December 6, 2024 - 6:40pm
Could Bitcoin hit a million? With the news that the cryptocurrency’s value has surged to $100,000 this week before falling slightly, up 130% for the year and some 50% since the election of Donald Trump, the incoming president’s favouritism suddenly makes the million-dollar target long mooted by crypto enthusiasts seem imaginable. It would probably also be catastrophic.
It helps to remember Bitcoin’s raison d’etre. Amid the anger that followed the 2008 crash, an anarchist hacker — or group of them — who went by the name Satoshi Nakomoto created a digital currency enabling users to bypass the banking system. Moreover, by fixing its supply, they aimed to exploit the central bank’s strategy of printing money to boost asset values, ensuring its price would only go up.
However neither Bitcoin nor any of the countless spin-offs which followed have ever really found utility as a currency, being too volatile and cumbersome. On any given day there are a few hundred thousand Bitcoin transactions. While it’s impossible to say how many fiat money transactions occur, in the Swift system alone — a sliver of the global economy — there are over 40 million of them daily. Add in all the activities in the world economy, and we’re looking at many billions of daily transactions in state currencies. So in the world of money, Bitcoin never left the drafting board.
However, as a store of value and hedge against currency debasement, similar to gold, crypto did find a role. As such, its fortunes have tracked the ebb and flow of Federal Reserve policy: rising in periods of loose monetary policy, sinking in periods of tightening. Its most recent rally began earlier this autumn once it became clear the Fed was going to shift to a loosening regime. It then went into hyper-drive when Trump won the election and promised to return the favour to the industry which was the biggest source of donations during his recent election campaign.
But that creates a policy problem both for the central bank and the government. It will be resolved in one of two ways, neither of which augur well for crypto. In the first scenario, debasement continues as central banks keep growing the money supply faster than the economy. In that case, crypto keeps rising, a wealth effect takes hold among those who own it, they begin spending and money flows into the economy, driving up inflation. At that point, interest rates will have to rise to attract money into the financial system, investment will drop, the economy will go into recession, and all markets will crash.
In the second scenario, the Fed pre-empts by tightening the money supply. Crypto could then only continue rallying by sucking capital from other parts of the market, ultimately inducing a recession. As a result, markets would crash.
Either way, this will end in tears. In the meantime, the rally is starting to exhibit the signs of a pyramid scheme. MicroStrategy, a firm which back at the turn of the millennium got in on the dotcom boom before crashing, is now back for a second round. It has created a circular flow of funds to boost Bitcoin and its own share price simultaneously, using one to feed the other as it drives up the price in what remains an illiquid market. And Trump, good to his word, is filling his administration with crypto-enthusiasts who pledge to pump it up further. This has been bolstered by the announcement of venture capitalist and major donor David Sacks as the President-elect’s “White House AI and Crypto Czar”.
And somewhere, Satoshi Nakomoto is sitting quietly on a trove of as much as a million Bitcoin. I sometimes imagine they’re waiting for the day the financial system goes all in on their invention before finally dumping their holdings, crashing both Bitcoin and the financial system. Revenge, they say, is a dish best served cold.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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SubscribeWhen it comes to cryptocurrencies, then the clue is in the name. Things may be looking rosy for Bitcoin at the moment, but back in May 2022, there was a fairly effective operation to take down cryptocurrencies after the adoption of Bitcoin as legal tender in the Central African Republic had posed a threat to the CFA franc, itself pegged to the euro and so on. It gives me no pleasure, but that is where the power lies.
What matters is to get our hands on the power. Then there would be no cost of living crisis. Recession and inflation are both political choices. A sovereign state with its own free floating, fiat currency has as much of that currency as it chooses to issue to itself. All wars are fought on this understanding, but the principle applies universally. The State also has the fiscal and monetary means to control inflation, means that therefore need to be under democratic political control in both cases.
Whatever the woes in the current UK political scene, the decision to stay out of the euro and retain the £ has had, and will continue to have, massive repercussions.
If we can somehow fight our way through this fog, having our own currency not only allows us some leeway to do so, but would’ve been impossible without it.
Cryptocurrencies provide us all with an example of how value works, and should never be taken for granted.
I can’t remember the details but one explanation for why we were inclined to keep out of the Euro was because of the way our housing market operates. I think it’s examined in John Lanchester’s Whoops.
Many will think you idealistic. Yet for 600 years inflation in England averaged less than 0.5% per annum*. This period spanned a civil war, the industrial revolution, the creation of a consumer economy, the emergence of the globalised trading economy, the birth of the middle class, absolute monarchy, dictatorship, and a fledgling democracy. While there were short bouts of coinage debasement, the English pound largely remained sound. But elsewhere in Europe in the same period many states were ravaged by inflation like we are today and it is no coincidence that these states indulged in severe coinage debasement and money printing.
There are of course ways to run a fiat currency, print money and not suffer severe consumer price inflation. The key is to mop up the printed money before it enters the real economy. Western inflation for the last 40 years would have been far worse if it weren’t for the gigantic asset bubble into which a good proportion of our printed money has been blown. In Japan the money is recycled into J bond and US stock assets. This though is just another type of inflation…
*Bank of England inflation calculator.
…so all our money comes from the Government eh?
From the State, yes. That is the issuer of currency. It says so on the banknotes. The word “revenue” expresses the point.
…so, the state just lends it to us because it’s their revenue?
Crypto is one of the greatest ponzi schemes ever perpetuated, like the tulip bubble in Holland during the 17th century, or the south sea bubble. Bubblicious until it’s no longer.
The only difference is that you could at least plant a tulip bulb and grow a tulip. Bitcoin doesn’t even have that level of functionality.
In the early days, it did have that functionality because you could run a “node” and the mining software came along with it, so you could “grow your own bitcoin” – but that rapidly ceased to become a practical proposition a couple of years after the currency launched. However, bitcoin has the functionality that you can send it to somebody else and everyone can know where it is. That you can’t say about tulips…
I had a friend who was a bitcoin miner in the early days, when you could do it with “consumer grade” computers. I figured he must be very rich now, but I heard that he had been hacked a number of times and lost most of his holdings. It seems that the crypto space has largely been populated by criminals (and it still is).
Unlike fiat currencies which are only in the hands of honest men.
I always find a bit disingenuous those who claim that Bitcoin is rarely used as a means of exchange but conveniently forget to mention that Bitcoin is taxed in most countries around the world. This means that if I want to buy something directly with Bitcoin, I have to calculate the capital gain and pay a tax.
“as a store of value and hedge against currency debasement, similar to gold, crypto did find a role”
A bitcon is not a store of value like gold.
It is a means of transferring wealth from buyers to sellers.
The sellers who acquired them for next to nothing are gettinge extremely wealthy selling their stock of Bitcoins. They have investerd in US Treasury Bills.
The buyers are getting tedious to calculate numbers.
It is a bubble that must one day burst. As the person who jumped from the the 50th floor said I am still alive as he passed the 10th floor. One day reality will set in. Everyone will realise they need a greater fool to buy their Bitcoin and there won’t be any, because, unlike gold, it is just a number.
An erudite comment.
Bitcoin reflects the nature of the post 2008 economy in my opinion. It seems to me that this economy can actually be described as a combination of both scenarios the author mentioned. During most of the period of loose monetary policy, CPI-inflation and real interest rates have remained low. But a select number of asset prices did go to the moon. One could see this as inflation as well. I think there are two reasons for this. First, the monetary policy and fiscal stimulus produced wealth that in many cases technically could not get into the real economy. Second, now that these bubbles are there everyone with some wealth is compelled to invest in them to protect their relative wealth, even if it does nothing productive. Another way to look at it is that you just have to make sure you get some of that free central bank wealth. Conversely, everyone who is not already in one of the asset bubbles has a hard time to join because salaries did not keep up. This is obvious in the housing market – you simply cannot buy a house with a normal salary in many urban areas of Western countries. The problem is that these practices indeed suck dry and stagnate the real economy. Again, this is obvious in the housing market where everyone got rich on paper, precisely by be being anti-productive and keep enough houses from being built.
So if bitcoin was indeed created to expose the crazy nature of this economy I think it is doing a pretty good job. Will the bubble crash? Well, if I remembered correctly, Krugman observed that every economic expansion since the 80s appeared to be a bubble in hindsight. So why not this one?
World top-20 richest then.