Bitcoin, a commentary
When this commentary was broadcast at the beginning of my radio show at noon, Pacific time, December 21, bitcoin was trading at about $15,600. It had a bad Friday, losing almost a quarter of its value, bottoming out at $11,858, before recovering to $14,267 as I’m posting this. I am not claiming cause and effect.
I’m going to indulge in a rare bit of holding forth on my own—on the topic of bitcoin. I thought of having a guest do that, but since I wrote a piece on the topic for The Nation back in 2014 (reposted here with no paywall), and have been keeping up with ever since. Some of what I’m about to say is drawn from that article, but it’s updated with material from the shimmering present.
Bitcoin, once a fairly arcane topic, is now everywhere. The market pundit Robert Prechter, who is a great psychologist of financial markets despite being a devoted follower of Ayn Rand and believing in a piece of superstition called Elliott Wave theory, once argued that in the course of a major bull market there’s something called a “point of recognition,” when the general public gets on board. That means it’s getting late in the run and it’s time for pros to think about getting out (though a serious mania can go on well after John and Jane Q get involved). It sure seems like we’re at the point with Bitcoin, whose price trajectory over the last few years resembles some of history’s great manias, like the Dutch tulip bulb frenzy of the 1630s, the South Sea bubble of the 1710s, and the U.S. stock market orgies of the 1920s and 1990s.
What is going on? Before getting into the details, I should say that money in general is not a simple topic. Most people have a good understanding of how gold, which is something of a primal money, is mined, refined, and shaped into ingots or coins. Slightly less obvious is why it has a monetary status unlike, say, platinum. But it is rare, pure, easily divisible, and has been highly cherished throughout the ages. Paper money is more complex. From 1900 through 1971, the U.S. dollar was backed by gold, meaning its value was legally defined by a certain weight of the metal. That ended in 1971, when Richard Nixon shocked the world by breaking the link to gold and allowing its value to be determined by trading in the foreign exchange markets. The dollar is valuable not because it’s as good as gold, but because you can buy goods and services produced in the U.S. with it—and, crucially, it’s the only form in which the U.S. government will accept tax payments. Among its many functions, the Federal Reserve is supposed to allow the issuance of just the right quantity of dollars—enough to keep the wheels of commerce well-greased, but not so much that things slip off the tracks in a hyperinflationary crisis.
But Bitcoin is another animal entirely. It is the first and most famous of a large and growing family of things called “cryptocurrencies.” Other family members include ethereum, ripple, dash, monero—but Bitcoin is by far the largest. The total value of existing bitcoins is now $261 billion—that’s a third bigger than the total value of Citigroup’s stock, and slightly below the value of Wells Fargo’s stock—real banks with millions of customers, making real money.
Bitcoin’s origins are in a 2008 paper written by the pseudonymous Satoshi Nakamoto. Despite repeated attempts, no one can figure out who he is, appropriately enough.
The semi-official definition of cryptocurrency is “a peer-to-peer, decentralized, digital currency whose implementation relies on the principles of cryptography to validate the transactions and generation of the currency itself.” (While that is a dense slab of prose, to be fair to the cryptoids, it wouldn’t be easy to define the dollar succinctly either.) What that all means is that bitcoin and the rest are electronic currencies—pure data entires in electronic ledgers—created and transferred by networked computers with no one in charge. The role of cryptography is not merely to guarantee the security of the transaction, but also to generate new units of the currency. New units of cryptocurrencies are “mined” by having computers solve complicated (and pointless) mathematical algorithms; once solved, a coin is created and its birth—with a digital signature guaranteeing authenticity and uniqueness—announced to the rest of the system. Every bitcoin includes a blockchain, an anonymous digital record of the unit’s transaction history. The creator earns the value of the new coin when it enters the system. You can buy or sell bitcoin on online exchanges, and there are even a few bitcoin ATMs scattered about. (The closest one to me in Brooklyn is about 2 miles away; the closest U.S. dollar ATM is at the deli half a block away.)
Mining requires enormous amounts of computing power. According to some estimates, bitcoin’s power use already may equal 3 million U.S. homes, topping the individual consumption of 159 countries. The bulk of this mining goes on in China, where most of the electricity comes from coal, so this is a dirty business. The number of bitcoin in circulation is supposed to top out at 21 million; we’re approaching 17 million now. As the limit is approached, the coin-creating algorithms get more difficult to solve, meaning more computing power is required, and more carbon is generated. Even the most seemingly immaterial of things often have deeply material roots.
I should emphasize that the algorithms used to generate bitcoin are pointless. They serve no useful purpose. To some partisans, that’s a good thing, because if they were tied to some useful purpose, that might confer some intrinsic value upon the currency; best to let its value float freely, limited only by the human imagination.
That’s the technology of Bitcoin; what about it as money? The classic economist’s definition of money is that it is a store of value, a unit of account, and a medium of exchange. You go to the store and find a can of tomatoes is priced at $3—unit of account, which the store will book as revenue when it’s sold. You take $3 out of your pocket or your debit card—you draw down the store of value (the cash on hand or in the bank), and use it as a medium of exchange. The value of the U.S. dollar is that everyone in the U.S. (and beyond) recognizes the currency as fulfilling successfully all these tests of money. The dollar is valorized by the goods and services that it can buy.
Bitcoin has serious problems in all three aspects. Over the last week alone, the value of bitcoin has varied from about $15,000 to $21,000. A year ago, it was worth just over $800. That’s not a very reliable store of value. [Note: it’s now $14,492. But wait a minute—it’ll change. Here is a live quote.]
Almost no one accepts bitcoin, nor do any businesses of note keep their books in bitcoin; it fails both as unit of account and medium of exchange. And its short history—the first bitcoins were minted in 2009—has been turbulent. There have been multiple thefts, frauds, and hackings, which partisans dismiss as growing pains. But with no regulator, no deposit insurance, and no central bank, this sort of thing is inevitable—it’s just tough luck. Introduce regulators and insurance schemes, though, and Bitcoin will lose all its anarcho-charm.
Gold is like Bitcoin in being a stateless form of money, which is why libertarians love it, but it does far better on the store of value measure. The price of gold varies by less than 1% a day—but its price is still more volatile than the much-maligned U.S. dollar. It is a semi-reliable store of value. But gold does little better on the other measures: there’s not much you can buy with it, and almost nothing is priced or accounted for in gold.
Despite that, gold retains an enormous phantasmic appeal—some “objective,” market-determined measure of value, unsullied by state intervention. Keynes called gold part of “the apparatus of conservatism.” That was an old conservatism, the conservatism of rentiers who loved austerity, because it preserved the value of their assets. Bitcoin serves a similarly totemic purpose for today’s cyberlibertarians, who love not only the statelessness of it as money, but also its power to “disrupt.” Bitcoin is part of the apparatus of anarcho-capitalism.
The political cast of the Bitcoin universe is mostly libertarian, but it has a left wing. A paper written a few years ago by Denis “Jaromil” Roio, a hacker, artist, and graduate student, deploys quotations from Michael Hardt and Antonio Negri, Giorgo Agamben, and Christian Marazzi to give Bitcoin a revolutionary spin, creatively reading it as a way for “the Multitude [to construct] its body beyond language.” He does not explain how transforming the monetary instrument will change what is produced or how incomes are distributed.
There’s something to be said for bitcoin’s anonymity—though you have to wonder how impenetrable its veil is to the National Security Agency. For now, it’s a semi-safe way to buy drugs and weapons.
But aside from anonymity—which is nothing to sneeze at!—it’s hard to see what problem Bitcoin solves. The switch to paper money was a response to the crisis of the old gold-centered system. There’s no practical value to Bitcoin—anonymity aside, again—but it does carry political baggage. Leaving aside the entrepreneurs and speculators, who are just looking to get rich, the political vision of Bitcoin is of a decentered, stateless world, with competing money systems.
Competitive money, ending the state monopoly over money, has long been a dream of the right; in a 1976 paper, Friedrich Hayek argued for allowing multiple currencies to circulated within individual countries; competition would lead to the use of the soundest—meaning most austerity-friendly—currency and put a check on governments’ attempts to inflate their way out of trouble. That would mean no fiscal or monetary stimulus in an economic crisis—just let things run their purgative course. In this view, the New Deal lengthened the Great Depression; had the bloodletting continued after Roosevelt’s inauguration, things would have righted themselves sooner or later. And we should have done the same in 2008–2009.
Cryptocurrencies would be an advance on the idea of competitive currencies—improvised currencies that could challenge the state monopoly itself. (Actually we had competing currencies in the 19th century; all kinds of little banks issued banknotes that often turned out to be worthless.) Of course, there is no inflation, and government money has proved far more stable than its alternatives, either gold or Bitcoin. No bank depositor lost a dime in the financial crisis of 2008; you can’t say that about Bitcoin in its short life. But libertarians—and there are a lot of them in tech and finance, the co-parents of Bitcoin—are always worrying about inflation; they worry about it the same way that hedge fund titans see talk of lifting their tax breaks as a rerun of Nazi Germany.
So even though Bitcoin fails as money, it’s acquired a vivid life as a speculative asset. But unlike more conventional speculative assets, its value is completely immaterial. Stocks are ultimately claims on corporate profits, and bonds are a claim on a future stream of interest payments. You can say no such thing for bitcoin. Its only value is what someone else will pay for it later today or maybe tomorrow. And now they’re trading futures on it, which takes speculation into a fourth or fifth dimension.
And what a speculative mania it is. Everyone wants to be part of the action. Bitcoin imitators are sprouting daily. The other day, speculators forked over $700 million to a company, block.one, for a cryptocurrency that doesn’t really exist and, according to its sponsors, has no purpose. The company has disclosed almost no information about itself, and almost nothing is known about its founders. And early on Thursday morning, the Long Island Ice Tea Corp., which sells nonalcoholic beverages, changed its name to Long Blockchain, and its stock price promptly more than doubled. The firm has no agreements with any cryptocurrency promoters, nor does it have prospects for any. The mere name change did the trick.
It’s all nuts, but my guess that it’s not the kind of bubble that will cause broad economic damage when it pops. For that to happen, the bubble would have had to be financed by banks that would be put at risk of failure when things fall apart. That doesn’t seem to be happening. But shirts will be lost. More seriously, this bubble shows that some people have too much money. Our society—and I mean that broadly, since a lot of the money going into bitcoin looks to be coming from Asia—has plenty of cash for speculation and not much for human need.