By Michael Roberts
As I write, the dollar price of bitcoins has hit nearly $17,000, and that’s up 2000% in one year. The rise in the ‘value’ of this digital currency is now more than the rise in the price of tulips experienced in the infamous tulip price bubble in Holland in the 1630s.
The history of financial markets is littered with asset price bubbles, from tulips in the early-1600s to more recent examples, such as internet stocks in the late-1990s and US house prices before 2008. This looks like another. Or is there more to the rise in the price of all these cryptocurrencies, as they are called?
Money in modern capitalism is no longer just a commodity like gold, as it was when capitalism began to emerge. Instead, it is now a fiat currency, either in coin or notes, or now mostly in credits in banks. Such fiat currencies are accepted because they are printed and backed by governments and central banks and subject to regulation and ‘fiat’. The vast majority of fiat money is no longer in coin or notes but in deposits or claims on banks. In the UK, notes and coin are just 2.1% of the £2.2 trillion total money supply.
The driver of Bitcoin and other rival cryptocurrencies has been the internet and the growth of internet-based trading and transactions. The internet has generated a requirement for low-cost, anonymous and rapidly-verifiable transactions to be used for online barter and fast settling money has emerged as a consequence.
By far the most widely known cryptocurrency is Bitcoin, conceived by an anonymous and mysterious programmer Satoshi Nakamoto, just nine years ago. Bitcoin is not localized to a particular region or country and nor is it intended for use in a particular virtual economy. Because of its decentralized nature, its circulation is largely beyond the reach of direct regulation or monetary policy and oversight that has traditionally been enforced in some manner with localized private monies and e-money.
Cryptocurrencies eliminate the need for financial intermediaries by offering direct peer-to-peer (P2P) online payments. The main technological innovation behind cryptocurrencies has been the blockchain, an on-line ‘ledger’ containing all transactions for every single unit of currency. It differs from existing (physical or digital) ledgers in that it is decentralized, ie, there is no central authority verifying the validity of transactions. Instead, it employs verification based on cryptographic proof, where various members of the network verify ‘blocks’ of transactions approximately every 10 minutes. The incentive for this is compensation in the form of newly ‘minted’ cryptocurrency for the first member to provide the verification.
For technology enthusiasts and criminals – and also for those who want to build a world out of the control of state machines and regulatory authorities – this all sounds exciting. Maybe communities and people (and criminals) can make transactions without the diktats of corrupt governments and thus control their incomes and wealth away from the authorities. It might even be the embryo of a post-capitalist world without states.
But is this new technology of blockchains and cryptocurrencies really going to offer such a utopian new world? Like any technology, it depends on whether it reduces labour time and raises the productivity of things and services (use values) or, under capitalism, whether it will be another weapon for increasing value and surplus-value. Can technology in and of itself, even a technology that apparently is outside the control of any company or government, really break people free from the law of value?
I think not. For a start, Bitcoin is limited to people with internet connections. That means billions are excluded from the process, even though mobile banking has grown in the villages and towns of ‘emerging economies’. So far, it is almost impossible to buy anything much with Bitcoin. Globally, Bitcoin transactions are at about 3 per second, compared to Visa credit at 9000 every second. And setting up a ‘wallet’ to conduct transactions in Bitcoin on the internet is still a difficult procedure.
More decisively, the question is whether Bitcoin actually meets the criteria for money in modern economies. Money serves three functions under capitalism, where things and services are produced as commodities to sell on a market. Money has to be accepted as a medium of exchange. It must be a unit of account with a fair degree of stability, so that we can compare the costs of goods and services over time and between merchants. And it should also be a store of value that stays reasonably stable over time. If hyperinflation or spiralling deflation sets in, then a national currency soon loses its role as ‘trust’ in the currency disappears. There are many examples in history of a national currency being replaced by another or by gold (even cigarettes) when ‘trust’ in its stability is lost.
The issue of trust is brought to a head with Bitcoin as it relies on ‘miners’, or members that contribute computational power to solve a complex cryptographic problem and verify the transactions that have occurred over a short period of time (10 minutes). These transactions are then published as a block, and the miner who had first published the proof receives a reward (currently 25 Bitcoins). The maximum block size is 1MB, which corresponds to approximately seven transactions per second. In order to ensure that blocks are published approximately every 10 minutes, the network automatically adjusts the difficulty of the cryptographic problem to be solved.
Bitcoin mining requires specialized equipment, as well as substantial electricity costs and miners thus have to balance their technology and energy investment. That means increasingly Bitcoin could only work as alternative replacement global currency if miners became large operations. And that means large companies down the road, ones in the hands of capitalist entities, who may well eventually be able to control the Bitcoin market. Also, if Bitcoin were to become as viable tender to pay tax to government, it would then require some form of price relationship with the existing fiat money supply. So governments will still be there.
Indeed, the most startling obstacle to Bitcoin or any other cryptocurrency taking over is the energy consumption involved. Bitcoin mining is already consuming more energy for computer power than the annual consumption of Ireland. Temperatures near computer miner centres have rocketed. Maybe this heat could be ecologically used but the non-profitability of such energy recycling may well ‘block’ such blockchain expansion.
And capitalism is not ignoring blockchain technology. Indeed, like every other innovation, it seeks to bring it under its control. Mutual distributed ledgers (MDLs) in blockchain technology provide an electronic public transaction record of integrity without central ownership. The ability to have a globally available, verifiable and un-tamperable source of data provides anyone wishing to provide trusted third-party services, i.e., most financial services firms, the ability to do so cheaply and robustly. Indeed, that is the road that large banks and other financial institutions are going for. They are much more interested in developing blockchain technology to save costs and control internet transactions.
All this suggests that blockchain technology will be incorporated into the drive for value not need if it becomes widely applied. Cryptocurrencies will become part of cryptofinance, not the medium of a new world of free and autonomous transactions. And Bitcoin and other cryptocurrencies will remain on the micro-periphery of the spectrum of digital moneys, just as Esperanto has done as a universal global language against the might of imperialist English, Spanish and Chinese.
Meanwhile the craze gathers pace. Only this week, futures markets for bitcoin have sprung up enabling investors to ‘short’ the cryptocurrency ie gamble on its price falling. That raises its own dangers as investors could now lose millions in betting on the currency falling just as they did with tulips 400 year ago. As Keynes once said: “The market can stay irrational longer than you can stay solvent.”
Banks are now launching investment vehicles called ETFs in Bitcoin so that the ‘man in the street’ can buy bitcoin without owning it directly. So, the crypto craze may well continue for a while longer, along with the spiralling international stock and bond markets globally, as capital searches for higher returns from financial speculation. Bitcoin could rise to $50,000 (after all that is only 150% from the current price). But these crazy prices are the best confirmation that this is yet another speculative bubble that will burst. The only winners will be those who got out early enough or those who charged the fees for buying and selling.
December 11, 2017
