Until recently Bitcoin and other cryptocurrencies were being touted as the future of money—and by some, even the future of capitalism itself.
Free from control by states and their banks, they were a subversive challenge to the system, they said.
But now a huge digital currency market crash seems to have wiped out many of these predictions.
The value of Bitcoin has fallen by over 50 percent since March, with the biggest falls in recent weeks. And most other digital currencies have gone the same way.
The trigger for the great devaluation seems to have been an announcement from Tesla—billionaire Elon Musk’s electric car company.
The firm said in a Tweet last month that it would no longer trade in Bitcoins and that concern over the environment was the primary reason.
Tesla was soon followed by a statement from the Bank of China. They said they were tightening regulations that ban financial institutions from providing services related to digital money.
“Virtual currencies,” the bank said, “are not supported by any real value”.
Tesla’s apparent environmental concern stems from the way digital currencies need huge computing power to create, trade and confirm their legitimacy—a process called “mining”.
They work using a decentralised technology named blockchain that records transactions. Huge banks of high powered computer servers, stored in giant warehouses, have been needed to process them as their exchange value soared.
Some estimates put the energy use of Bitcoin alone at more than the entire country of Argentina. But Musk’s environmental concern is unlikely to be his prime motivation—after all, he is the owner of the SpaceX, the firm that wants to use massive amounts of fossil fuel in order that humans can colonise Mars.
A more likely explanation is the way the value of digital currencies are prone to huge swings as a result of patterns of investment.
When global stock markets crashed in March last year many investors took flight fearing the coming pandemic would hit hard most of the firms listed on financial exchanges.
With profits expected to tumble, stock prices were sure to follow. So those with spare millions had to think of other places to store their money.
Banks were offering very low interest rates, and government bonds were unlikely to generate a high enough return.
Some of that “spare money” ended up in digital currencies and helped drive up their price to previously unknown heights. Lots of smaller investors bought into the hype and ploughed their savings into Bitcoin and its competitors, including Dogecoin and Ethereum, in the belief that their value would only rise.
And so it seemed to. By March of this year, Bitcoin’s value had risen by around 800 percent over the course of a year.
But contrary to the beliefs of digital currency evangelists, the value of Bitcoin and its rivals is being manipulated by powerful forces.
IT entrepreneur Michael Saylor has joined forces with Musk to attempt to centralise the market, forming the “Bitcoin Mining Council” with leading currency mining companies.
Musk has invested over £1 billion in Bitcoin. This huge investment allows him to easily manipulate the market, moving money out of Bitcoin drives its value down.
Some 40 percent of cryptocurrencies are held by a small group of super rich investors. The total value of significant cryptocurrencies equates to over £1 trillion.
That sounds like an enormous amount of money until you know that the global market for stocks, let alone tradable currencies and bonds, totalled £67 trillion.
Far from being a more democratic form of exchange that can by-pass the powerful, recent weeks have demonstrated that digital currencies are just another a rich man’s game.