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If gold is fear index, bitcoins are act of sheer desperation

Beware of buying bitcoins, a fictitious currency dreamt up by an anonymous nerd or nerds operating solely on the internet.

You know there must be something deeply wrong with global markets when one of the only new asset classes anyone is prepared to get excited about is a fictitious currency dreamt up by an anonymous nerd or nerds operating solely on the internet.

Given that only five years ago global markets imploded in a vortex of speculation-fuelled idiocy it seems remarkable that something as obviously worthless as the "bitcoin" could exist at all. But exist it does and, as is the way with asset classes that hold absolutely no intrinsic value, multiple bubbles have already inflated and burst.

In the past week alone bitcoins have lost about 70 per cent of their value, signifying that another bubble had inflated and burst, yet there are those who truly believe it will rise again to its former heights. God help us all if it does.

For the uninitiated, bitcoins have existed since 2009, when a fictitious person or persons called Satoshi Nakamoto invented them. The bitcoin is the most successful example of a phenomenon known as the crypto currency, that is a currency produced by solving a complicated algorithm on a supercomputer or many lesser computers. In short there is a hard sum that only a computer can solve. When the computer has solved the sum the answer it produces is a bitcoin.

These notional pieces of eight are then bought and sold on exchanges, used to fund online and real world transactions and even printed out or fashioned into rudimentary coins.

There is one such bitcoin coin - known as a casascius - in the British Museum in London.

It seems that some people will believe absolutely anything, for that is all it takes for these bitcoins to hold any value - belief.

They are a bit like gold.

Gold is a shiny and soft yellow metal. So shiny and soft, in fact, it is not good for much except making into bangles and baubles and bars. Yet we have used it as the ultimate value storage device for millennia.

In comparison with gold, then, perhaps a bitcoin does hold value. Except we have given gold intrinsic value by dint of the fact that it costs hundreds of dollars to mine every ounce and we are prepared to pay for things fashioned out of it proportionally based on that cost of production. Then there is the fact that you can see it, touch it and drop it on your toe. Gold is real, unlike bitcoins.

Bitcoin production is also referred to as "mining" in an effort to give it similar value. But this, patently, is nonsense that only an internet-obsessed geek would really believe.

Real money, or fiat currencies as they are known, are based upon the wealth of a nation and the ability of that nation and the holders of its currency to make good on the debts they accrue accumulating goods and services. Money is an article of faith.

Bitcoin claims to be better than gold and traditional currencies because it is not reliant on faith or trust but mathematics - an inhuman discipline that is, so they say, incorruptible.

But at the end of the day you have to use money to buy it, unless you are the owner of one of the supercomputers that produce it in the first place, so what's the difference?

We could argue about the ins and outs of bitcoin until the cows come home. But those ins and outs are as worthless as the crypto currency itself.

What is important is that the bitcoin's very existence illustrates how broken the global financial system has become and how far we are from fixing it.

Central banks have printed so much money in the past five years in an effort to stimulate economies, and interest rates have been at zero for so long that actual money holds little real value any more.

The collapse in the price of gold last week further highlights the fact that all is still not well in the world of economics.

Gold is basically a fear index. From late 2008, when our current financial troubles began and bitcoin was first thought of, the price of gold rose steeply month after month until its unexpected crash last Friday.

When gold falls in this way we would normally expect to celebrate, as it should indicate that the value of all other asset classes - importantly those with yield - are rising. But they did not rise, not enough to make up for the collapse of the gold price anyway.

This is why bitcoin exists. Investors have lost faith in just about every asset class on Earth.

If gold is the ultimate fear index then bitcoin must be the barometer of desperation. The fact that Cypriots were buying them by the bucketload as their government contemplated taxing their savings is indication enough of that.

The bitcoin people, who have formed themselves into something they call a foundation, have spent too long playing World of Warcraft or whatever it is they do when they are locked in their back bedrooms. They have convinced themselves their virtual existence is real. It is not. The dirham bills in my wallet are real, and what is more, I can spend them when there is a power cut or when my internet connection is not working.



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