In the past few days I’ve seen news coverage of the Bitcoin phenomenon which has included a man trying to find a hard drive containing millions in the currency, lost on a landfill site in Wales, reports of a rise in theft of bitcoins, and even accusations about Bitcoins being nothing but a fancy Ponzi scheme.

There are two things that seem to me to be fairly obvious about this whole phenomenon. Firstly, that it’s a technological solution to the wrong problem, and secondly that it’s a bubble.

Money is a system of trust. Banknotes usually have the words “promise to pay” written on them, a long-lost legacy of when they were backed by the appropriate amount of bullion in the vaults. These days much of the value of the transactions that go on around the world sits as bits and bytes on the systems of the banks in whom we trust to manage our notional wealth (or lack thereof). Having said that, I was in conversation some while ago with a chap from Visa who claimed that there were more 500 Euro notes in circulation than any other denomination because their high value made money laundering much easier. I digress…

The thing is, I don’t think that the breakdown in trust that we have today is with currencies – even the Euro with all of the challenges that it faces. Our problem, our beef, is with the banks. They are the ones who continue to demonstrate their untrustworthiness (as RBS and Lloyds yet again proved this week). When a currency becomes untrusted, you tend to get hyperinflation (see the Weimar Republic, Zimbabwe, etc). That just hasn’t happened.

Now the thing is, and here’s my spin on things, the point at which the banks started to become untrustworthy was the point at which technology started to take over – from deregulation and “big bang” in the 1990s onwards. Bitcoin, a purely technological solution to currency, is (from my simplistic viewpoint) trying to replace trust in currencies with trust in code and cryptography when in fact it’s the techno-centric banking system that we’ve lost faith in.

Which then leads us to matters of bubble. As I’ve said many times before, I’m not an economist. But the “polygraph pattern” that is the Bitcoin exchange rate at the moment doesn’t do much for raising trust. And, moreover, the speculative activity generating huge wealth from no intrinsic value, does have more than the slight whiff of tulips about it for me.

One thought on “Tiptoe through the tulips…

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