Bitcoin: Boom or Bust?

By Douglas Carswell
October 25, 2021

Why is Bitcoin worth as much as it is? For the same reason that anything is worth what it is.

The price of Bitcoin reflects the extent to which people want it relative to the amount of it out there. With the total supply of Bitcoin fixed, the massive rise in the price of the world’s first cryptocurrency – from a few cents to over $50,000 in a few years - is a reflection of soaring demand.

The fact that one Bitcoin is worth tens of thousands of dollars, however, seems to offend some folk. Why is it, they want to know, that a piece of software code should be worth so much?

There are no shortage of those that have compared the Bitcoin boom today with the 17th century Tulip bubble in Holland. Tulip mania saw vast sums invested in tulip bulbs, which ultimately proved to be more or less worthless.

Bitcoin, the skeptics often point out, has little utility. It’s just a piece of code – you can’t use it for anything. So why are so many people pouring so much money into it? Its not even a very effective method of payment, given that the value of Bitcoin is so volatile.

But surely many of the same things could also be said about gold?

Gold, too, has limited utility. Beside jewelry and a little electronics, you can’t really do a lot with it.

Nor is gold, even in coin form, a very good way to pay for things.

Not so long ago, the economist John Maynard Keynes dismissed gold as a ‘barbarous relic’. It was, according to this Cambridge-educated technocrat, absurdly old fashioned that a base metal should serve as a reserve currency.

Twenty years ago, British finance minister Gordon Brown, thought something similar when he ordered the Bank of England to sell off its gold reserves.

But, of course, what Keynes called a relic retained its value long after he had passed on. When Brown began to sell off Britain’s gold reserves, he did so for $275 per ounce. Gold today is worth over $1,700 per ounce.

Gold, like Bitcoin, is not valuable because it does something. It is valuable because lots of people want it, and there isn't much of it about. That is all.

With neo-Keynesians running many of the world’s central banks, I suspect that demand for an alternative to their paper fiat currencies will only increase.


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