When the speculators flee, what will be left of Bitcoin?

The underlying currency might not work without the inflated prices.

Last week's post pointing out bubbly appearance of Bitcoin's market capitalisation sparked some kickback. That was to be expected; in any bubble, people who are currently exposed to the possibility of a crash are unlikely to take the news well. Bitcoin has even more die-hard defenders than most bubbles, though, because of the mixture of political and cultural factors which cause a lot of people to invest such hope in it.

Amongst the currency's fanbase – and the fact that a currency has a fanbase is itself notable – are libertarians who decry any government involvement in the free market, techno-utopians who love the idea of fully digital money, monetary hawks who like the fact that the success of bitcoin would basically end inflation, and, frankly, criminals who like a completely untraceable currency (I'm not implying that if you like an untraceable currency you must be a criminal, but there's no denying that Bitcoin is a big deal for sites like Silk Road), as well as your common-or-garden speculators. All of them (except maybe the criminals) have a bigger reason to hope for the success of Bitcoin than just financial: if it succeeds, it proves them right.

But I fear that there are very few arguments which can be made to prove the Bitcoin boom that we're seeing right now – which has resulted in a 250 per cent increase in the total value of the Bitcoin economy in just three months – isn't a bubble. The problem is that there is not really anything to point to in that time period to explain the massive increase, except the massive increase itself. So it may be comforting for Bitcoin fans that there is a Bitcoin hedge fund in Malta, but given that that hedge fund exists because of the boom, not the other way round, it doesn't explain anything.

In fact, in the last few months, there have been a few news events which ought, by rights, to reduce the value of the currency. Chief among them is the fact that the block chain – the distributed record of every Bitcoin transaction, and the technical underpinning of the entire things – forked earlier this month, something it should not be able to do.

A transaction was made using a new version of the software, which was too large for earlier versions to handle. As a result, some clients accepted it, while others rejected it, leaving two valid block chains circulating. Some users are pointing to the fact that the currency is still circulating largely unaffected as a sign of its strength, but that's a bit like saying that the fact that your plane is still flying after its engine exploded makes the explosion good news.

The best way to justify the exponential increase in the market capitalisation of Bitcoin would be to point to a similar exponential increase in people using the currency to perform their everyday lives, and that simply hasn't happened. Take-up is strong, but nowhere near the level it would need to be to explain a half-billion market cap. Whereas speculation – people buying Bitcoin low to sell high – does.

(Note too I'm not saying that the currency is a Ponzi scheme, an accusation often levelled at it over the fact that the first holders of bitcoin had the most to gain from talking it up to others and then selling high. A bubble isn't necessarily the same as a Ponzi scheme, even a bubble which is deliberately engineered to reward its first buyers, and I don't think Bitcoin has those characteristics.)

The natural price of Bitcoin is far, far lower than where it stands right now, probably around the same level it was last summer, after its first catastrophic crash and before its second. The real question for the currency isn't whether it can survive being an investment for speculators – it can't – but whether it can survive as a currency when valued at 10 per cent of what it is currently.

The problem it faces is that the distributed computing which lets Bitcoin work is expensive. It takes energy, and time, and frequently also specialised hardware. The reward for doing so – "mining", in the parlance – is a randomly allocated share of the new coins produced through inflation. As time goes on, the currency will produce less and less extra coins this way, but for now, the bigger fear is if the natural price for Bitcoin can go low enough that it no longer becomes efficient to run these mining rigs.

There are still ways of getting around that – the technology allows for the payment of what is essentially a processing fee on top of each transaction – but it may be the case that Bitcoin's use as a currency is currently being subsidised by its bubble-tastic value. Hopefully the two are separate enough that even after the crash, Bitcoin can continue to function as an alternative way to send money over the internet. But the more Bitcoin fans boost the bubble, the bigger the shock's going to be when it pops.

The Bitcoin logo.

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 biggest divide in politics is not left against right, but liberals against authoritarians

My week, including a Lib Dem membership rise, The Avalanches, and why I'm putting pressure on Theresa May over child refugees.

It is a boost for us that Nick Clegg has agreed to return to the front line and be our Brexit spokesperson. I hadn’t even had a chance at our meeting to make him the offer when he said: “Before we start, I’ve been thinking about this and want to take on the fight over Europe.”

With Labour apparently willing to give the Tories a free pass to take us out of Europe, the Liberal Democrats are the only UK-wide party that will go into the next election campaigning to maintain our membership of the EU. The stage is remarkably clear for us to remind Theresa May precisely what she would be risking if we abandon free trade, free movement, environmental protection, workers’ rights and cross-border security co-operation. More than a month on from the referendum, all we have heard from the Tories is that “Brexit means Brexit” – but they have given us no clue that they understand what that means.

 

Premature obituaries

Not long ago, the received wisdom was that all political parties were dying – but lately the supposed corpses have twitched into life. True, many who have joined Labour’s ranks are so hard left that they don’t see winning elections as a primary (or even a desirable) purpose of a party, and opening up Labour to those with a very different agenda could ultimately destroy it.

Our experience has been happier: 20,000 people joined the Liberal Democrat fightback in the wake of the 2015 general election result, and 17,000 more have joined since the referendum. We now have more members than at any time this century.

 

Breaking up is hard to do

Journalists have been asking repeatedly if I want to see the break-up of the Labour Party, with moderates defecting to the Liberal Democrats. I have been clear that I am not a home-wrecker and it is for Labour to determine its own future, just as I focus on advancing the Liberal Democrat cause. Yet I have also been clear that I am happy for my party to be a home for liberals of whatever hue. I enjoyed campaigning in the referendum with a variety of progressive figures, just as moderates from different parties shared platforms in 1975. It struck me that far more unites us than divides us.

That said, not all “moderate” Labour figures could be described as “liberal”, as John Reid demonstrated as Labour home secretary. The modern political divide is less left v right than authoritarian v liberal. Both left and right are looking increasingly authoritarian and outright nasty, with fewer voices prepared to stand up for liberal values.

 

What I did on my holidays

Time off has been virtually non-existent, but I am reading A Wilderness of Mirrors by Mark Meynell (about loss of trust in politics, the media and just about everything). I’m also obsessively listening to Wildflower by the Avalanches, their second album, 16 years after their first. It’s outstanding – almost 60 minutes of intelligently crafted dialogue, samples and epic production.

During the political maelstrom, I have been thinking back to the idyllic few days I spent over half-term on the Scottish island of Colonsay: swimming in the sea with the kids (very cold but strangely exhilarating ­after a decent jog), running and walking. An added bonus is that Colonsay is the smallest island in the world to have its own brewery. I can now heartily recommend it.

 

Preparing for the next fight

The odds are weirdly long on an early general election, but I refuse to be complacent – and not merely because the bookies were so wrong about Brexit. If we have learned one truth about Theresa May as Prime Minister so far, it is that she is utterly ruthless. After her savage cabinet sackings, this is, in effect, a new government. She has refused to go to the country, even though she lectured Gordon Brown on the need to gain the endorsement of the electorate when he replaced Tony Blair. Perhaps she doesn’t care much about legitimacy, but she cares about power.

You can be sure that she will be keeping half an eye on Labour’s leadership election. With Jeremy Corbyn potentially reconfirmed as leader in September against the wishes of three-quarters of his MPs, Mrs May might conclude that she will never have a better chance to increase her narrow majority. Throw in the possibility that the economy worsens next year as Brexit starts to bite, and I rule nothing out.

So, we are already selecting candidates. It is vital that they dig in early. As we are the only party prepared to make the positive case for Europe, such an election would present us with an amazing opportunity.

 

Sitting Priti

David Cameron pledged to take an unspecified number of unaccompanied children from camps across the Continent. I am putting pressure on Theresa May to turn that vague commitment into a proper plan. Having visited such camps, I have been fighting for Britain to give sanctuary to a minimum of 3,000 unaccompanied children, who are currently open to the worst kinds of exploitation. We have heard nothing but silence from the government, with underfunded councils reporting that they are not receiving the help they need from Whitehall.

Meanwhile, it remains government policy to send refugees to Turkey – whose increasingly authoritarian government has just suspended human rights protection.

As if all of this were not grim enough, we have a new Secretary of State for International Development, Priti Patel, who has said that she thinks aid should be used largely to promote trade. As someone who wants our country to be respected around the world, I find this plain embarrassing. Actually, it’s worse. It’s shaming. As with Europe, so with the world: the ­Conservative government is hauling up the drawbridge just when we need more than ever to engage with people beyond our shores.

Tim Farron is the leader of the Liberal Democrats. To join the party, visit: libdems.org.uk/join

Tim Farron is leader of the Liberal Democrats.

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue