Although the mother of cryptocurrencies has struggled to hold above the $60,000 mark in recent days, its enthusiasts still insist it will soon get back on its feet and resume heading upwards, possibly to a million. Given the extreme volatility of Bitcoin, the claim actually sounds plausible.

By choosing a starting point during one of its dips, and then extrapolating from the subsequent rally, it’s easy to come up with astounding annualised rates of increase. For instance, during a two-month period early this year, Bitcoin rose at an annualised rate of several thousand percent.

The problem is that these rallies don’t last, and are subsequently offset by another dip. Stretching it out over time, Bitcoin fails to impress much, worth no more today that it was at the end of 2021. You’d have done better to buy gold.

That 2021 cut-off date in the rise of Bitcoin isn’t accidental. That’s when Federal Reserve chair Jerome Powell said it was time to retire the word “transitory”, signalling the end of the cheap-money era. Soon after, central banks across the West began raising interest rates, and the roaring bull markets in a host of asset classes, from real estates to stocks, came to an end. Unless we return to a cheap-money era, it’s hard to see what role crypto will play.

Looking back to the start of the crypto era, we can detect three distinct periods. Each was defined by the changing policy regimes of central banks, and in particular the US Federal Reserve. The first lasted from Bitcoin’s creation in the wake of the 2008 financial crisis until the start of the Covid-19 pandemic in early 2020. This was the time during which central banks tried to shore up asset values and stimulate the economy by slashing interest rates and using the novel device of quantitative easing — essentially giving free money directly to the Government and, eventually, the private sector. During this time, Bitcoin rose steadily from its humble, shadowy origins until it was worth around $10,000.

The second period began when pandemic lockdowns plunged the world economy into recession, and central banks responded by slashing interest rates so deeply that credit became essentially free. The flood of money into markets which resulted sent Bitcoin ballistic, and it rocketed some 600% over the next two years.

Finally came the end of the cheap-money era, when interest rates rose sharply and central banks began reversing quantitative easing. History may reveal the phase we’re in to be the terminal stage of the crypto era.

Throughout Bitcoin’s long journey from upstart to semi-respectable asset class, it has attracted a motley range of true believers. However, its creators were anarchists, channelling public rage at the management of the 2008 crisis — bailouts, bonuses to the bankers behind the crisis, austerity for ordinary folk, and the campaign by central banks to juice asset values with cheap money. Bitcoin was arguably designed as a hack of this policy regime. By creating an asset whose supply was fixed and lay beyond the control of any central bank, it was able to expose cheap-money policies as little more than currency debasement.

Now that inflation has moved from asset markets to the rest of the economy, central banks are saying ultra-cheap money will never return. If they stick to that pledge, it’s hard to see what upside will remain for Bitcoin. And if it falls just as it’s becoming respectable, with bankers getting in on the action, one can’t help but think those original rebels will feel they got their revenge.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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