a calm and articulate politician who appeals to disaffected voters.

Nagua Alba, who at 26 is Podemos’s youngest MP, said the new alliance would be stronger than the sum of its parts, because Spain’s voting system punishes smaller parties when it comes to allocating seats in parliament. “It [the alliance] will attract all those people that aren’t convinced yet. It shows we can all work together,” Alba said.

As part of the agreement with Podemos, Izquierda Unida has agreed to drop its demands for a programme of renationalisation and withdrawing Spain from Nato. The alliance is campaigning on a platform of reversing Rajoy’s labour reforms, removing the national debt ceiling, opposing the TTIP trade deal, and increasing the minimum wage to €900 a month. A Unidos Podemos government would attempt to move the EU’s economic policy away from austerity and towards a more expansionist stance, joining a broader effort that involves Greece, Italy and Portugal. It is also committed to offering the Catalans a referendum on independence, a move that the mainstream parties strongly oppose.

The latest polls suggest that Unidos Podemos will become Spain’s second-biggest party, with 26 per cent of the vote, behind Rajoy’s Popular Party. The Socialist Party looks poised to fall into third place, with 21 per cent, and Ciudadanos is expected to hold its 14 per cent share. If the polls are accurate, the PSOE will face a difficult choice that highlights how far its stock has fallen. It can choose to enter as a junior partner into a coalition with the insurgent left, which has politically outmanoeuvred it. Or it could decide to prop up a Partido Popular-led right-wing coalition, serving as a constraint on power. 

This article first appeared in the 23 June 2016 issue of the New Statesman, Divided Britain