Bitcoin started life in 2009 as an obscure, anonymously created digital asset, a new form of money favoured by hacktivists and others who valued the anonymity it guaranteed. On dark web drug-dealing websites such as Silk Road, it was the only means of payment. In the aftermath of the financial crisis, bank bailouts and quantitative easing, this new, decentralised currency was based on a free-market libertarian desire to create a means of exchange divorced from the control of governments and central banks. Bitcoins were not backed by states but “mined” by users, who paid for them with electricity and computing power. The blockchain logs all bitcoin transcations: when bitcoin is exchanged, its “distributed ledger” is updated. Nothing tangible changes hands.
For crypto-evangelists, bitcoin and its ilk will free us from the grip of central banks. But removing the power of state-backed institutions to adjust the money supply (by raising or lowering interest rates or printing new cash) leaves governments impotent in the face of economic crises. For all the faults of the British capitalist superstructure, it was the massive monetary stimulus injected into the economy by the Bank of England – through QE and slashing rates – that prevented the 2008 recession turning into a giant depression.
But bitcoin’s rise in value took it from the bedrooms of anarcho-libertarians into the arena of international finance capital. After the credit crunch and slow recovery from the near-collapse of the international banking system, investors looked for higher rates of return than they could find in traditional markets. In February 2011, a bitcoin (BTC) traded at $1. By its peak on 15 December 2017, 1 BTC was worth $17,900. A week later it had lost a third of its value; 2017 registered several drops of 30 per cent or more in the space of 24 hours. Today, 1 BTC is worth around $6,000.
The cryptocurrency’s extreme volatility prevents its widespread use as a currency. If you’d converted your savings into bitcoin in December of last year, you would now have lost most of them. If you’d taken out a mortgage in bitcoin in 2011, you would now be paying back 599,900 per cent. As a stable store of value for savers or borrowers, then, it is useless. Few have used bitcoin as a means of exchange and far fewer have done more than to merely exchange it for other currencies. Buying things with bitcoin – or at least things available outside of the dark web – is uncommon. When bitcoin’s price rises, it indicates nothing more than the confidence of an increasing number of people that its price will rise. As a purely speculative asset, it has no intrinsic value; it is worth what people say it is worth.
At a recent hearing of the US Senate Committee on Banking, Housing and Community Affairs earlier this month, the economist Nouriel Roubini described cryptocurrencies as “the mother of all scams and bubbles”, and the underlying blockchain technology as “the most over-hyped – and least useful – technology in human history.” Investors and techno-utopians should take note, before enough people start to realise that the emperor is wearing no clothes.