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.

Photo: Getty Images
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I'm far from convinced by Cameron's plans for Syria

The Prime Minister has a plan for when the bombs drop. But what about after?

In the House of Commons today, the Prime Minister set out a powerful case for Britain to join air strikes against Isil in Syria.  Isil, he argued, poses a direct threat to Britain and its people, and Britain should not be in the business of “outsourcing our security to our allies”. And while he conceded that further airstrikes alone would not be sufficient to beat Isil, he made the case for an “Isil first” strategy – attacking Isil now, while continuing to do what we can diplomatically to help secure a lasting settlement for Syria in which Assad (eventually) plays no part.

I agreed with much of David Cameron’s analysis. And no-one should doubt either the murderous barbarism of Isil in the region, or the barbarism they foment and inspire in others across the world.  But at the end of his lengthy Q&A session with MPs, I remained unconvinced that UK involvement in airstrikes in Syria was the right option. Because the case for action has to be a case for action that has a chance of succeeding.  And David Cameron’s case contained neither a plan for winning the war, nor a plan for winning the peace.

The Prime Minister, along with military experts and analysts across the world, concedes that air strikes alone will not defeat Isil, and that (as in Iraq) ground forces are essential if we want to rid Syria of Isil. But what is the plan to assemble these ground forces so necessary for a successful mission?  David Cameron’s answer today was more a hope than a plan. He referred to “70,000 Syrian opposition fighters - principally the Free Syrian Army (FSA) – with whom we can co-ordinate attacks on Isil”.

But it is an illusion to think that these fighters can provide the ground forces needed to complement aerial bombardment of Isil.  Many commentators have begun to doubt whether the FSA continues to exist as a coherent operational entity over the past few months. Coralling the myriad rebel groups into a disciplined force capable of fighting and occupying Isil territory is a heroic ambition, not a plan. And previous efforts to mobilize the rebels against Isil have been utter failures. Last month the Americans abandoned a $500m programme to train and turn 5,400 rebel fighters into a disciplined force to fight Isil. They succeeded in training just 60 fighters. And there have been incidents of American-trained fighters giving some of their US-provided equipment to the Nusra Front, an affiliate of Al Qaeda.

Why has it proven so hard to co-opt rebel forces in the fight against Isil? Because most of the various rebel groups are fighting a war against Assad, not against Isil.  Syria’s civil war is gruesome and complex, but it is fundamentally a Civil War between Assad’s forces and a variety of opponents of Assad’s regime. It would be a mistake for Britain to base a case for military action against Isil on the hope that thousands of disparate rebel forces can be persuaded to change their enemy – especially when the evidence so far is that they won’t.

This is a plan for military action that, at present, looks highly unlikely to succeed.  But what of the plan for peace? David Cameron today argued for the separation of the immediate task at hand - to strike against Isil in Syria – from the longer-term ambition of achieving a settlement in Syria and removing Assad.  But for Isil to be beaten, the two cannot be separated. Because it is only by making progress in developing a credible and internationally-backed plan for a post-Assad Syria that we will persuade Syrian Sunnis that fighting Isil will not end up helping Assad win the Civil War.  If we want not only to rely on rebel Sunnis to provide ground troops against Isil, but also provide stable governance in Isil-occupied areas when the bombing stops, progress on a settlement to Syria’s Civil War is more not less urgent.  Without it, the reluctance of Syrian Sunnis to think that our fight is their fight will undermine the chances of military efforts to beat Isil and bring basic order to the regions they control. 

This points us towards doubling down on the progress that has already been made in Vienna: working with the USA, France, Syria’s neighbours and the Gulf states, as well as Russia and Iran. We need not just a combined approach to ending the conflict, but the prospect of a post-war Syria that offers a place for those whose cooperation we seek to defeat Isil. No doubt this will strike some as insufficient in the face of the horrors perpetrated by Isil. But I fear that if we want not just to take action against Isil but to defeat them and prevent their return, it offers a better chance of succeeding than David Cameron’s proposal today. 

Stewart Wood is a former Shadow Cabinet minister and adviser to Ed Miliband. He tweets as @StewartWood.