Sam Leith

The Bitcoin delusion

The Bitcoin delusion
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Cast your mind back a few years to last week – when there was much laughing and wailing at the collapse of Squid coin, a meme cryptocurrency launched to capitalise on the popular Netflix show. It had gone to market, had rocketed 23 million per cent in value to $28,000-odd a unit... and then plummeted to zero on Monday morning after the creators cashed out for real-world money. Yet like the battle-hardened protagonist of the show, amazingly, the currency is down but not out. Yesterday it was reported to have been the top gainer in the global crypto market, having rocketed more than 800 per cent in 24 hours to... $0.65.

Not much consolation, I suppose, to those who bought the peak, but hope obviously springs eternal. And the story of Squid coin – not least that forlorn determination to ‘buy the dip’ – seems to stand for so much about the troubling world of blockchain hype: we’re looking at a religious as much as an economic phenomenon. Arthur C. Clarke’s line that any sufficiently advanced technology is indistinguishable from magic seems to apply here. What do we do when we see magic? We worship it.

I don’t understand the mathematical or computational basis of the blockchain, and few of us do. It might as well be magic. But the principle – a distributed ledger of transactions that’s fully transparent and that can’t be messed with by any central authority – is one with any number of uses and virtues. Yet as often with sketchily understood new technologies, the best use-cases aren’t always the ones we arrive at first; and wonderment at its miraculous maths-addled existence produces infatuation and magical thinking.

Hence: the fad for cryptocurrency. The best and clearest argument I’ve heard against Bitcoin and its myriad digital cousins does not depend on the underlying technology. It is this: that crypto can’t decide whether it’s a currency or a speculative investment. All the early hype about Bitcoin was about the first thing. It concerned the ways it would disrupt fiat currencies, liberate international markets from the dead hand of central banks and all those bloodsucking intermediaries; not to mention circumventing the sorts of snoops and bluenoses who take an interest in money-laundering, tax and preventing the sale of automatic weapons to the under-twelves.

But what’s happening now is very much more about the second thing. People aren’t really using Bitcoin to buy goods and services. The fact you could buy a Tesla with Bitcoin was a good publicity stunt precisely because it was an outlier. Nobody’s buying the weekly Tesco shop or paying the cleaner with Bitcoin. Instead, they’re trading speculatively in order to make real-world money on crypto exchanges. They’re watching it rocket up in value (or at least price) in ways that outstrip boring real-world things like blue-chip shares.

The divergence of these two things seems to be most neatly illustrated in the story of a friend of mine who bought a couple of Bitcoin back in the early 2010s. He had been asked to write a feature on this wacky new experiment in currency, so shelled out a couple of notes to find out how the whole thing worked. Feature written, he did then what everybody else at the time did with Bitcoin. He didn’t ‘hodl’ it in the hopes of it going ‘to the moon’. He went on the Silk Road – a now defunct darkweb trading site – and bought a bag of weed. As he ruefully reflects, had he held onto his Bitcoin he would by now have been able to pay off his mortgage and had change left over to buy Owen Paterson. It was, retrospectively, the most expensive bag of weed he ever bought. He mistook a speculative investment for a currency.

There isn’t an absolute distinction between the two things I’ve set out: as forex markets show, currency can be traded speculatively and is. But they are herring of a slightly different stripe. You don’t generally want currencies to fluctuate wildly in value: if you are running a restaurant, you don’t want to discover that by the afternoon service you’re selling a burger at a quarter of the price the ingredients cost you that morning. You want to know that the pound in your pocket is worth roughly the same at teatime as it was at breakfast. Bad Things happen when it isn’t.

What stabilises the price of traditional money, if as a non-economist I’m understanding this correctly, is that millions of people are using it all the time to buy real-world goods and services. Speculation in currency piggybacks on that, but the bottom line is that paper money’s ‘value’ is evidenced and tested and constantly corrected by squillions of transactions taking place in real-world economies.

Investments, on the other hand, do want to move in price. That’s sort of the point of them. The braver among us don’t mind investments being volatile -- and the more abstract they are, the least grounded in multiple real-world transactions (the market in fine art, say, or untested tech start-ups, or guesses about what the future of the market itself will be) the more volatile they will be. But in most cases – joint-stock companies being an original instance -- they are pegged to some sort of real-world value, or expectation of it.

In the absence of its use as a currency, though, the only thing supporting the value of crypto is the expectation that there’s always going to be someone else who’ll pay to take it off your hands. You’re betting, essentially, on being the last person holding the bomb before it goes off. With Squid coins, most people could see the wires sticking out and smell the cordite (let’s not even talk about the similarly ill-fated cryptocurrency Monkey Jizz). Bitcoin is heavy, shiny and attractive. But if you hold it right up to your ear, deep inside, I think you can hear something ticking.

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