Bubble and chic
All money is a work of the imagination. Pound coins, dollar bills and even the fragments of computer code known as bitcoins can do their work only because of a collective agreement that they will. So there is nothing unnatural in the efforts of libertarian computer programmers to invent their own money, and then to use these new currencies to buy things, among them old-fashioned currencies like dollars and euros. Bitcoin, the oldest, best known and most valuable, has lasted for nine years now.
Because cryptocurrencies can be anonymous, it’s impossible to know how many people use them. Estimates from the Judge Business School in Cambridge suggest that there are between 5 million and 10 million active users. Very few are using it as currency, or as a medium of exchange. Instead it is being used as a means of speculation. The exchange rate between the bitcoin and the dollar has seen the price fluctuate crazily in the last three years, from $1,242 to $246 and back up above $2,800 again. Why not, when it is worth only whatever buyers and sellers agree at any one moment that it should be?
Another rival cryptocurrency, ethereum, has appreciated by more than 40 times against the dollar this year. At current prices, the two together are priced at a notional $66bn. There’s still little sign of anything except imagination to justify this.
The promoters of these technologies are filled with the mixture of exuberant greed and libertarian zeal that drove the earlier iterations of the internet such as the growth of the world wide web. That is a disconcerting precedent. There is a persistent belief among programmers that understanding how code works means that they also understand the world outside code. It is mistaken. The web has turned out to be something that nobody had imagined. It is both better and worse than we could then dream – and much more powerful. When all today’s bubbles have burst, cryptocurrencies may prove the same.