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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The Home Office made Theresa May. But it could still destroy her

Even politicians who leave the Home Office a success may find themselves dogged by it. 

Good morning. When Theresa May left the Home Office for the last time, she told civil servants that there would always be a little bit of the Home Office inside her.

She meant in terms of its enduring effect on her, but today is a reminder of its enduring ability to do damage on her reputation in the present day.

The case of Jamal al-Harith, released from Guantanamo Bay under David Blunkett but handed a £1m compensation payout under Theresa May, who last week died in a suicide bomb attack on Iraqi forces in Mosul, where he was fighting on behalf of Isis. 

For all Blunkett left in the wake of a scandal, his handling of the department was seen to be effective and his reputation was enhanced, rather than diminished, by his tenure. May's reputation as a "safe pair of hands" in the country, as "one of us" on immigration as far as the Conservative right is concerned and her credibility as not just another headbanger on stop and search all come from her long tenure at the Home Office. 

The event was the cue for the Mail to engage in its preferred sport of Blair-bashing. It’s all his fault for the payout – which in addition to buying al-Harith a house may also have fattened the pockets of IS – and the release. Not so fast, replied Blair in a punchy statement: didn’t you campaign for him to be released, and wasn’t the payout approved by your old pal Theresa May? (I paraphrase slightly.)

That resulted in a difficult Q&A for Downing Street’s spokesman yesterday, which HuffPo’s Paul Waugh has posted in full here. As it was May’s old department which has the job of keeping tabs on domestic terror threats the row rebounds onto her. 

Blair is right to say that every government has to “balance proper concern for civil liberties with desire to protect our security”. And it would be an act of spectacular revisionism to declare that Blair’s government was overly concerned with civil liberty rather than internal security.

Whether al-Harith should never have been freed or, as his family believe, was picked up by mistake before being radicalised in prison is an open question. Certainly the journey from wrongly-incarcerated fellow traveller to hardened terrorist is one that we’ve seen before in Northern Ireland and may have occurred here.

Regardless, the presumption of innocence is an important one but it means that occasionally, that means that someone goes on to commit crimes again. (The case of Ian Stewart, convicted of murdering the author Helen Bailey yesterday, and who may have murdered his first wife Diane Stewart as well, is another example of this.)

Nonetheless, May won’t have got that right every time. Her tenure at the Home Office, so crucial to her reputation as a “safe pair of hands”, may yet be weaponised by a clever rival, whether from inside or outside the Conservative Party. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.