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As the price of bitcoin hit $ 10,000, cryptocurrency supporters took to Twitter last week to brag about their triumph. “You Wall St trader: spent years in school learning the details of finance, 10 years of 100 hour work weeks, never see your family, super excited about your 10% returns this year, “wrote one enthusiast. “Me: a Bitcoiner: read books, s *** posted on Twitter, ate steaks, enjoying 900% returns.”
This lagging social media comment perfectly captures the mutual contempt between professional financiers, who have for the most part watched the rise of bitcoin with a mixture of bewilderment and horror, and the hard core of true believers who consider possession. of cryptocurrencies as a disruptive act of financial iconoclasm.
Those who attempt to explain the popularity and behavior of bitcoin through the glasses of traditional finance are making a simple analytical mistake: they are attempting to apply factual analysis to an asset that is impervious to it.
Bitcoin is a faith-based financial asset for a populist era.
Speculative manias have occurred throughout history. Studying bubbles is more valuable in informing us about the state of the societies in which they have occurred than any lasting financial lesson. The tulip bubble in the Netherlands occurred during the Dutch Golden Age, when the country was the world’s leading economic and social power, and an investment’s ability to defy gravity was easy to believe.
The price of Bitcoin is not determined by anything that resembles conventional financial logic, but in part by the same forces that have caused the political shocks of the past two years. Like populist politics, belief in cryptocurrencies and “trustless networks” has been accompanied by a collapse of trust in traditional forms of authority and a disregard for experts. The unwavering belief in the history of Bitcoin is fueled by the authority of the crowd fueled internet.
Financial professionals who do not understand why someone would risk their fortunes by investing in bitcoin when it is so obvious to them that it is a bubble can be compared to political analysts who thought it it was impossible for the UK to vote to leave the EU.
The global financial crisis has severely discredited the banking system. In the investment world, there has been a loss of confidence that investors and expert professional advisers know what they are doing. The rise in passive investing comes at a time of criticism of years of excessive fees and poor performance of mutual funds that millions of people rely on to fund their retirement.
When an expert like Jamie Dimon, the head of America’s largest bank, warns that bitcoin is dangerous, true crypto believers view these warnings with the same disdain towards experts ahead of the British referendum.
Like bitter political feuds on Twitter, any criticism of bitcoin is greeted by this cohort as inherently corrupt in their motives, while any alternative opinion is used as evidence that only confirms existing beliefs.
Skeptical financial professionals also seem to underestimate what can be considered a millennial devotion that accustoms them to conventional investing psychology: the fear of losing money.
Bitcoin’s most dedicated supporters – those who see themselves as HODL-ers, or those who will hold onto whatever comes to the prize – see their survival from previous crashes in its value as a point of pride. Devotees hold the value and the future of bitcoin is a matter of faith, a Manichean battle between believers and skeptics.
For this most extreme sidekick, there is a noble glory in owning bitcoin, even if it comes at a debilitating loss.
Much attention will inevitably be devoted to the wild swings in the value of bitcoin in the weeks to come.
In decades, whether bitcoin still exists or not, its importance may be seen less as a financial asset than as a speculative barometer of the political forces shaping our time.
Miles Johnson is the FT’s Capital Markets Editor