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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.

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.

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Low turnout may not be enough to save Zac Goldsmith

Demographic patterns in mayoral elections do not replicate those at general elections. 

It is a truism in politics to say that older people vote. Almost exactly a year ago - the day before the General Election - ComRes published a briefing note for our clients pointing out that with large leads particularly amongst older people, as well as among the affluent and those who owned their home, the Conservatives were in the dominant position as the country headed to the polls.           

Turnout is one of the most difficult parts of polling to get right, but history was unequivocal in suggesting that these groups were overwhelmingly the most likely to vote in a General Election. This gave David Cameron the advantage, whatever the headline numbers in the polls were saying, and Labour would need a change in behaviour of historic proportions in order to make it to Downing Street.           

It is in the same spirit that a number of commentators have written articles raising the prospects of an upset in the election for Mayor of London. Different arguments have been used, but the central thrust has tended to be that, despite Sadiq Khan’s lead overall, there are turnout advantages not picked up in polling which benefit the Conservatives and which could produce a shock result.            

This is the first point made by Asa Bennett when advising “Don't write Zac Goldsmith off as London Mayor – he can still win this thing”, while Adam Bienkov has suggested that a low turnout “will inevitably help the Tories, whose voters tend to be older, wealthier and more likely to turn up to the polls.”           

While these arguments make intuitive sense, they make one fatal assumption: that demographic patterns in mayoral elections replicate those at general elections.           

Firstly, it is important to point out that there are no exact numbers on who actually votes at elections. The paper copies of marked electoral registers are kept separately by local authorities and contain no demographic information anyway.            

Instead, we know who votes in General Elections because in places where the population is older, turnout tends to be higher than in places where it is younger. Communities with more middle class and affluent constituents have higher turnouts than more deprived areas.      

The graphs below show the relationship between the socio-economic make up of a constituency’s population, with the proportion of people who turned out to vote at the last General Election. As can be seen, the higher the proportion of constituents who come from the most affluent AB social grades, the higher the turnout was in the constituency. On the other hand, turnout was lower the higher the proportion of a constituency’s population came from the least affluent DE social grades.

Now this all fits with expectation. But the rub comes when we run a similar exercise on the last mayoral election in 2012. If we look at the age profile of individual electoral wards, we would expect to see those with a higher proportion of older people have a higher level of turnout at the election. “Older people vote” after all.

But if we look at the data, a different picture emerges. The graph below shows all the wards in London, and the relationship between the proportion of people aged 55 and over in that ward, and the proportion of people who turned out to vote. And the picture is surprising but clear: there was almost no relationship between age and likelihood to vote at the last mayoral election. 

As the graph shows, there is a very slight incline upwards in the trend-line as the proportion of 55+ constituents increases, but the fit is very loose. The individual data points are scattered all over the place, far from the line and indicating an extremely weak relationship – if any at all (this wouldn’t pass a statistical test for the presence of a correlation).

The case is similar if we use with proportion of 18-34 years – or for that matter, the proportion of a ward’s population which owns their home. Despite some commentators suggesting homeowners are more likely to vote, the data suggest this is not the case at mayoral elections.

Another common trope is that “the doughnut may yet do it” for the Conservatives, with turnout being lower in inner London, where Labour does better, and higher turnout in the leafy suburbs therefore delivering victory for Zac Goldsmith. Again though, this claim does not really stand up to reality. If we look at average turnout in inner and outer London boroughs, it has not been noticeably higher in the outer ring of the doughnut since 2004. In fact, at the last mayoral election, average turnout was slightly higher in inner London boroughs than it was in outer London boroughs.

There is one final possibility, which has become a higher profile issue in the current contest than in the past: that there is a racial element in Londoners’ likelihood to vote. This is important because Zac currently leads Sadiq Khan by seven points among London’s white population, but is 31 points behind among BAME Londoners. If white Londoners were much more likely to vote therefore, there is an outside possibility that Zac Goldsmith could sneak a result.

Once again though, the data suggest this is not the case – there was very little relationship between a ward’s ethnic profile and its level of turnout at the last mayoral election. The predominantly white wards on the left hand side of the chart below include the wards with the highest turnout – but also most of the lowest. There is little to suggest that the predominantly BAME wards necessarily have a lower level of turnout than the London-wide average.

Overall then, there is little relationship between turnout at mayoral elections and age, home ownership, suburbia or ethnicity. It is within this context that much of Zac Goldsmith’s campaign, which has raised controversy in some areas, should be seen. Seeking to link Sadiq Khan to Islamic radicalism is not necessarily about trying to get people to change how they will vote, but more to provide an incentive for older voters in outer London to go out to the polling station and to drive up turnout among Conservative-leaning groups.

In turn, the hope is also to reduce the motivation to vote among Labour-leaning voters by creating an element of doubt in the back of the mind and to dampen enthusiasm (“Meh – I’m not sure I want him to be elected anyway”). The leaflets targeting Hindu and Sikh households are perhaps also similar examples of this - if not converting your opponent’s voters, at least reducing their affinity to him (or her).

Of course, it could also have the opposite effect. Rather than making Labour-leaning voters less likely to vote, Goldsmith’s campaign may have provided them with more of a reason to make the trip to the polling station, in order to stop a campaign they see as racially-charged and a threat to London’s status as a beacon of successful multiculturalism.  

Either way, if such tactics are to work, the Conservatives will need to overturn the turnout trends seen in 2012 to a very large extent. 

London is famously a city where relative wealth and deprivation sit closely alongside each other. Mews housing Georgian terraces meander into streets containing chicken shops, homeless refuges or council estates; Londoners of all backgrounds subscribe themselves to the same crush of the Tube at rush hour. For whatever reason, London also has not the stark variations in propensity to vote between different social groups seen in national elections. Turnout may hold the key for Goldsmith, but it would represent a rupture of historical trend, rather than an expression of it.