The bursting of the bitcoin bubble

published 19 January 2015

Last year's worst-performing currency against the dollar was bitcoin. The crypto-currency fell by more than 50% against the greenback, trailing even the Russian rouble. Having peaked at around $1,150 in late 2013, it is now trading at $230 or so after a gradual decline over the past year.

"The essential breakthrough", as the FT's John Authers explains, was to allow two parties to exchange money directly with each other, without an intermediary, and to do so completely digitally.

Paper money, and previous incarnations of digital cash, needed third parties to handle money flows, or some kind of central authority a central bank, essentially to issue it.

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But bitcoins only exist as entries in a giant electronic ledger, called the blockchain, which is a record of all bitcoin transactions that have ever taken place. Nobody actually owns this as there are many copies around the world.

The supply of bitcoins is tightly controlled because bitcoins are only produced, or "mined", when computers solve complicated mathematical puzzles. The rate at which bitcoins can be mined declines as the existing stock grows, and there is an overall cap of 21 million bitcoins (which can, like other currencies, be subdivided into smaller denominations).

This relative scarcity has prompted comparisons with gold, whose supply is also limited. Like gold, nobody is legally required to accept it and its value rests on what people perceive it to be worth, says Authers.

Unlike gold, it has only been around a few years and confidence dwindled amid the collapse of one big exchange and a hacking attack on another.

The sliding dollar value of bitcoin became self-fulfilling: "no one wants to hold a currency that has that great a risk of depreciating in value", says David Evans on pymnts.com. "It is... dead as a mainstream currency."

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.