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15 April 2021updated 23 Jul 2021 6:32am

Bitcoin – the future of money or a speculative bubble?

Coinbase's IPO and post-Covid monetary policy worldwide will only increase talk of crypto as a new "digital gold".

By Jonny Ball

In June 2013, the police raided a squatted former police station in Soho, London, arresting 57 activists who had turned the premises into an anti-G8 headquarters. A “Carnival Against Capitalism” was being held in central London as the Group of Eight leaders met in Northern Ireland to discuss international trade, global action on tax avoidance, and the Syrian civil war. Inside the occupied Soho address, a group of idealistic computer programmers plotted the downfall of the world’s financial system. Their plans centred around Bitcoin.

The cryptocurrency, developed five years earlier, could be stored and spent anonymously, and could be minted without interference from the watchful eyes of government. When the anti-G8 Bitcoin squat was raided, 1 Bitcoin (BTC) was worth around $100. Today 1 BTC is worth around $57,000 – an increase of 57,900 per cent. In February this year, Bitcoin hit a market capitalisation of $1trn after a 296 per cent rally in 2020. A report released last month by Citigroup conceded that “large swathes of the traditional banking and financial markets view Bitcoin as a completely valueless asset”, and quoted the economist Nouriel Roubini as saying “the Flintstones had a better monetary system”.

But the report went on to say that Bitcoin is “recognised as a source of ‘digital gold’”, largely due to its built-in scarcity – a finite number of Bitcoins is written into the cryptocurrency’s code – and that it could one day become “the cuJPrrency of choice for international trade”. Some, including former Bank of England governor Mark Carney, have speculated that a digital currency like Bitcoin could one day become the global reserve currency, replacing the US dollar. As governments around the world announce colossal spending packages in the wake of Covid-19, and with historic low interest rates looking set to remain part of any “new normal”, the report notes that “concerns about future possible inflationary pressures” for traditional currencies are giving extra impetus to the bull market for Bitcoin.

Institutional investors have started making forays into Bitcoin, according to investment bank JP Morgan. The bank has said that if wild price fluctuations such as those seen over the past decade were to slow, this would improve Bitcoin’s efficacy as a safe store of value much more akin to the touted “digital gold”, and could see the price of 1 BTC rise to $130,000. This week, shares in Coinbase, a cryptocurrency exchange platform, finished their first day of trading 31 per cent above their reference price of $250 a share. One of the company’s founders, Brian Armstrong, said that cryptocurrencies were here to solve the “important meta-challenge” of “economic freedom”.

Read more: Coinbase IPO: like it or not, you’re now invested in Bitcoin

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But not everyone is convinced. “No scheme like this in history has ever lasted forever without either just blowing up or some kind of legal party taking action,” says Martin Walker, who as well being director of banking and finance at the Center for Evidence-Based Management, a non-profit, is a major sceptic. The thing about cryptocurrencies, he says, “is that unlike almost any other kind of financial asset, they do not generate any return. They don’t pay a coupon like a bond, they don’t pay a dividend like a share, they don’t give you any ownership rights on anything, and you can’t really spend them anywhere.”

Why buy them? “The only reason is if you think the price will keep going up,” he says. In other words, Bitcoin is little more than a speculative asset.

Despite the left-wing radicalism of the Bitcoin squatters, much of the early interest in cryptocurrency was generated by followers of what Walker describes as “right libertarian philosophy”. David Golumbia, a professor of digital studies at Virginia Commonwealth University, has written extensively on the links between Bitcoin and “far right political thought”, and Nick Land, a leading proponent of “Dark Enlightenment” philosophy on the alt-right, is a Bitcoin enthusiast.

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Due to the anonymity afforded by cryptocurrencies (which don’t have to be stored in traditional bank accounts linked to names and addresses with official identification, regulatory oversight, and “know your customer” policies) Bitcoin grew in popularity as a means of buying illegal products on the “dark web”, including drugs, guns and child pornography. In 2014, when the FBI shut down the black market website Silk Road, the price of Bitcoin collapsed. Even today, its use as a means of payment for legal products is extremely rare. Bitcoin has also been adopted by criminal groups as a way of evading taxes and laundering money. When an anonymous “dark wallet” for Bitcoin was first developed, a blog supporting Islamic State hailed it as “simple” and “easy”, and asked “Allah to hasten it’s [sic] usage for us”.

Bitcoin was developed in 2008 by an unknown coder using the pseudonym Satoshi Nakamoto. It was to be a “decentralised” digital currency, unshackled from state-owned banks like the Fed, the Bank of England or the European Central Bank. At the time, these three institutions and others like them were dealing with the fallout from the collapse of the US sub-prime mortgage market and the largest financial crisis since the Great Depression. Soon they would fight the fire of insolvency through the creation of billions of dollars in new money, used to purchase bonds and financial assets in a process known as quantitative easing.

In a nod to the chaotic circumstances in which Bitcoin was born, Nakamoto inserted a copied message, a headline from The Times, into the code of the original Bitcoin block: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Instead of relying on this failed system of boom, bust and bailouts, Bitcoin would use “blockchain” technology to create a public “distributed ledger” – a record of all the Bitcoin trades and transactions that had taken place, and all the Bitcoins that had been created. This “distributed ledger” would be accessible to all, and it not only facilitated quick transfers of Bitcoin from one “digital wallet” to another, without the intermediaries of the traditional banking system, but also made Bitcoin impossible to forge or replicate. The “distributed ledger” of Bitcoin transactions would be maintained through the process of “mining” or creating new Bitcoins, using computing power to make complex mathematical calculations to keep the blockchain up to date.

Written into Bitcoin’s code was the proviso that its numbers would be kept finite. Unlike in the old, discredited world of fiat currencies, with central banks able to issue free-floating pounds and dollars ad infinitum, no more than 21 million Bitcoins will ever be mined. While there are currently around 19 million in circulation, it’ll take until 2140 for the full amount to be created. It is this “digital scarcity”, engineered into the product, that has led to comparisons, including in the Citigroup report, with gold. Its limited supply, like the precious metal, means it is “insulated from inflation rates” and the ultra-low interest rate monetary policy pursued by central banks for a post-Covid recovery.

Read more: Facebook and the great crypto con

The vision of many of the early users of Bitcoin was for a currency that didn’t bow to the whims of the global banking and financial system. “A lot of people have an alternative view of the world – and a lot think that because capitalism is bad, Bitcoin is great,” says Walker. “But no. With Bitcoin you’ve taken the worst bits of capitalism, concentrated it in one thing, and totally divorced it from anything real.”

An ecosystem of cryptocurrencies and blockchain-based products has grown alongside Bitcoin. In January, the price of Dogecoin, a cryptocurrency that takes inspiration from the doge internet meme, rose by 800 per cent in 24 hours after it was promoted via Twitter by the rapper Snoop Dogg and Tesla’s founder Elon Musk. Another, Coinye, released in 2014, was sued by Kanye West when it used his image without permission. It is alleged, too, that cryptocurrency Tether, a so-called “stablecoin”, which claimed to be backed by real US dollars, has been used to pump the price of Bitcoin.

Perhaps most bafflingly, the current crypto boom has exploded in tandem with the market for non-fungible tokens (NFTs) – unique digital codes, also built using blockchain technology, that cannot be copied or forged and are often linked to digital artwork or music. At the beginning of March, auction house Christie’s sold a computer-generated collage image linked to an NFT for £50m, making the image’s creator, Beeple, one of the top three most valuable living artists, alongside Jeff Koons and David Hockney.

“People just keep pumping the price up,” says Walker. And the story is the same across all crypto assets, all blockchain-based technologies, from cryptocurrencies to the burgeoning market in art made up of noughts and ones on a server. “Just think,” Walker continues, “if Bitcoin stabilises at $60,000 people will say ‘Hurray, it’s worth $60,000!’ But if the price stops moving, no new money comes in. That means there’s no new money to pay for the Bitcoin miners who have billions of dollars in expenses every year. There’s no profit for anyone at all if the price is stable, so they have to keep pumping.”

As policymakers experiment with monetary and fiscal policy to stave off a post-Covid recession, Bitcoin and cryptocurrencies may well continue their volatile journeys as finite, inflation-resistant assets at the centre of a speculative bubble of historic proportions. While the crypto market remains unpredictable, what is certain is that these digital products have come a long way from the world of anti-capitalist hacktivism and Soho squats. 

This article originally appeared in the Spotlight supplement on fintech. You can download the full edition here.