Bitcoin has once again taken centre stage in the media. Its price fluctuations are of great interest due to the high levels of anticipation they trigger among its advocates. These individuals possess an almost religious zeal, convinced that Bitcoin will eventually supplant traditional money. Yet, this is a bold assertion and most people still remain focused on conventional money, giving little thought to cryptocurrencies.
Bitcoin is particularly intriguing because its backers have successfully transformed the intangible into the tangible. Here, the intangible refers to an insubstantial token with no underlying support, while the tangible signifies an asset that millions have faith in, and which has enabled certain individuals to amass wealth, its value currently escalating.
The recent media spotlight on Bitcoin is not attributed to the drastic depreciation that characterised the past one and a half years, but its significant appreciation. In recent times, Bitcoin reached a new zenith of $69,000 (€63,300), slightly dropping to roughly $67,000 the following Thursday. Its earlier highest price was established in November 2021, when it attained $57,000, before entering a sustained bear market and depreciating to as low as $16,000.
As per Forbes, the worldwide cryptocurrency market’s value is roughly $2.64 trillion at present. To provide a better perspective, the global bond market’s value is approximately $150 trillion. While the global crypto market constitutes less than 2% of the bond market’s value, every alteration in the crypto market is heavily publicised on social media, thanks to its enthusiastic followers. In the bond market, a 1% change can potentially have a colossal effect on international wealth, yet it garners little attention. When Bitcoin’s value changes, its holders proclaim it as a monumental financial event.
But what is Bitcoin’s purpose? Let’s initially define Bitcoin before delving into its function.
Bitcoin’s conception followed a proposal by Wei Dai, a Chinese-American engineer, in 1998 when he introduced the concept of “cryptocurrency” on the Cypherpunk mailing list. Cypherpunk, an associated movement with the mailing list, is an intriguing blend of art, literature, and social reform that advocates for anti-establishment ideologies and social alterations via technology adoption; essentially, the punk rock of the internet era. Dai proposed that this could be a new form of money utilising cryptography and concealing transactions from a central authority, part of its allure is this insubordinate facet.
The origins of bitcoin, developed in 2008, are shrouded in mystery. Its creation is attributed to an unnamed group or solitary individual. The groundwork for actualising Bitcoin was laid out in an open forum for cryptography by a supposed pseudonym, Satoshi Nakamoto, in 2009. Nakamoto abandoned the project in late 2010, providing scarce information about themselves. Since then, a multitude of developers have propagated the growth of this virtual concept.
The infancy of Bitcoin coincided with the financial catastrophe between 2008 and 2012, which roused an upheaval against banking authorities and garnered an appreciation for the revolutionary idea of a non-regulated, anti-establishment virtual currency.
An illustrative model to understand the workings of Bitcoin is to imagine a coal mine with a defined amount of coal. As miners relentlessly extract coal, there’s an understanding that the resource is finite. In the case of Bitcoin, it is a digital mine, virtual miners’ exert effort unraveling codes, leading to the release of the coveted Bitcoin. This extraction process is determined by a computerised algorithm that caps the amount of digital coins to 21 million, almost 19.6 million of which have already been mined.
With each Bitcoin currently valued around $66,000, the motivation to mine only grows as the algorithm nears its cap. These Bitcoins are procured for trading or storing. The appeal of Bitcoin lies in its speculative value, as investors believe its limited availability justifies its price.
Conceived during the financial slump when trust in banks was plummeting, Bitcoin offered an unrivalled proposal: a decentralised and de-authorised currency that promised endorsement of anonymity. This meant all transactional activities were linked to online personas, resulting in total user invisibility.
However, Bitcoin’s anonymous nature has made it a hotspot for illegal activities, facilitating everything from ransomware attacks to illicit drug purchases via the dark web. This anonymous feature has not only served as a medium for illicit online activities but also made such activities easier to conduct. Despite the fading element of anonymity around Bitcoin, recent reports suggest that the US Federal Reserve is keeping tabs on 63.7 out of every 75 Bitcoins.
Bitcoin, known for its subtle anonymity and minor defiance, has increasingly become integrated with mainstream finance, contradicting its initial mission to provide a corruption-free alternative to traditional banking. This integration came about chiefly because an increase in Bitcoin’s value led it to blend with Wall Street.
In recent times, the wealthy figures who supported Bitcoin have engaged the very financial institutions the cryptocurrency aimed to replace. These immense sums of wealth mean the early adopters, who purchased Bitcoin at a minimal price, have amassed significant wealth. Consequently, they now advocate within the very governments they initially aimed to challenge.
In Ireland, we witnessed a similar situation during the property rise and fall of the Celtic Tiger era. Bitcoin, unlike property, doesn’t contain any tangible value; it’s essentially just a computer code.
Following aggressive lobbying, Bitcoin funds have recently gained approval from the US Securities and Exchange Commission, ushering their entrance into mainstream trading. Large financial powerhouses such as BlackRock, Ark Invest/21Shares, Fidelity, Invesco and VanEck, are among those offering Bitcoin for conventional investment. The US government has acknowledged cryptocurrencies as authentic assets, generating a surge of willing investors, while potentially artificially elevating the authenticity of Bitcoin.
But labelling Bitcoin as an ‘asset’ is problematic as true assets require a revenue stream, something Bitcoin doesn’t possess. Therefore, it relies purely on speculation under the umbrella of the greater fool theory—the idea that profit can be accrued by finding someone prepared to buy at a higher price.
Another important aspect is the lack of tangible value that Bitcoin holds, being nothing more than a computer code. Unlike property during the Celtic Tiger era in Ireland, Bitcoin cannot be compared to money or any other cryptocurrencies in terms of real value. The slight sense of legitimacy it holds stems from merely being the largest cryptocurrency.
When the ultra-wealthy lobby the government to legitimise something inherently illicit, and Wall Street becomes the benefactor, it raises concerns. This approach may lead to exposing lower-level investors to Bitcoin and incentivise higher prices—an issue that should evoke deep concern.
Previous observations and knowledge of monetary history inform us about the likely outcome of this situation, which is far from favourable.