Bitcoin has crashed again – little wonder as it fails every test to be considered a currency

The cryptocurrency has nothing but sentiment behind it. And yet sentiment is a powerful thing when it comes to driving the price up or down

Bitcoin is the emperor’s new clothes of financial commodities. It’s been prancing up and down money street with nothing on for years, despite the fact that lots of thoroughly sensible people have been playing the role of the boy in the fable who says “ere, ee’s got nuffink on”.

Does the fact that the cryptocurrency has endured two major crashes in the space of just three days signal a turning of the tide? The tipping point at which it runs back into the palace in search of a robe accompanied by a hail of stones from its victims?

I’ve been waiting for it to happen. It almost always does when people put together a load of old cobblers and tout them as hot investments. Remember collateralised debt obligations or CDOs? They were created by the packaging up of dodgy mortgages that had been mis-sold to poor people, which were given a fancy sounding name so they could be sold around the world to people who should have known better.

When sufficient numbers of them realised that CDOs were wearing the emperor’s new clothes the result was near global financial meltdown that was only narrowly averted courtesy of great wads of taxpayers’ cash.

The popping of Bitcoin’s bubble isn’t likely to lead to something quite so dramatic, although there’ll be a lot of pain. There always is. You’ll certainly find it high up on the worry lists of most regulators, who will kept very busy dealing with the aftermath.

The odds strongly favour it blowing up at some point because it always does. These things have been happening since the 17th century when people got wildly over excited by tulips during the Dutch golden age. Economic historians could probably point you in the direction of even earlier instances.

The thing about Bitcoin is there isn’t even a bulb to put in the ground from which something pretty should grow.

As my colleague Hamish McRae wrote last year, it fails every test to be considered alongside what we commonly understand as “money”. It’s a highly speculative investment commodity with nothing behind it other than sentiment.

A share is clothed in the earnings stream delivered by the products sold by the issuing company. A real currency is dressed in the prospects of the economy that uses it, and the willingness of a central bank to deploy its reserves to support it.

They thus have a notional floor (although the bottom can still fall out which is why countries and companies go bust).

Bitcoin has nothing. Zip. And yet sentiment is a powerful thing. Already there have been articles aimed at boosting it by taking about how Bitcoin’s represents a hot “buying” opportunity now it’s lost its legs. They have graphs. They have lots of big, clever sounding words that don’t mean very much. I saw one accompanied with a tweet talking about its “parabolic upward trend”. No, really. To those who look at that and say “What on Earth?”, what it means as that the person who said it is really really clever and should be taken seriously. The emperor’s new birthday suit is covered in fancy gold braid. Don’t you see it? Get online, the hot investment is now affordable! Buy, buy, buy.

I got a giggle from one talking about the improving “fundamentals” of Bitcoin.

That’s classic finance speak. The word “fundamentals” usually refers to the prospects for corporate earnings, or what a central bank might do to boost a currency (such as raising interest rates). There are lots of analysts paid lots of money to write reports and produce graphs based on how stocks, currencies or commodities (like gold, fine wine or frozen concentrated orange juice) might perform based on their “fundamentals”.

Bitcoin, however, doesn’t have any fundamentals other than the fact that some people think it might go up from here because it’s relatively tightly-held and maybe the big the sellers have all been flushed out.

And you know what? It will go up if the herd puts enough money down.

It’s happened before and it will keep happening until it doesn’t. At which point it will leave a trail of tears behind it and the world’s regulators will be prodded into writing reports about why they didn’t shut the thing down (they’d probably like to if they could find a way to do it) before the punters got hurt. People will get very cross. Fingers will be pointed. But no one will go to jail.

No one will so much as a slap on the wrist. And we’ll all move on to the next one of these.