Bitcoin is proving why it can't be called 'money' - yet

Bitcoin is incredible, but the power of a currency is its credit - and Bitcoin hasn't got there yet.

The tender, age of four (Photo: Getty Images/George Frey)

It’s a big week for Bitcoin. In the last forty-eight hours alone the value of one Bitcoin (1 BTC) rocketed from £328 to £511 and, as many predicted, in the past twelve it crashed back down again to a low of £322, a rise and fall of over 50%. It is currently fluctuating fairly madly around the £350 mark. But it is fair to say these look more like growing pains than death throes. 

It is worth remembering that just a week ago Bitcoin was only worth £227, and seven months ago people were pulling out their hair because the market crashed from £169 to £84. It is still approximately forty times more valuable than this time last year, so there is one outcome of this latest spasm perhaps more significant than the price itself: now it’s got everyone’s attention.

Bitcoin is being trumpeted as a paradigm shift by firebrand market analysts like Max Keiser and tech gurus like John McAfee. Both are urging everyone to clean up now before it’s ubiquitous. Speaking to Canadian television, McAfee said: “Bitcoins will be everywhere and the world will have to readjust. World governments will have to readjust.” And perhaps not coincidentally, Bitcoin prices rose nearly £20 in the three days after Keiser championed Bitcoin on Have I Got News For You a fortnight ago.

So, if the buzz is to be believed, one of two things can happen from this point:

  1. Obviously such rampant growth is unsustainable. Bitcoin is a classic flash in the pan, will-o’-the-wisp, dotcom-style bubble, and it will lead a few early sellers to riches and thousands of others to ruin and/or disappointment.
  2. Governments will attempt but fail to control the burgeoning cryptocurrency, which will undermine the increasingly exploitative and crisis-prone finance industry hegemons, peacefully ushering in a new era of decentralised democratic money unburdened by unfair fees and the dangers of things like toxic mortgages.

It’s undoubtedly exciting, and bombast is tempting, but there is little point pretending to be Nostradamus when investors are still so flighty. All we can do is diagnose what’s going on right now.

So what was behind the latest boom? A lot of Bitcoin’s growth has come on the tail of some huge media coverage this last month. Aside from the latest drama, two particular news stories last month boosted the currency’s profile. The first was the fairytale story of a Norwegian man who bought 5,000BTC when they were invented in 2009, at £14, and promptly forgot about them. When he remembered them this year, they were worth £550,000. Quite an advert.

The second, somewhat ironically, was the FBI’s dramatic closure of Silk Road last month. As well as hearing about Bitcoin for the first time, people found out you could order pretty much any illegal substance from the comfort of your living room, anonymously - which is not something any other currency will offer any time soon. When the FBI arrested Ulbricht, the alleged head of Silk Road, they seized his ‘wallet’ containing 144,336BTC. (At the time, that was worth £17.3m, but just over a month later it is already worth over £50m.) As time goes on, this big-ticket arrest is looking more and more like a Pyrrhic victory for the FBI, because as even mainstream news sources acknowledge, the Silk Road is now thoroughly back online – along with a range of other competing black market sites (and now even more people know about them too).

What’s more, the danger that bitcoins will somehow leach away the world’s tax revenues and lead to anarchy is rapidly dissolving, as governments decide how to cope with them. Yesterday, in an act that clearly knocked many off the fence and into the Bitcoin market, the US Department of Justice told the US Senate committee for Homeland Security and Governmental Affairs that Bitcoins are "legitimate financial instruments" – a statement at once bold and vague, but certainly the first step on the road to regulation and a huge boost to buyer confidence.

The German government has already categorized Bitcoin as a ‘unit of account’, that is, officially recognizing it as money taxable under capital gains, which has lead many to speculate that others in the Eurozone may soon follow suit. However, not all governments have been so welcoming: in July, Thailand banned Bitcoin outright.

Our own HMRC is suggesting bitcoins will soon be taxable in their own right as ‘single use vouchers’ – a clumsy definition, as ‘vouchers’ have a relatively stable face value and bitcoins are repeatedly proving to have anything but.

But, as it stands, it’s difficult to argue the boom is motivated by anything more than the desire to make a quick buck. The largest Bitcoin exchange, BTC China, led today’s selling spree, in a rather blunt demonstration that Bitcoin has not proven its worth as a social investment just yet. Whatever its increasingly extreme price swings may eventually portend, it hasn’t earned the right to be called ‘money’. As the Washington Post’s Neil Irwin quipped back after the last Bitcoin crash, in April:

"If a currency can lose 75 percent of its buying power in two days, it may not be the best store of value. . .

What makes money money is what you can do with it. If you can purchase the goods and services that you want and need with it, it is money; if you can’t, it isn’t."

Bitcoin can be used in some shops around the States, a whole street in Berlin, thousands of online stores, and there is even a Bitcoin ATM in Vancouver. Some people have experimented living exclusively using Bitcoin – one successfully managed a Bitcoin roadtrip as early as 2011 (though he mostly paid other Bitcoiners to pay in US dollars…).

But clearly to the vast majority of its buyers, Bitcoin remains a surreally lucrative, volatile asset; it has a hefty price, but does it have value? Its proponents call these wild swings ‘price corrections’ as the market realizes the currency’s true value, but the element of faith still outweighs the evidence.

Bitcoin is, in many ways, incredible; but the entire power - indeed the entire point - of a currency is its ‘credit’. Time will tell if this week’s conversations in the Senate have changed all that. But for now, it looks like the main force behind the Bitcoin boom is indistinguishable from that which has been behind every other boom: buy low, sell high.

N.B.: figures correct at time of publishing, but probably not for long.