The bursting of the bitcoin bubble

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.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

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."