Bitcoin: more than just a bubble?

Bitcoin: more than just a bubble?

Oh my goodness, bitcoin has been having a wild ride, said Dominic Frisby on MoneyWeek.com. In October, the cryptocurrency was worth $10,000; it then climbed and climbed – reaching a dizzying new high of $42,000 this month, before crashing back 30% in a day. The papers ran doomy headlines; but at $34,000, bitcoin was still up more than 15% this year, beating “pretty much every asset class”. By market capitalisation (the value of all bitcoins in circulation), it’s now the 14th most valuable currency in the world, and even the naysaying FT – which warned its readers that bitcoin was a bubble when it was worth $132 – is talking about it being “integrated into the financial system”. So is it a bubble? Of course: “manias almost always accompany new tech”. But does that mean you should dismiss it? No. Tulips were a bubble, but tulip farming is still big business; dotcom was a bubble, but we still conduct our lives online. Many don’t understand bitcoin, but they should try, because as a “stateless money system for the internet, immune to the whims of politicians”, it is here to stay.

No one really knows why bitcoin was created; they don’t even know who created it, said Hugo Rifkind in The Times. But it’s pretty clear that it was in reaction to the financial crash of 2008. “It was an attempt to wrest control of money away from governments, because governments were no longer to be trusted with it.” Post-crash, they’d printed more and more of it, trashing your savings to bail out “the bloody banks”. Bitcoin, which can’t be devalued by national treasuries, was designed to “disempower the suits”. But it hasn’t really worked out that way. Cryptojunkies envisaged it being used to pay for goods and services, said Robert Watts in the same paper, yet few such transactions take place. Bitcoin is being used as a “store of value”, and increasingly mainstream investors are getting on board – which is alarming, as it “exists only as a line of code, with no real asset backing”.

Let’s face it – it’s just not a useful currency, said Tim Worstall on CapX. Consider the man in Wales, who lost bitcoin now worth £230m when he threw away his old hard drive by mistake; or the chap in the US, who can’t remember the password to his digital wallet, and has two chances left to get his hands on $220m. Some 20% of bitcoin is said to be “stranded”. And it can’t be replaced, because the currency is fixed: once 21 million bitcoin has been issued (through its environmentally disastrous digital “mining” system), that’s it. No one knows what will happen then, but surely the reason we switched from gold to money in the first place is that it’s handy to be able to print more of it.

 

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