What history reveals about the future of Bitcoin

Bitcoin's monthslong price rally  has drawn mounting institutional interest as well as speculation that the digital currency could one day replace gold as the world's favored safe haven asset. But volatility seen this week has skeptics saying the Bitcoin bubble they've long predicted could finally be starting to pop.

On Sunday, Bitcoin hit a new record high of $58,000 (€47,480). By Tuesday morning, the price had fallen to just above $46,000. The drop followed a weekend in which Tesla CEO and Bitcoin fan Elon Musk tweeted skepticism at the coin's seemingly unstoppable rally, saying he thought the cryptocurrency could be overvalued.

The buzz was enough to draw criticism from US Treasury Secretary Janet Yellen as well as billionaire and Microsoft co-founder Bill Gates.

"My general thought would be that, if you have less money than Elon, you should probably watch out," Gates told Bloomberg.

But Bitcoin believers have remained bullish. On Wednesday the coin had climbed again and was trading near $50,000.

The latest activity has forecasters on both sides of the Bitcoin debate claiming their predictions are coming true. To find out whether we're looking at the gold of the future or the next big bubble, DW spoke to experts on both about what the past can tell us.

Gold is still the winner

Bitcoin and gold "aren't comparable," or only are in the sense that they are both mediums of exchange, says Bernd-Stefan Grewe, professor of history didactics at the University of Tübingen in Germany. Grewe is an expert on the gold product chain and the author of the book "Gold: eine Weltgeschichte" ("Gold: A world history"). 

Gold is universally accepted around the globe and can easily be converted into the local currency regardless of where you are, Grewe tells DW.

Bitcoin, he says, is not like that. The digital coin requires finding someone who can convert it into the local currency. The main problem, and the point where it gets risky, is the question of at what point it is converted.

"If things get tight and I want to quickly convert Bitcoin, exchange it for another currency, assuming the rate drops, who guarantees I can convert it at the price I wanted to sell it at?" Grewe asks.

Converting Bitcoin into cash has been known to take days, he adds.

These so-called "points of transaction" will play a significant role in determining Bitcoin's success going forward. Much of the hype around Bitcoin is derived from the fact that its exchanges are anonymous. Every Bitcoin exchange is recorded publicly on the blockchain ledger, a feature that secures each transaction.The identities behind the wallets sending and receiving the Bitcoin, however, remain anonymous, a quality that is attractive to criminals.

But authorities can still glean information at these points of transaction.

"The original idea behind Bitcoin was that you can't trace the transactions and you have an alternative currency that is free from central bank influence. That might have been a bit naive," says Grewe. "Naturally, it is in the vital interest of our entire economic system to gain control at certain points and to control the money supply. And I believe that it is at the point where it is converted into traditional money."

With Bitcoin gaining greater public interest and acceptance, legal and regulatory interest is bound to increase as well.

"As soon as Bitcoin  leaves that system and is fed into other economic circuits, that's the point where it becomes a risk to criminals," says Grewe. "State institutions will certainly be watching — at least, I hope so."

This could also threaten Bitcoin's reputation as being safe from inflation. 

"If the belief in convertibility is lost, then that will also collapse," Grewe speculates. "Just as with any other currency, there will be tremendous inflation."

Bubbles of the past

So much for the gold theory. What about the supposed bubble? Have there been bubbles in the past that resemble what we're seeing with Bitcoin?

"The short answer is no," says Will Quinn, a lecturer in finance at Queen's University Belfast in Northern Ireland. Quinn is the co-author of "Boom and Bust: A Global History of Financial Bubbles," which was published in August 2020.

"There are previous schemes that it has elements of," he tells DW. "But it is fundamentally new and different."

One example with similarities is the Mississippi Bubble of 1720, "a large-scale monetary experiment that never quite added up," says Quinn.

The idea, the brainchild of Scottish economist John Law, was "very, very deliberately put together as part of a scheme to introduce paper money into funds for the very first time," Quinn explains.

"If you go back and interrogate the books, you just can't avoid the conclusion that the price was too high."

Bitcoin also resembles the Mississippi Bubble due to the emergence of Tether, a digital currency used to purchase Bitcoin.

Tethers, which can be purchased on exchanges using fiat money, are supposedly backed one to one by US dollars, which is meant to assure their stability.

On Tuesday, however, authorities in the state of New York announced that two major companies facilitating the trade of Tether could no longer operate there, after an investigation found they had "lied" to cover up financial losses and a lack of cash reserves, hiding the true risk to investors looking to buy Bitcoin.

The long-term ramifications for Bitcoin remain to be seen. But considering the high share of Bitcoin purchased with Tether, some see the news of Tether's fraudulence as the beginning of the end.

The future of...fraud?

The other thing Bitcoin reminds Quinn of? A Ponzi scheme.

The Bitcoin system is designed in a way that generously pays out early adopters with funds generated by later investors, he explains, the main characteristic of a Ponzi scheme.

It's also similar in that early adopters aggressively recruit new adopters.

"Which is sort of what the internet consists of," says Quinn. "People trying to convince you to buy Bitcoin all the time."

It's almost an improved version of a Ponzi scheme, he adds, because you don't have a central operator that can absorb the money.

The verdict

Looking forward instead of back, neither Quinn nor Grewe are convinced everyone will be trading in Bitcoin in the future.

"Personally, I've been expecting the bubble to burst for three years now," says Grewe.

For Quinn, Bitcoin's transaction limit, among other things, is a major barrier to its adoption. Bitcoin can handle far fewer transactions per second than companies like VISA, for example.

And because Bitcoin has no one in charge, there's no way to implement these changes, he says. "It's a governance structure that's designed to not be changed."

"I think you can call it a bubble at this point," concludes Quinn, who had resisted that label until recently, citing the small number of traders involved. 

"But at this point, there's a lot of retail interest," he says. "It just looks like a bubble to me."