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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Everyone's forgotten the one issue that united the Labour party

There was a time when Ed Miliband spoke at Momentum rallies.

To label the row over the EU at Thursday’s Labour leadership hustings "fireworks" would be to endow it with more beauty than it deserves. Owen Smith’s dogged condemnation of John McDonnell’s absence from a Remain rally – only for Corbyn to point out that his absence was for medical reasons – ought to go down as a cringing new low point in the campaign. 

Not so long ago, we were all friends. In the course of the EU referendum, almost all of the protagonists in the current debacle spoke alongside each other and praised one another’s efforts. At a local level, party activists of all stripes joined forces. Two days before polling day, Momentum activists helped organise an impromptu rally. Ed Miliband was the headline speaker, and was cheered on. 

If you take the simple version of the debate, Labour’s schism on the EU appears as an aberration of the usual dynamics of left and right in the party. Labour's left is supposedly cheering a position which avoids advocating what it believes in (Remain), because it would lose votes. Meanwhile, the right claims to be dying in a ditch for its principles - no matter what the consequences for Labour’s support in Leave-voting heartlands.

Smith wants to oppose Brexit, even after the vote, on the basis of using every available procedural mechanism. He would whip MPs against the invocation of Article 50, refuse to implement it in government, and run on a manifesto of staying in the EU. For the die-hard Europhiles on the left – and I count myself among these, having run the Another Europe is Possible campaign during the referendum – there ought to be no contest as to who to support. On a result that is so damaging to people’s lives and so rooted in prejudice, how could we ever accept that there is such a thing as a "final word"? 

And yet, on the basic principles that lie behind a progressive version of EU membership, such as freedom of movement, Smith seems to contradict himself. Right at the outset of the Labour leadership, Smith took to Newsnight to express his view – typical of many politicians moulded in the era of New Labour – that Labour needed to “listen” to the views Leave voters by simply adopting them, regardless of whether or not they were right. There were, he said, “too many” immigrants in some parts of the country. 

Unlike Smith, Corbyn has not made his post-Brexit policy a headline feature of the campaign, and it is less widely understood. But it is clear, via the five "red lines" outlined by John McDonnell at the end of June:

  1. full access to the single market
  2. membership of the European investment bank
  3. access to trading rights for financial services sector
  4. full residency rights for all EU nationals in the UK and all UK nationals in the EU, and
  5. the enshrinement of EU protections for workers. 

Without these five conditions being met, Labour would presumably not support the invocation of Article 50. So if, as seems likely, a Conservative government would never meet these five conditions, would there be any real difference in how a Corbyn leadership would handle the situation? 

The fight over the legacy of the referendum is theatrical at times. The mutual mistrust last week played out on the stage in front of a mass televised audience. Some Corbyn supporters jeered Smith as he made the case for another referendum. Smith accused Corbyn of not even voting for Remain, and wouldn’t let it go. But, deep down, the division is really about a difference of emphasis. 

It speaks to a deeper truth about the future of Britain in Europe. During the referendum, the establishment case for Remain floundered because it refused to make the case that unemployment and declining public services were the result of austerity, not immigrants. Being spearheaded by Conservatives, it couldn’t. It fell to the left to offer the ideological counter attack that was needed – and we failed to reach enough people. 

As a result, what we got was a popular mandate for petty racism and a potentially long-term shift to the right in British politics, endangering a whole raft of workplace and legal protections along the way. Now that it has happened, anyone who really hopes to overcome either Brexit, or the meaning of Brexit, has to address the core attitudes and debates at their root. Then as now, it is only clear left-wing ideas – free from any attempt to triangulate towards anti-migrant sentiment– that can have any hope of success. 

The real dividing lines in Labour are not about the EU. If they were, the Eurosceptic Frank Field would not be backing Smith. For all that it may be convenient to deny it, Europe was once, briefly, the issue that united the Labour Party. One day, the issues at stake in the referendum may do so again – but only if Labour consolidates itself around a strategy for convincing people of ideas, rather than simply reaching for procedural levers.