Bitcoin is back in the news. The gyrations of its price are noteworthy because they create extreme excitement for its enthusiasts. These people believe, with a cultish fervour, that bitcoin will eventually replace money. It’s a big claim. In contrast, the vast majority of population don’t think about cryptocurrency, remaining more concerned about real currency.
Yet bitcoin is interesting, because its proponents have managed to create something out of nothing. By nothing I mean a fabricated token backed by nothing; by something I mean an asset millions believe in, which has made some people rich and whose price is now surging.
This time bitcoin is in the news not because of its precipitous fall, as was the case for the past 18 months, but its turbocharged rise. In the past few days, bitcoin hit a new peak, reaching $69,000 (€63,300) briefly; on Thursday it had fallen back a little to about $67,000. Bitcoin’s previous peak was in November 2021, when it hit $57,000, before slumping into a prolonged bear market where prices sank to as low $16,000.
According to Forbes, global crypto market capitalisation currently stands at about $2.64 trillion. To put this in context, the global bond market capitalisation is about $150 trillion. So even though the global cryptocurrency market is less than 2 per cent of that of the bond market, every move in crypto is plastered all over social media, due to the evangelism of its proponents. A 1 per cent move in the bond market has a far greater impact on global wealth, yet no one blinks when it occurs. When bitcoin moves, it is trumpeted by its owners as the financial Second Coming.
But what exactly is bitcoin for? Let’s step back from the hype and explain what it is before trying to ascertain what is it for.
Bitcoin was conceived after Wei Dai, a Chinese-American engineer, first described the idea of a “cryptocurrency” on the Cypherpunk mailing list in 1998. Cyberpunk, with which the mailing list was associated, is a fascinating art, literature and social movement that advocates for anti-establishment, social change through embracing technology, basically punk rock for the internet age. Dai suggested that this could be a new form of money that uses cryptography and hides transactions from a central authority. Part of its appeal is this anti-authoritarian angle.
So who created it? It’s not clear whether bitcoin was created by a group or a stand-alone individual, but it was made in 2008 as a way to conduct transactions without intervention from any sort of regulatory body. The first bitcoin specification and proof of concept was published in 2009 in a cryptography mailing list by the presumed pseudonymous Satoshi Nakamoto. Satoshi left the project in late 2010 without revealing much about himself. The community has since grown exponentially, with many developers working on various aspects of bitcoin.
Bitcoin emerged during the 2008-2012 financial crisis, at a time when people began to lose faith in the banks, making the concept of an unregulated, antiauthority currency attractive, even revolutionary
A way to think about bitcoin is to consider a coal mine with a finite amount of coal in it. Miners hack away to bring the coal up to the surface, knowing eventually it will run out. Bitcoin is a cybermine where cyberminers hack away, trying to find combinations that will crack a code, releasing a precious bitcoin. The code is set by a computer algorithm that has a fixed cap of 21 million digital coins (nearly 19.6 million have been created so far).
Obviously, at a value of about $66,000 per bitcoin, there’s an incentive to mine – and the closer the mine gets to exhaustion, the greater the incentive to mine. These bitcoins are then traded or hoarded. The demand comes from investors who believe its purely speculative value is justified due to the fact it is scarce and becoming scarcer.
Bitcoin emerged during the 2008-2012 financial crisis, at a time when people began to lose faith in the banks, making the concept of an unregulated, antiauthority currency attractive, even revolutionary. It purported to ensure anonymity, allowing people to be completely invisible when making transactions – as everything was done through online identities.
This has made it a hub for criminal activity, from ransomware attacks to buying drugs on the dark web. Not only is it used for illegal activities, but it means illegal activities online have been made easier due to its existence. However, the anonymity aspect has waned and a recent report suggests that the US Federal Reserve is to track 63.7 out of every 75 bitcoins.
Over the years, the anonymous, slightly rebellious aspect of bitcoin has faded and – ironically, for an asset that was supposed to offer an alternative to the corruption of mainstream finance and banking – the acceleration of bitcoin’s price is precisely why bitcoin got into bed with Wall Street.
In the past few months, bitcoin’s rich advocates have enlisted the very financial institutions that the cryptocurrency was supposed to upend. Lest you think this is all some avant-garde, DIY punk movement, the huge amounts of money involved means the people who initially bought bitcoin for pennies are now enormously wealthy and, like all rich people, they now lobby the very governments that they were supposed to undermine.
We in Ireland have seen this game before in the land boom/bust of the Celtic Tiger years. Unlike land or houses, bitcoin doesn’t hold any tangible value – after all, it is just computer code
After extensive lobbying, the US Securities and Exchange Commission recently approved bitcoin funds, allowing them to be traded in the mainstream market. Eleven huge financial behemoths, including BlackRock, Ark Invest/21Shares, Fidelity, Invesco and VanEck, now offer bitcoin to ordinary people for investment purposes. Cryptocurrencies have been recognised by the US government as a legitimate asset – leading to more people willingly investing, adding a false sense of legitimacy to bitcoin.
The problem with calling bitcoin an asset is that an “asset” requires a stream of income, whereas bitcoin has none. It is a purely speculative punt based on the greater fool theory – all you need to profit from an investment is to find someone willing to buy the asset at a higher price.
We in Ireland have seen this game before in the land boom/bust of the Celtic Tiger years. But unlike land or houses, bitcoin doesn’t hold any tangible value – after all, it is just computer code. It is not money, that is clear, and it has no more real value than any other cryptocurrencies. Its “legitimacy” stems only from the fact that it is the biggest cryptocurrency.
When very rich people lobby the state to make something legitimate that began explicitly as illegitimate, and they seek to enlist and enrich Wall Street in the process, you should be worried. When this is pursued in a fashion that opens up avenues to sell bitcoin to small investors, who will be excited by higher prices, alarm bells should ring loud and clear.
We’ve seen this before, and anyone with a sense of financial history knows the way this ends. And it’s not pretty.