In 2021, the price of a single bitcoin…
…the leading cryptocurrency, broke $60,000
And the market value of all cryptocurrencies…
…reached a staggering $2.5trn
Bitcoin’s promise to create a new decentralised financial system…
…beyond the control of governments and banks…
…has captured the imagination of the world
It’s become a bit of a social phenomenon
Mark Zuckerberg, the boss of Facebook…
…has pet goats and he’s named them Max and Bitcoin
But so far, the bitcoin dream has not been realised
Rather than becoming a new form of money…
…bitcoin has become a highly volatile investment asset
Creating big winners…
Investors have sent its price skyrocketing during the pandemic
...and big losers
The crypto-valuation lost a third of a trillion dollars…
…just overnight
For the believers…
…bitcoin is still a digital stepping stone towards a utopian future
For the sceptics…
…the crypto market is nothing more than a digital casino…
…too volatile to be trusted
So what will become of the bitcoin dream?
It all started in 2009
Somewhere in the world, a shadowy figure…
…hiding behind the name of Satoshi Nakamoto…
…created the very first bitcoin
It was the start of a digital revolution
Bitcoin and the thousands of cryptocurrencies…
…that have followed are nothing like actual coins
They are code, recorded on a digital ledger…
…that gets longer and longer…
…as more people use them
And embedded in Nakamoto’s code for the first batch, or block…
…of bitcoins…
…was a newspaper headline
Bitcoin’s creator put that headline in the first block…
…because he wanted to send a signal…
…he wanted to show that people were looking for alternatives…
…after the financial crash
And the question that people were asking is…
…can we trust financial institutions with our money
And bitcoin was the response
Trust is at the heart of the current financial system
Banks and other financial institutions…
…control how money flows around the economy
Faith that their ledgers are accurate is vital
This is because money is simply a social convention
It exists and has value because we agree that it does
This agreement only works…
…because we put trust in financial institutions such as banks
Bitcoin does not require trusted institutions
Nakamoto wanted to create a secure system…
…that did not rely on any trust at all
To achieve this…
…the coins are registered on a revolutionary technology…
…called a blockchain…
…which is a ledger of transactions…
…that is not held by a centralised institution
Instead, transactions are verified and logged…
…by a network of computers all over the world…
…in a process known as “mining”
Bitcoin mining exists for two purposes
One is to put new bitcoin in circulation
And the second one, which is also essential…
…is to verify transactions on the network
But it’s a complex process
If someone wants to make a transaction…
…everyone on the network is alerted
The transactions are verified by so-called “miners”
First, they check the transactions are legitimate
Once a miner has checked a few thousand transactions…
…they group them together in a “block”
That’s the easy part
The miners then race for the right to add this block…
…to a string of those previously made…
…known as the blockchain
To do this, they compete to solve a complex numerical problem
The miner that solves it first sees their block added to the chain
And they are rewarded in bitcoin
This whole process is incredibly energy intensive…
…and is contributing to the climate crisis
As of May 2021…
…bitcoin mining used more electricity annually…
…than the whole of the Netherlands
To keep bitcoin scarce and to help maintain its value…
…the number of bitcoins that can be mined is capped at 21m
To date, almost 19m bitcoins have been mined
But it cannot yet be classified as money
For something to be considered money…
…it has to work in three ways: as a medium of exchange…
…as a store of value and as a unit of account
For all the main functions of money that you can think of…
…actually, so far, bitcoin is not superior to the solutions…
…that we already have…
…which are fiat money and other ways of paying
And that’s, you know, the main reason…
…why you can’t really call it a currency now
Here’s why
Fundamentally, bitcoin is a string of code with limited use
Like a gold bar, it doesn’t produce any revenue
But compared with the price of gold…
…the value of a single bitcoin is hugely volatile
And a single tweet can change people’s faith in it…
…as a future currency
As a result, its price moves wildly up and down…
…as people buy and sell it
And unlike the dollar…
…there is no central bank or government to defend its value
This volatility also makes bitcoin…
…very hard to use as a medium of exchange
So a seller on Amazon is unlikely to accept bitcoin for their goods…
…as the following day the price could vary dramatically
As happened on May 19th 2021
The price dropped almost $8,000 in less than an hour
But that’s not stopping El Salvador
The Central American country…
…has become the first to adopt bitcoin as legal tender
It’s a major gamble
Bitcoin doesn’t really work as a means of payment…
…because it’s very inefficient…
…it can process only ten transactions per second…
…when, you know, Visa, the credit-card company…
…can do as much as 24,000 per second
So if bitcoin doesn’t work as a way of paying for things…
…what gives it value?
Like shares and bonds, it is also traded as an investment
This has led to a speculative mania…
…where teenagers have become millionaires
And it’s not just maybe a get-rich-quick scheme…
…as a lot of people put it…
…but I see it as the future of currency
And others have lost it all. Literally
In 2013, one unlucky man in Wales even scoured a rubbish dump…
…for a hard drive containing 7,500 accidentally discarded bitcoins
Without that file, there is no way of getting the money back…
…because there is no central server that records a log of it
Today that hard drive would be worth $280m…
…if only he could find it
But investing in cryptocurrency…
…is no longer for early adopters and armchair investors
It’s attracting attention from some of the world’s biggest banks…
…including Morgan Stanley…
…which now offers investors access to bitcoin funds
But even cautious buy-in from some financiers…
…brings greater scrutiny
Banks are taking tentative steps to get into bitcoin
Regulators are watching this closely
And so far, they’ve only allowed a limited set of things…
…that banks can do
They can provide access to the market, to clients…
…but they can’t bet on the markets themselves, for example…
…using their own capital
And regulators are also wary because bitcoin has a dark side
So bitcoin has been used to fund criminality or to launder money
If you venture on the dark web, which I did for an article recently…
…you’ll find that everything from stolen credit-card details…
…to drugs is priced in bitcoin
There’s also been a lot of theft…
…from crypto exchanges and a lot of fraud
And it’s not just criminality that is ringing alarm bells
Leading economists have warned…
…that bitcoin is a dangerous bubble…
…destined to burst and join the graveyard…
…of historically hyped-up investments
Like the tulip mania of the 1630s…
…where the price of the tulip bulbs rose sharply…
…before spectacularly crashing
Or the dotcom boom in the late 1990s
In 2018, there was reason to believe the sceptics might be right
The sharp surge, and later drop, in the price of bitcoin…
…mimicked these historic bubbles, a pattern which continued…
…into the first half of 2021
The price soared to over $60,000 only to fall again
The bitcoin market is very fragile in 2020 and 2021
We’ve seen these sudden sharp drops in price…
…on the basis of very little
And then they partially recover for other bits of news…
…that are completely unpredictable
Supporters see cryptocurrency as a burgeoning asset class…
…with real value, more like gold than tulips
But the jury is still out on whether the comparison is accurate
Bitcoin or another cryptocurrency…
…might become a relatively stable…
…or trusted asset class like gold
But it’s too early to tell because we can see today…
…as soon as people think it’s no longer a good investment…
…then demand plummets and value with it
Perhaps the biggest winner from its climb…
…is bitcoin’s mysterious inventor…
…Satoshi Nakamoto
Assuming, of course, that Nakamoto is a real person…
…who is still alive…
…they’re thought to own more than 1m bitcoin…
…currently worth around $37bn
Bitcoin may yet become a stable asset like gold
Or prove to be a bubble that bursts spectacularly
But one thing is for certain
The utopian dream of bitcoin becoming a new form of money…
…beyond the control of governments and central banks…
…is still as elusive as the technology’s creator
I’m Matthieu Favas…
…finance correspondent at The Economist
To read more of our coverage on Bitcoin…
…please click on the link
Thank you for watching