In 2017 the value of the world’s most used cryptocurrency doubled 4 times.

Bitcoin reached $1,000 per coin in January. In May it broke $2,000. A month later, $4,000. November saw $8,000 become $16,000 in just under a fortnight, before settling at around $15k for the year’s close. The stream of capital into the asset has happened for a set of reasons that, like a lot else in economics, eludes most economists.

Specifically, its 15-fold ascent has made a lot of Bitcoin watchers all the more confident to diagnose the new market as a bubble – a verdict that for a few years now has been the dominant editorial line of resident Wall Street Wyrd Sisters, Bloomberg, The Economist, and the Financial Times.

And, to be fair, the ‘make-believe money’ lines up with most textbooks’ definitions of a bubble. Spasms of speculative over-pricing almost always follow on from the introduction of new technologies or contrived financial products, the two most famous examples being the early 2000s’ dot com bust and ‘07 subprime mortgage crisis. Bitcoin is both a new kind of financial product and a new technology – ‘double double, toil and trouble.’

The problem for those watching the cryptocurrency is that, even eight years on from its creation, the potential real-world applications of Bitcoin for capital remain untested. This makes it impossible to categorically say whether the cryptocurrency is, in the long view, over- or under-priced. While the hypothetical nature of its purported uses make these uses hard to confirm, they are nonetheless worth our attention as possible explanations for the rise of Bitcoin and other cryptocurrencies – is Bitcoin just a bubble, or has capital identified something of value in the technology? Could bubble aspects co-occur with this untapped utility?

Discounting Bitcoin

As Bitcoin is a new type of financial asset, attempts to make sense of it using conventional economics are bound to end in the state of perpetual uncertainty entombing most journalism on the topic. Regulators have likewise struggled in their efforts to identify any concrete drivers behind its parabolic rise. In 2013, the Dutch Central Bank put forward “mania” as the trend’s best explanation, judging Bitcoin to have zero worth beyond the allure attached to its collection by a certain cyber-libertarian milieu – its trajectory spurred on by little more than faddishness. A year later, the Danish Central Bank agreed, arguing that the ‘coins’ themselves bear “a closer resemblance to glass beads” than commodities with any real utility.

Indeed, the Atlantic’s Derek Thompson even went as far as to pinpoint the 1990s’ Beanie Baby phenomenon as Bitcoin’s closest historical analogue. The toy brand was infamous for gaming the supply of their products to engineer scarcity, leading a frenzy of consumers to, very literally, buy into the idea that the chintzy toys could mature in value just like a Cabernet Sauvignon. Thompson understands the rise of Bitcoin in similarly psycho-pathological terms. If a bubble occurs when an asset’s price dramatically exceeds its utility value, then the surge in Bitcoin must, he argues, be down to the lemming-like paroxysms of its userbase – their blind faith in the assets’ ‘utility’, paired with its in-built scarcity, is identified as both cause and effect of the ongoing market hype.

By this reckoning, Bitcoin’s users are magpies: unsophisticated retail investors attracted to the lustre of the cryptocurrency’s newfangled tech. But as the flow of capital from, well, more ‘respectable’ sources – banks, hedge funds and big money lenders – vastly increases, this handwavy profile of the investor base loses its acuity. Cartloads of dollars, yen, and euros are now rolling in on the basis of professional forecasts glimpsing valuable future applications – uses that put the cryptocurrency on a collision course with economic democracy.

The Trust Machine

Bitcoin could offer capital the power to pass freely through tax codes, companies, and borders, allowing firms and individual capitalists the freedom to relocate their wealth wherever they wish. Those trying to circumvent such barriers could exchange liquid assets, e.g. dollars, for anonymously-held Bitcoin, and then either keep it as a store of value or exchange it back into real-world currency in any jurisdiction – or none.

Statelessness is ingrained in the coding of every transaction. When one user pays another, the details are sent out in a ‘block’ across a network of privately-operated, anonymous hubs known as ‘mines’ where supercomputers decrypt the details of the Bitcoin exchange. The first mine to decrypt the block is rewarded in coins, which incentivises miners to maximise the processing power they contribute to the network. When most mines have decrypted the block and verified by consensus the accuracy of each other’s findings, the block, along with the confirmed transaction, is added to the ‘blockchain’ – the trusted record of all previous payments. This, Bitcoin’s ‘distributed ledger’, is the technological basis for trust in the currency, negating the need for any centralised regulatory oversight.

Goldman Sachs analysts Dominic Wilson and José Ursua were among the first to note that the absence of a third-party verifier, most notably a central bank, could make this peer-to-peer network an untraceable backchannel for capital under the radar of regulators. Of course, this wouldn’t really be anything new – offshore banking has existed for centuries to serve this exact purpose. One way to look at Bitcoin is as a revolutionary autonomisation of the shadow finance sector. The cryptocurrency could provide a service for capital that currently requires small armies of lawyers, lobbyists and accountants, ensconced on Caribbean islands. The blockchain threatens to displace this crooked labour

For this reason, Jamie Dimon, the chairman of JPMorgan Chase, is said to view Bitcoin as a “brand new competitor” to his firm. Dimon and colleagues reportedly “understand that JPMorgan collects a lot of fees for providing storage of wealth in a secure way … and that Bitcoin does it an order of magnitude better.” The ‘crypto-scepticism’ of investment bankers is what has shaped most mainstream economic analysis of Bitcoin; instead of taking their contributions at face-value, these broadsides should instead be heard by economists as sly attempts to talk down a severe risk to the bankers’ business models.

Wall Street’s tactic of choice so far has been to misrepresent the purpose of Bitcoin, fudging it as an inferior rival to PayPal or Visa. Bitcoin pessimists often cite the fact that Visa can handle up to 60,000 transactions per second, whereas the cryptocurrency’s peer-to-peer network is capable of just 7. But this is a mistaken comparison. Bitcoin isn’t meant to become a consumer payment system, and so transaction speed and volume don’t really matter. It’s meant as an instrument for extralegal capital flow. What does matter is the amount of capital it carries, and by that metric, it’s succeeding: even though the mean number of transactions stayed almost static in 2017, the amount of capital in the Bitcoin market has risen 15-fold. The fact that cryptocurrency is playing a different ball game to the likes of PayPal is perhaps most evident from PayPal founder Peter Thiel’s continued backing.

When vampire billionaires like Thiel pile capital into Bitcoin, it’s because they are investing in a labour-saving technology that could offer a radically more cost-effective means of evading tax, regulations and public scrutiny. Looked at this way, the current spike in investment is simply anticipation of big money to be made down the line – in other words, Bitcoin’s price has behaved like the stock of a company on the verge of astronomical profits. And one recent development in particular has removed a stumbling block to the realisation of these future dividends for capital.

Running with the Four Horsemen

‘Bitcoin Futures’ opened for trading in Chicago just last week. Entering the cryptocurrency into the world’s oldest and largest futures market was a move that journalists in the Wyrd corner expected would provoke its fabled collapse. How could a gimmick from the neckbearded underbelly of the Internet compete for investment against actual financial instruments, grounded in real commodities? Chicago’s futures markets are hallowed institutions where bread and butter produce like gasoline, corn, meat and ethanol are traded in global volumes, where brokers make multimillion-dollar trades between bites of a sandwich.

The embrace of Bitcoin by Western futures traders will steady its price against volatility. Those investing in Bitcoin can now hedge – that is, insulate themselves – against short-term fluctuations in its spot price. Entering contracts that guarantee to pay specific dollar sums for the currency at specific points in 2018 allows buyers to lock-in their calculations of a continued ascent in capitalisation, and allows sellers to sell the currency without endangering the spot price. In stabilising Bitcoin, futures markets make it less risky as a medium of exchange, in turn giving it more weight as a store of value. In short: the more capital is invested in Bitcoin, the easier it is for further capital to follow and, indeed, flow through the asset’s market.

Futures could clear the way for Bitcoin’s adoption as an instrument of instant, illicit capital transfer. There are already big sections of the global economy where the use of Bitcoin in this way is widespread: namely, the Four Horsemen – drugs, trafficking, money-laundering and terror. Just last month, a New Yorker was indicted for using Bitcoin to transfer $150,000 of laundered money to ISIS. While she was apprehended on account of the laundering, the money itself is now, courtesy of Bitcoin, irretrievably with the terror network. And as rates of profit decline in the formal economy, the promises of profitable returns from investment in the other three horsemen make each a more attractive bet for capital. The problem for capitalists in these ‘shadow economies’ has never been making money, but rather moving it around in ways that can’t be traced back to them.

As things stand, even a behemoth like HSBC – the UK’s largest firm – cannot guarantee a failsafe service for its black market clients. In 2012, US authorities caught-up with the bank’s industrial-scale laundering operation for Mexican cartel money, fixing it with a £1.9bn fine; since then, a series of leaks have implicated several other major City institutions, including HSBC, in the handling of proceeds from corruption in places like Russia and South Africa. Oligarchs and crime bosses – often one and the same – have shown themselves willing to spend billions on having their cash “cleaned” so that it can be spent without suspicion. The HSBC saga shows that even one of the world’s biggest banks, with the laxest of regulators, has struggled to fully scrub its clients’ ill-gotten gains of the trails leading back to the coca plantations, palaces and bought politicians of the money’s origins. Bitcoin’s distributed ledger, however, could one day facilitate this for free, minus paperwork, and with significantly reduced risk.

Bitcoin’s Whale Problem

Weighing the scam potential of Bitcoin’s blockchain technology against the more immediate obstacles it could face is no easy feat. In talking up these applications, it is important not to neglect these endemic drawbacks, which serve as very real hurdles that could bring the whole network tumbling down.

The first is the rising amount of computation power required. Any given privately-owned Bitcoin mining operation could one day find itself unable to meet the costs of the energy required to process the blockchain; the network now consumes as much energy as the whole of Denmark. As transactions are added to the chain, the cryptographic blocks they are contained in become exponentially more complex, demanding more and more processing power to decrypt and verify. In order to make good on their energy bills, the miners could be forced to sell-off more of their massive coin stockpiles to ensure solvency and meet running costs. The jitteriness of the market means that even an incremental rise in ‘whale sales’ could precipitate a rout.

Additionally, the behaviour of these ‘whales’ – actors with large stores of Bitcoin, such as mines – is nigh impossible to model. They are an unknown, a mixed bag of investors and miners, sometimes casual sometimes pro, each with a large stake in the currency’s future. A user could have bought several thousand Bitcoin eight years ago at $2 a coin, maybe to service a coke habit or run a dark-web business. The fate of Bitcoin is tied to the choices of this rag-tag group – not all of whom can remember their passwords.

A third risk for the cryptocurrency again relates to the mines. If these operations can survive staggering running costs and make it into the early 2020s, then they will also have to deal with an inverse decline in the payment they receive for processing blocks. A decreasing-supply algorithm was built into Bitcoin’s basic software so that the rate of coin generation approximates the rate at which gold is mined, meaning that new coins will become increasingly rare up to the point that they practically stop materialising; after this, the miners will, hypothetically, be paid in a smaller quantity of coins skimmed through transaction fees. There is a question mark over whether this alternative incentive scheme will be enough to keep the miners in the business of processing Bitcoin despite growing energy bills – while there will be fewer coins given in payment, optimists argue that their rising purchasing power will compensate. If, however, the miners do switch off, the entire system would grind to a halt.

Were the cryptocurrency to crash in the near future from a panic stemming from running costs or cashflow issues, a lot of analysts would take it as proof that Bitcoin never had any market potential. This would be a dire misreading of the cryptocurrency. A collapse in the price of an asset is not in itself confirmation that it was overpriced. As traders have pointed out, it is possible for Bitcoin to display bubble aspects while simultaneously being underpriced. The seven-steps-forward-two-steps-back history of its rise is evidence for this – “remember the poor fool who bought at $31 in mid-2011 at the top of that bubble…”

All too often in economic journalism, a bubble is a bubble until it isn’t. But even if Bitcoin does burn out on a technical impracticality in its core set-up, it is almost guaranteed that that a better-designed distributed ledger will arrive, engineered by the likes of Thiel to meet capital’s clandestine needs.

The Beanie Baby phenomenon never came quite as close to offering capital the same suite of anti-worker powers now on offer with cryptocurrency. The question of Bitcoin’s future is the question of whether the obstacles it faces outweigh its potential application as a competitor to the offshore financial sector. If they do not, and the use of the asset gains further ground in global capitalism, then we will be left to consider how big it can get before the full risk to workers is realised. The metastasis of Bitcoin is well under way, and the avenues to ending it will only grow darker.