I am not an economist; neither am I, at least in terms of occupation and/or formal training, an historian. I say that from the outset simply because it may be objected that, especially in terms of economics, I have no intellectual locus standi, despite the fact that most predictions made by economists turn out to be inaccurate. Also, “two economists, three opinions”…
So, Bitcoin. Bitcoin was invented in 2008, possibly in Japan, by someone (or a group) whose provenance and even real name or names remain unknown:
What is Money, in any case?
Money is an almost metaphysical thing. Different societies have used seashells, precious metals etc as money, the key characteristic being the relative rarity of the commodity used. In China (in the 7th Century under the Tang dynasty), paper currency was invented and more widely introduced in the 11th Century (Song Dynasty), where it was encountered by Marco Polo and others, who introduced the idea to Europe.
Paper currency was, at first and for a long time, backed or notionally backed by precious metals, notably gold. Paper money only became generally acceptable in Europe a thousand years after its invention in China. The natural scepticism of the people was overcome both by its convenience and by its credibility, that credibility not only bolstered by its supposed convertability into gold or silver but by the draconian penalties visited upon those who counterfeited the notes.
These factors underpin all money, credibility or popular belief in its value being the core.
One could go wider and say that credibility and belief underpin all valuation of assets, whether money assets, real property or other property in which the population is impelled to invest. Time and again there have been speculative bubbles: in currencies, in shares, in housing, in undeveloped land, in metals and even in such things as tulip bulbs (17thC Holland).
A good history of these bubbles and other mass events of the sort was penned in 1841 after the South Sea Bubble and was reprinted after the Wall Street Crash of 1929: Extraordinary Popular Delusions and the Madness of Crowds.
Since that book came out, since its 1930s reprinting, other bubbles have come and gone. Among the more noteworthy were the “Silver Bears” bubble of the 1970s
and various real property bubbles across the world.
Bitcoin Goes Viral
At first, back in 2008, Bitcoin was valueless, worth nothing at all. It was just electrical impulses on a machine, effectively. It was still of small value three years later:
“The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as bubbles and busts. In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2. In the latter half of 2012 and during the 2012–13 Cypriot financial crisis, the bitcoin price began to rise,reaching a high of US$266 on 10 April 2013, before crashing to around US$50. On 29 November 2013, the cost of one bitcoin rose to a peak of US$1,242. In 2014, the price fell sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014 it was under US$600.” [Wikipedia]
“Ponzi scheme and pyramid scheme concerns
Various journalists, economists, and the central bank of Estonia have voiced concerns that bitcoin is a Ponzi scheme. In 2013, Eric Posner, a law professor at the University of Chicago, stated that “a real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion.” A 2014 report by the World Bank concluded that bitcoin was not a ‘deliberate’ Ponzi scheme, but that it did thus far meet the “standard definition of a speculative bubble”.:7 The Swiss Federal Council:21 examined the concerns that bitcoin might be a pyramid scheme; it concluded that “Since in the case of bitcoin the typical promises of profits are lacking, it cannot be assumed that bitcoin is a pyramid scheme.” In July 2017, billionaire Howard Marks referred to bitcoin as a pyramid scheme.
On 12 September 2017, Jamie Dimon, CEO of JP Morgan Chase, called bitcoin a “fraud” and said he would fire anyone in his firm caught trading it. Zero Hedge claimed that the same day Dimon made his statement, JP Morgan also purchased a large amount of bitcoins for its clients.
Speculative bubble dispute
Bitcoin has been labelled a speculative bubble by many including former Fed Chairman Alan Greenspan and economist John Quiggin. Nobel Memorial Prize laureate Robert Shiller said that bitcoin “exhibited many of the characteristics of a speculative bubble”. Journalist Matthew Boesler in 2013 rejected the speculative bubble label and saw bitcoin’s quick rise in price as nothing more than normal economic forces at work. Timothy B. Lee, in a 2013 piece for The Washington Post pointed out that the observed cycles of appreciation and depreciation don’t correspond to the definition of speculative bubble. On 14 March 2014, the American business magnate Warren Buffett said, “Stay away from it. It’s a mirage, basically.”
Two lead software developers of bitcoin, Gavin Andresen and Mike Hearn, have warned that bubbles may occur. David Andolfatto, a vice president at the Federal Reserve Bank of St. Louis, stated, “Is bitcoin a bubble? Yes, if bubble is defined as a liquidity premium.” According to Andolfatto, the price of bitcoin “consists purely of a bubble,” but he concedes that many assets “have bubble component to their price”.:21 Speculation in bitcoin has been compared to the tulip mania of seventeenth-century Holland. Comparisons have been made by the vice-president of the European Central Bank, Vítor Constâncio, by JPMorgan Chase chief Jamie Dimon, by hedge fund manager Ken Griffin of Citadel, and by former president of the Dutch Central Bank, Nout Wellink. In 2013, Wellink remarked, “This is worse than the tulip mania […] At least then you got a tulip [at the end], now you get nothing.” On 13 September 2017, Jamie Dimon compared bitcoin to a bubble, saying it was only useful for drug dealers and countries like North Korea. On 22 September 2017, a hedge fund named Blockswater subsequently accused JP Morgan of market manipulation and filed a market abuse complaint with Financial Supervisory Authority (Sweden).
Bitcoin started to reach escape velocity in late 2016, going from hundreds of U.S. dollars to thousands. At time of writing (December 2017), a single Bitcoin is valued at over $14,000 [USD], or £10,500 [Pounds Sterling]. People who “invested” less than £100 several years ago have seen their stock suddenly rise to be “worth” as much as £100,000. Those who have risked more (in some cases a million pounds or more) now find themselves in theory able to buy small or even medium-size nation-states lock, stock and barrel.
What Do We Know About Bitcoin?
- Bitcoin’s origins are obscure, to the extent that journalists and others have researched, investigated and written about the names of possible founders and organizers without having come to a definite conclusion;
- Bitcoin is almost useless as a popular currency: its explosion in “value” has made it unusable for any transaction not involving, at the least, tens of thousands of pounds;
- Bitcoin, though supposedly limited in overall amount or number, has seen security breaches which, at the push of a button (putting it simply), have at least briefly increased the supply of Bitcoin.
Bitcoin is a classic speculative bubble or, alternatively and perhaps even better put, pyramid scheme. The people who got in early and stayed in are sitting on mirage-fortunes; those who have “invested” more recently will probably lose everything they put in. At the moment of writing, Bitcoin is probably nearing its peak. When it starts to fall rapidly, the panic will probably wipe it out entirely.
The surely inevitable collapse of Bitcoin will take down more than just Bitcoin itself. It may affect the stability of the economy more generally. Beyond that, if (as Bitcoin proponents and/or “investors” say–and their anger at any criticism is perhaps born of subconscious desperation), Bitcoin is as “credible” as any “ordinary” currency (and that is Bitcoin’s strongest point), then the upcoming crash of Bitcoin could take with it much public confidence in the value of the world’s major currencies too. Our major currencies are no longer backed by gold or silver and have only the value we put upon them. We exchange stones for bread. Our currencies are themselves castles in the air and “such things as dreams are made on”.
We recall the hyperinflation of early 1920s Germany, and I myself saw, on several visits to 1980s Poland, how the slide of the zloty affected that country politically and socially. The fate of Bitcoin is not just about Bitcoin.
Update, 23 November 2018