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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Ansbach puts Europe's bravest politician under pressure

Angela Merkel must respond to a series of tragedies and criticisms of her refugee policy. 

Angela Merkel, the Chancellor of Germany, is supposed to be on holiday. Two separate attacks have put an end to that. The first, a mass shooting in Munich, was at first widely believed to be a terrorist attack, but later turned out to be the actions of a loner obsessed with US high school shootings. The second, where a man blew himself up in the town of Ansbach, caused less physical damage - three were seriously injured, but none killed. Nevertheless, this event may prove to affect even more people's lives. Because that man had come to Germany claiming to be a Syrian refugee. 

The attack came hours after a Syrian refugee murdered a pregnant Polish woman, a co-woker in a snack bar, in Reutlingen. All eyes will now be on Merkel who, more than any other European politician, is held responsible for Syrian refugees in Europe.

In 2015, when other European states were erecting barriers to keep out the million migrants and refugees marching north, Merkel kept Germany's borders open. The country has resettled 41,899 Syrians since 2013, according to the UNHCR, of which 20,067 came on humanitarian grounds and 21,832 through private sponsorship. That is twice as much as the UK has pledged to resettle by 2020. The actual number of Syrians in Germany is far higher - 90 per cent of the 102,400 Syrians applying for EU asylum in the first quarter of 2016 were registered there. 

Merkel is the bravest of Europe's politicians. Contrary to some assertions on the right, she did not invent the refugee crisis. Five years of brutal war in Syria did that. Merkel was simply the first of the continent's most prominent leaders to stop ignoring it. If Germany had not absorbed so many refugees, they would still be in central Europe and the Balkans, and we would be seeing even more pictures of starved children in informal camps than we do today. 

Equally, the problems facing Merkel now are not hers alone. These are the problems facing all of Europe's major states, whether or not they recognise them. 

Take the failed Syrian asylum seeker of Ansbach (his application was rejected but he could not be deported back to a warzone). In Germany, his application could at least be considered, and rejected. Europe as a whole has not invested in the processing centres required to determine who is a Syrian civilian, who might be a Syrian combatant and who is simply taking advantage of the black market in Syrian passports to masquerade as a refugee. 

Secondly, there is the subject of trauma. The Munich shooter appears to have had no links to Islamic State or Syria, but his act underlines the fact you do not need a grand political narrative to inflict hurt on others. Syrians who have experienced unspeakable violence either in their homeland or en route to Europe are left psychologically damaged. That is not to suggest they will turn to violence. But it is still safer to offer such people therapy than leave them to drift around Europe, unmonitored and unsupported, as other countries seem willing to do. 

Third, there is the question of lawlessness. Syrians have been blamed for everything from the Cologne attacks in January to creeping Islamist radicalisation. But apart from the fact that these reports can turn out to be overblown (two of the 58 men arrested over Cologne were Syrians), it is unclear what the alternative would be. Policies that force Syrians underground have already greatly empowered Europe's network of human traffickers and thugs.

So far, Merkel seems to be standing her ground. Her home affairs spokesman, Stephan Mayer, told the BBC that Germany had room to improve on its asylum policy, but stressed each attack was different. 

He said: "Horrible things take place in Syria. And it is the biggest humanitarian catastrophe, so it is completely wrong to blame Angela Merkel, or her refugee policies, for these incidents." Many will do, all the same.