Lambert here: Prosecution futures, as Yves has always said.
By Marshall Auerback, a market analyst and Research Associate at the Levy Institute. Originally published at Alternet.
Is the bitcoin craze another in a series of history’s most infamous bubbles, or is it a genuine harbinger of a new global financial architecture? In spite of recent market turbulence, its champions see bitcoin (and its cryptocurrency peers) as an ideal market-generated solution as questions arise about the future viability of paper currencies in a global economy characterized by sky-high indebtedness and bloated government/central bank balance sheets. The enthusiasts behind cryptocurrencies produce debt clocks that relentlessly tick over to get us to believe that a Weimar–style hyperinflation is imminent. By creating an alternative store of value outside the control of easy-money-peddling central banks, and their corrupt Wall Street handmaidens, they assert that bitcoin offers a way out of this looming destruction of our savings.
Certainly one can appreciate the appeal of anything that purports to prevent an economic Armageddon. No less a figure than Frederick Hayek, the Austrian Nobel prize-winner known for his work on the theory of money and demigod of free-marketers, called for the elimination of state-controlled money and the abolition of “money-printing” central banks. He considered fiat currencies and the inflationists predominant in the post-gold-standard policy-making world as the root causes of destructive financial bubbles.
If bitcoin and its equivalents could deliver what its champions promise, what’s not to like? Even allowing for the recent gyrations, if you had bought $100 in bitcoin back in 2011, your investment would be worth millions today. But intuitively, it hardly seems believable that an instrument that bears many of the hallmarks of a classic speculative bubble realistically represents a cure for the ills described by Hayek. Having risen to a high of around $20,000 by mid-December, the price has recently fallen by almost half. The real question now seems to be whether this fall will have broader implications for the economy as a whole.
Let’s first do a quick ABC on these newfangled “cryptocurrencies.” To use the most famous example, bitcoin: It is a digital currency coupled with an online ledger, called a block chain. The “block chain” records all transactions that have occurred since the inception of the bitcoin system. The system is set up so that every ten minutes or so a new page—called a transaction block, or just block—is added to the ledger. This new page refers to all past transactions requests (by referring to the immediate previous block) and records all the new transaction requests.
To use a simple example from Eric Tymoigne, the monetary economist:
“Mr X. uses the bitcoin payment system to send a request to buy a pizza from Joe’s Pizza. Joe’s Pizza wants to make sure that this is a valid transaction. That requires verifying that Mr. X holds enough bitcoins to pay for the pizza (the ledger will tell from which past transactions he got his bitcoins), and that he is not trying to double spend the bitcoins. This verification process is done by the accountants of the system, who are called the ‘miners.’ Usually Joe’s will wait for confirmation from several miners (the rule of thumb seems to be six confirmations) before agreeing to sell the pizza (‘confirmation’ means that a recorded transaction request is included in following blocks). Anybody can be a miner, you just need a computer.”
Sounds great, doesn’t it? You get rid of bankers, credit card companies and all sorts of pesky financial intermediaries, who extract their pound of financial flesh from the consumer with regularity. Again, what’s not to like?
Well, for one thing, as bitcoin usage has grown, the math problems computers must solve to make more bitcoin (the “mining”) have become more and more difficult—a wrinkle intended to control the currency’s supply. That’s good in the sense that limiting the supply helps to preserve the underlying value of the currency. The bad news is that “mining” for currency is almost as environmentally unfriendly as traditional mining, because of the high amounts of computing power required, which guzzle energy. You wouldn’t believe it, but bitcoin’s fatal flaw is an electricity problem. In fact, there is a “bitcoin energy index” that shows that each bitcoin transaction requires the same amount of energy used to power nine houses. There are many pejoratives one can ascribe to central bankers, but “environmental vandal” is usually not one of them.
Of course, many of the libertarian champions of bitcoin and its ilk are in the climate change skeptics’ camp, so it’s unclear that this fact would bother them. It’s doubtful they would welcome “green initiatives” if it meant the end to their precious bull market in cryptocurrencies. But the truth is that the aggregate computing power required to sustain Bitcoin makes it, all by itself, unviable in the developing world, where electricity shortages are a fact of life. At the same time, what good is a currency if it creates a resource constraint that hinders global growth and prosperity? The appeal of most monetary instruments is that they avoid the inflexibility associated with the old gold standard or fixed exchange rate systems. This inflexibility prevented governments from introducing policies that generated the best outcomes for their domestic economies.
Proponents would argue that environmental concerns notwithstanding, the ongoing price rise validates bitcoin’s growing acceptance as an alternative store of value. The counter-argument is that much the same might have been said about Dutch tulips in the mid-17th century. At least tulips (or flowers of any kind) have some sort of aesthetic value. You can see them at any marketplace, buy them, and put them in a vase, where they’ll last for a few days. And they represent a nice gift for a loved one.
What do you actually get when you exchange dollars (or yen, sterling, or euros) for a cryptocurrency? Drill down to the essentials, and they are, in effect, no more than digital, decentralized, partially anonymous currencies, not backed by any government or other legal entity, and not redeemable for gold or other commodities.
But, say the defenders, any paper or “fiat” currency, be it dollars, yen, pounds sterling or euros, are all created digitally via computer keystrokes and also have no intrinsic value since we’ve moved off the gold standard. The paper currency issued in the U.S.—the dollar—proclaims on its face, “This note is legal tender for all debts, public and private.” And that’s all it says. It does not say “backed by the gold stored at Fort Knox.”
There is, however, one crucial distinction between, say, a bitcoin and a dollar: One of the most important powers claimed by sovereign governments (perhaps the most important) is the authority to levy and collect taxes (and other payments made to government, including fees and fines). Tax obligations are levied in the national money of account—dollars in the U.S., Canada, and Australia, yen in Japan, yuan in China, and pesos in Mexico. Further, the sovereign government also determines what can be delivered to satisfy the tax obligation. In all modern nations, it is the government’s own currency that is accepted in payment of taxes.
In the words of the American economist Abba Lerner, from his essay in the 1947 edition of the American Economic Review:
“The modern state can make anything it chooses generally acceptable as money… It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done.”
The modern state, then, imposes and enforces a tax liability on its citizens and chooses that which is necessary to pay taxes. The unit of account has no real value if not ultimately sanctioned by use from the state. By extension, the state is never revenue-constrained because it alone determines what constitutes “money.” The tax (and the corresponding ability to enforce payment) is what gives an otherwise worthless piece of paper with pictures of dead presidents on it its value. Even though this paper is not “backed” by anything, taxes function to create the notional demand for said paper dollars. Value is imparted by requiring it to be used to fulfill a tax obligation. Seen in this context, the idea of “denationalizing” money, as Hayek advocated, makes about as much sense as divorcing childbirth from procreation.
Ironically, if governments were to allow bitcoins (or other cryptocurrencies) to be used to extinguish existing tax liabilities, this would certainly entrench them as a viable alternative currency, since they would automatically become designated legal tender. It would, however, be an irony of historic proportions were the bitcoin bubble to be preserved by the very governments whom its libertarian enthusiasts purport to despise. Although they believe that the cryptocurrency heralds a new age of sound money separate from the debt and corruption of the dollar-hegemonic world, paradoxically the only real means of salvaging said currency is via its incorporation into this very world they wish to escape.
Put in those terms, why on earth would the government voluntarily surrender this monopoly privilege? In fact, many countries—notably, China, Vietnam, Sweden—have already banned cryptocurrencies on the grounds that it enables criminals and terrorist organizations to move value around the world out of sight of national governments and law enforcement.
National security concerns aside, as appealing as it sounds to have a monetary system that stands apart from the “tyranny” of government and central banks, bitcoins and their peers violate all of the rules of finance. To quote Tymoigne again:
“There is no central issuer guaranteeing payment at face value to the bearer; in fact, there is no underlying face value, and subsequently no imputed value at maturity, which means they are completely impractical for use in servicing of debt. The fair price of bitcoins as measured by the discounted value of future cash flows is zero.”
Of course, that hasn’t stopped our modern-day financial engineers from jumping on a good bubble when they see one. The Chicago Board Options Exchange (CBOE) has already launched the first bitcoin futures market. Rival exchanges such as Chicago Mercantile Exchange (CME) and the over-the-counter NASDAQ are expected to follow, and it is certainly only a matter of time before the City of London jumps in unless regulators begin to adopt a more proactive stance.
Yes, innovation can be a good thing. But recent experience should make us understandably wary about the consequences when it is applied in banking and finance. To the extent that cryptocurrencies such as bitcoin contaminate the credit system, they represent a real and present danger to our economic well-being. It is true, as venture capitalist William Janeway has argued (Doing Capitalism in the Innovation Economy: Markets, Speculation and the State), some speculative bubbles, such as the railways, or the dotcom boom, do not have as malign an impact. When these kinds of manias exhaust themselves, at least society is left with innovations scattered across the landscape for our use. But bubbles that take root in the very credit system itself (such as the housing mess) leave behind a literal wasteland.
It’s early days, but so far, bitcoin’s cataclysmic fall does not seem to be triggering any systemic concerns, which would suggest, thankfully, that it has not yet taken root in the credit system. But again, what’s to like? Anything that enables participants to exchange a legal tender dollar or some other real asset for a cryptocurrency, which has no intrinsic value or yield, is environmentally toxic, trades in cyberspace, outside of the regulated world of banks and financial payments is a recipe for fraud. And haven’t we had our fill of that for a while?
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Some Russian businessman has purchased two power plants in Russia (http://russia-insider.com/en/investor-buys-russian-power-plants-mine-cryptocurrency/ri22251) for the future generation of cryptocurrency mining. Would you call them cryptocurrency mints?
“Value is imparted by requiring it to be used to fulfill a tax obligation.”
That’s one half of the value. If you issue notes on demand you won’t get any actual value no matter how fast you tax them away.
The other half of the value is the ‘proof of work’ you have to submit to be issued with new money – whether that is a loan application, or a Job Guarantee.
Value is determined by how hard a currency is to get *and* how much of it you have to get to settle your liabilities.
Proof of work is a cost, not a value.
Ask any worker how their proof of work is protected.
I believe it would be somewhat more accurate to say, “Value is determined by how hard a currency is to get relative to how much output there is to spend it on…”
Effort and value are not related. If they were children would have to pay parents.
For a quick example consider the market for expensive women’s handbags.
Or the value of a Brand. For example iPhone.
I’m not talking about effort but final output. If the government decided to double its spending via deficit spending that would be a large increase in demand on productive resources. If output does not increase sufficiently (or if demand does not decrease from other sectors) then producers will resort to price increases or inflation. Each dollar will purchase less. Each dollars value will decline.
“requiring it to be used to fulfill a tax obligation” is not value either, it is fiat creation of demand. A time tested method at that (see Mathew 21:12)
…how do you feel about dove sellers?
Cryptocurrency mining should be done off-planet.
Where did you get the idea that Sweden has banned cryptocurrencies?
I don’t think so. As I mentioned in passing in my post for today (quoting CNBC): “[Stockholm-based ETF Products] has successfully run a bitcoin exchange-traded product for the last two years “
Yeah, that did sound off to me too. I thought I’d heard something recently, about Sweden and crypto, but not that it was banned. Did a quick search and found this:
From October of last year.
Not knowing the type of power plants that the Russian businessman will be utilized (coal, nuclear, natural gas). The issue as stated in this article, “The bad news is that “mining” for currency is almost as environmentally unfriendly as traditional mining, because of the high amounts of computing power required, which guzzle energy. You wouldn’t believe it, but bitcoin’s fatal flaw is an electricity problem.” Certainly there are many IoT & electronic devices that also have a similar fatal flaw.
The challenge for the advancement of society and preservation of the environment, irregardless of climate change, is a change from fossil fuel to renewable. Solar cells are a great step forward but have issue when the sun goes down or overcast. Sure the solar cell technology has improved and forms of energy storage have entered the space. But Space is the prime location for solar cells to drastically change humanities and the environments future. Only a few major obstacles hinder this advancement.
First getting the solar cells into orbit.
Second getting the power back to earth.
Third reducing rocket bound technology (cause that harms the environment).
Fourth financing. Certainly there are other issues.
As to the core of the article, cryptocurrency, the concept of a decentralized ledger would deem that a central bank or government would not be capable of manipulating the store of value for a recognized currency. Not going to disagree that cryptocurrencies are not recognized currency. Neither are Pokemon cards, an interesting fad valued by a few collectors but with no intrinsic store of value or ease of trade for alternative consumables. Ergo a Pokemon card is best traded for a Pokemon card but a simple search of Ebay would justify that some Pokemon cards are valued above others.
At the very least the blockchain security technology could be beneficial beyond cyptocurrencies. https://www.theregister.co.uk/2016/02/18/ibm_open_sources_blockchain_code/
Don’t forget that the vast majority of “legitimate currency” non-cash transactions execute electronically too and require electricity to transact and to update and protect the integrity of all parties ledgers with lots of encryption at every step and storage location. Big banks are also looking at blockchain technology as a more efficient way of maintaining their own secure electronic ledgers.
As the real tax burden has shifted to the working class, and the burden is only getting worse, oligarchs need some means to recycle their dollars. The competition between oligarchs requires them to endlessly speculate in order to determine the “winner”- top dog. Cryptocurrency can function as a parallel speculative machine, functioning alongside captured governments worldwide.
The gambling rollercoaster can keep the wealthy occupied and pull in the uninformed with a few spare currency units from the real economy during the low periods, in the hope of striking it rich.
So now we have captured governments using the power of money creation to prop up corrupt corporate and banking interests. Lottery systems distracting the poor with hopes of riches to relieve their suffering, and the stock market and cryptocurrencies evolving into institutions the normalize corruption and inequality.
Taxes have always been used to achieve some social function. The government requests goods and services or orders contracts for work done by issuing some form of “money” into society. The work gets done and a level of tax is levied to bring that issued currency back to where it came from, always allowing for a fair exchange between labor and resources used in the building and the taxes collected. It is the never ending balancing act. A political act.
Until humans can live peaceably together and are not driven by the ethos of “screw thy neighbor”, the power of government and money creation is the only thing that stands in the way of being ruled by violent sociopaths.
Neoliberalism depends on captured government. Libertarians falsely believe in weak government. Government for and by the people is the only hope for humankind.
Fair exchange for labor and a say in what is actually built are the cornerstones of a livable world.
Here, here.. Speak truth to power and may the ‘finance’ be with you
x 10 E 6
“Global growth and prosperity.” From the article. Is that one of those BS “tells” that I keep reading about? And past bubbles like “the railroads” and the dot.com boom leaving “innovations scattered across the landscape for our use”? Glass half full, with what a lot of folks find is hemlock or a delightful reduction of oleander blossoms?
And I like the glib bit here about “Bitcoin mining should be done off planet.” Carries along very nicely, and sort of palliates and immunizes, the lust for externalizing and what, not “socializing” but maybe “universe-izing,” as part of the “discourse” cloud that lets us be “smart” and such while pursuing our individualized gluttonous “preferences.” Dyson Spheres, anyone? Seen in the popular mind as a laudable goal? Not terraforming, but dismantling, extraction writ large, and “creating innovation” on a very imaginable scale. What kinds of creatures will inhabit the Sphere? It won’t be humans as I in my parochial “Luddite” worldview think of them, and no, that is not “something wonderful…” https://www.youtube.com/watch?v=V5HA-umweZ0 But of course I’ll likely be dead, one way or the other, before those who “win the future” have their forked way…
What is or are the goal(s) and aim(s) of our species? Just “moar groaf” and “MORE FOR ME”? Is that all there is? Not even hints of deferred gratification any more, which of course just puts off the reckonings and gets the Few thinking about still more novel ways to game the planetary system for Big Ten-Baggers Down The Road. Seems to me like the whole of the last millennium of “history” is pretty much “about” the long game of the greedheads that have figured out how to own us and rent the world back to us (extracting obscene profit and fees) and in their rotted thinking, don’t give a rip that “we” seemingly are at the point where the mopery is about to experience a horror-filled die-off… Can’t define obscenity, but I know it when I see it…
And they won’t even give us a “Samson moment,” when we might bring the house down with us — why expose themselves to any personal risk, just for the pleasure of gloating? Drop us in the oubliette, and langorously order more wine and dancing girls…
There’s probably a reason why we haven’t been able to detect “intelligent” life out there and it has nothing to do with the equipment.
JTMcPhee,
There are many issues and concepts with space exploration. The reality is avoiding the coming tipping point, (https://www.theguardian.com/environment/radical-conservation/2018/jan/16/biodiversity-extinction-tipping-point-planetary-boundary), that would require an advanced species to leave or seek resources from an external source. The problem then becomes should an advanced species if capable of acquiring external resources, actually follow through with acquisition of those resources. What if when attempting to mine an asteroid, bringing it into a near planetary orbit to mine for select resources, the orbit decays faster than intended as mining progresses. When the orbiting asteroid becomes a meteor and destroys part or whole of the planet.
Is humanity doomed to remain on earth until extinction (tipping point)?
Hoping against all odds that collective knowledge, curiosity and exploration triumph over fear of the unknown and self centered motives.
For a minute there, I thought NC was actually posting a neutral (as versus virulently anti-) crypto article, which would have been astounding, but as I got through the first few paragraphs, I started to feel that the anti bias has only gotten more sophisticated, and even made for an interesting read. So thanks, NC for upping your game.
It shouldn’t need saying but of course one has to approach investing in cryptos the way one approaches other investment: with great amounts of caution, assessing risks, and not believing everything you hear or read. How could it be otherwise? So the author rules out crypto investing on the precautionary principle which sounds better then the flatulent tulipmania noises that other financial experts make (easy to forget them who got us into this mess in the first place!)
I’m a grey-haired ecowarrior who would have supported Bernie Sanders if I was in the USA, but didn’t need to cause I get most of what he was demanding because I happen to live in a nice little part of Europe. So, we aren’t all west coast millenial techies who obsess over Ayn Rand.
Footnote: I did invest in cryptos a couple of years ago because seeing my meager savings earning 0.70% yearly didn’t seem right nor healthy as my golden years rush in. What a smart move. It can go down some more and it’ll still be smart move. Just saying.
Nope. It is a casino.
One thing to mention is that the miners receive a transaction fee for recording/verifying the ledger ( i.e. mining ).
The transaction fee has recently gone from $0.12 to $54 and is back to $24 currently.
This fee precludes the use of bitcoins for purchasing anything priced under $1000 or so.
So it appears that few people are actually spending bitcoins on products. It reminds me of the rai stones of the island of Yap. Very valuable, but impractical in real life.
I read somewhere that “miners” were having to spend an increasing amount on computer equipment and electricity to make any headway mining bitcoins.
I wonder who is really making any money off of transactions fees?
The price of bitcoin went up very considerably towards the end of last year. That means miners were (still are) making a lot more money than they were previously. Naturally, much of that new found profit will be invested in more mining equipment, in an attempt by miners to earn more bitcoin, further increasing Bitcoin’s network security.
Transaction fees are a result of block space scarcity. Bitcoin reached its (current) capacity of ~200,000 transactions per day some time ago. Developers are working to slowly increase that capacity; in the meantime, higher fee paying transactions are processed more quickly than lower fee paying transactions. That competition for block space (there are more transactions broadcast than there is space in blocks) has led to a substantial rise in transaction fees, such that the total amount of fees per block is no longer insignificant; fees already constitute a healthy percentage of the overall block reward. This is important because fees will one form 100% of the block reward for miners — fees alone will pay for the entire security of the Bitcoin network.
Speculation on a non asset that has no yield and is attractive to those that have upper bound inflation concerns seems a bit non nonsensical, especially considering the distribution dynamics of it e.g. 4% own the vast majority of its issuance.
The latter really seems to contravene the selling point about decentralization, furthermore, there seems to be a huge problem wrt the notion of an “A” political fix to a political dilemma. Mostly grounded in inflation hysteria, those at NC should know the wealthiest own the vast majority of financial paper and as such are the ones most concerned about, along with the networks to redress their concerns.
In addition there there is no repurchase setup [gold standard or pure fiat] “it’s just an algorithm” so any sharp drop in bitcoin demand has to see the price drop suddenly. And as long as it trades above zero it is a bubble.
Basically bitcoin is a religion e.g. its demand pull is predicated on – “a” belief – at a fundamental level, as such, largely quantified by how many people are brought into the fold. From antiquity we know how such events are driven, political fractions [power dynamics] and how one crafts the narrative. The most concerning point of this all is the unwashed are not even taken into consideration, they are just political leverage to be deployed by those with more power, in an attempt to drive their agenda or spoil the party for their antagonists – counter party’s.
Block chain is more like the proverbial burning bush that gives life to the perception that crypto has some intrinsic value i.e. the binary is akin to words that are self evident e.g. once disbelief is suspended you can fill anyone’s head with the preferred [proffered narrative].
Considering its ideological roots I take this whole thing as par for course.
I would concede that Bitcoin is a religion if it can also be agreed that the concept of currency itself is also essentially a religion too; one observed by nearly every adult on the planet.
Bar tabs, frequent flyer points, coupons, are forms of money tho don’t function on religious precepts, further more sovereign is underpinned by counterfeiting laws, taxes, et al.
Crypto is largely premised on an ideological precept of utopian principles WRT decentralization [basically Austrian free banking]. The quasi religious aspect is how the code both creates and stores value ex nihilo, this is somehow supposed to negate the human agency dilemma, yet all I can see is a fear based agenda e.g. the end is nigh, do you have your crypto portfolio sorted.
Lastly I would note on another blog someone responded to me with this:
“The blockchain is decentralised trust. Anyone who thinks it’s analogous to a spreadsheet is, at best, mildly retarded.”
I responded by how they arrived at their conclusion, especially in light with the concentration of ownership being 4% distribution. I got this as a reply:
I just… I can’t help you. Try this:
https://en.wikipedia.org/wiki/Learning
I think the quasi religious aspect holds.
Fortunately, Bitcoin is opt-in. It always has been!
No one is going to badger you into investing in Bitcoin (though crypto portfolio pumpers are much more common nowadays).
Concentration of ownership is naturally limited because early adopters took the time to understand the technology and saw potential and value early on. Others, like yourself, saw (and may continue to see) no value — that’s fine, of course, but unreasonable to expect distribution to be extended to people who take no interest.
In any event, I would query that 4% figure — it seems to ignore large custodial wallets (i.e. that represent many users).
Castillero de Diablo,
What’s a nice guy like you doing in a sh*thole neighborhood like bitcoin? I hope you are able to sell out and escape with more than what you invested.
After you make your getaway, I hope everyone else in bitcoin loses their very first nickle, their very last nickle, and every nickle in between . . . as they deserve. May their homes be drowned or tornadoed in the global warming their precious bitcoin helps to intensify.
I have never mined, owned, bought, or sold any cryptocurrency and have no plans ever to do so.
Nevertheless I follow the story in the same spirit that I follow the National Football League and the National Basketball Association. This video was entertaining:
CryptoBeast #6 – A World of Infinite Love and Abundance
Government issued currencies have the advantage, or disadvantage as the case may, of being issued by entities with a monopoly on the means of socially effective force. Are Bitcoin et al going to have their own police force and army? That tiny-print “legal tender” clause on the dollar bill is a big deal both literally and figuratively.
After some thought, the only reason I can see for converting part of one’s currency holdings to bitcoin is if one lives in a country whose currency could plausibly be devalued (a standard tactic of the neoliberal system of global monetary imperialism that is run out of Washington, London, Wall Street, etc.). In such cases, bitcoin allows individuals to escape the system of monetary imperialism.
A better solution would be the ‘basket of currencies’ approach, which ultimately would mean a single global currency, which is likely where the world is heading, in a matter of decades (or a century, perhaps). This would mean the end of currency speculation and monetary imperialism, so the usual suspects are deeply opposed to it.
Maybe Bitcoin will make it into the IMF’s SDR, or an equivalent, one day.
In the meantime, currency holdings seem hard to justify, beyond having reserves of cash for emergency purposes. Interest rates are so low (globally — in some cases negative or in danger of turning negative) that inflation quickly eats away at savings.
In my mind, Bitcoin is better thought of as a non-correlated asset (still an open question as to correlation, but it certainly seems that way); people should be looking at the high risk/high return elements of their investment portfolios and deciding whether there is room for a risky investment like Bitcoin.
So the story goes, very few participated in the Dutch tulip bubble of the 1630’s and it caused little disruption in the burgeoning economy of the time when flower power waned.
…this has the same feel
I think you need to read this:
https://www.goodreads.com/book/show/162120.Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds
“So the story goes” does not appear to line up with the facts.
I read that 30 years ago, and a fun read, but limited in scope, as really how much information was available on the subject in 1841?
From Wiki:
“In many ways, the tulip mania was more of a hitherto unknown socio-economic phenomenon than a significant economic crisis. And historically, it had no critical influence on the prosperity of the Dutch Republic, the world’s leading economic and financial power in the 17th century.”
Not appealing at all. It is just an energy-wasting ultraliberal dystopia. Mr. Auerback does a good job although too polite for bitcoiners.
I would put cryptocurrency news on guillotine watch
As I understand it, there will come a point where the mining will cost more in energy use than it would yield in bitcoins, and you already have to have a special machine to even make it cost-efficient. Also, there’s a point where no more bitcoins will actually be made (I forget what the exact number is or when that point would occur, presumably coincides with the coming nuclear Apocalypse). So who would be doing the block-chain ledger thingy once there are no more coins to be had?
It’s all very complicated, and strikes me as distantly psychotic and hilarious if I were to actually comprehend the fullness of it. Or perhaps it is genius, aren’t those two supposed to go hand in hand?
For clarity, the majority of Bitcoin earnings from “mining” are made by being the first to correctly calculate the hash within a blockchain that confirms a Bitcoin transaction between parties. This is collected by the mining party in the form a transaction fee deducted from the transaction. For this type of mining, the limit of earnings is tied to the number of transactions and your likeliness to be the first to perform the calculation. Anyone can monitor the initiated transactions and attempt to calculate the correct hash first, but many CPU cycles and BTUs can be wasted by the miners who did not win the race (there is no prize for second place).
Not fully understanding mining of alt currencies. Wouldn’t pool mining be a “second place” prize?
In essence the equivalent of a group owned participation prize. All who participate in the pool to solve the decentralized ledger problem first are allotted a portion of the total coin for that hash. Decentralizing earnings and further the ledger. Sure there is the opposite that many investors pile into a server style operation and reap the proportion of investment into that “pooled” resource. Still not fully understanding wouldn’t either pool still have to calculate the correct hash first, to win?
There are such thing as mining pools — the pool administrator uses the combined hash rate of all the pool members to attempt to win each race for a block.
It doesn’t really matter if a miner or mining pool wins an individual race for the _next_ block; what matters is the miner or mining pool can (in terms of probability, based on overall network hash rate) reasonably expect to win x of the next y races.
Some alt coins work a little differently — for example, Ethereum miners get a small reward for finding a valid block even if that block doesn’t ultimately make it into the blockchain.
No, Bitcoin has no long-term future. Why doesn’t it? Because it has no purpose beyond being a vehicle for speculation. Buying Bitcoin low and selling it high is its only purpose.
Most other items traded on markets have some intrinsic value. Commodities like oil and copper are regularly consumed by industry. Stocks pay dividends. Bonds pay interest. Even gold (which is regularly used for speculation) is used in jewelry and for plating high-reliability electrical contacts. Bitcoin has no intrinsic value.
Of course, one could argue that the dollar or Euro have no intrinsic value, but they are well-established in our economies as a medium for routine financial transactions. Because Bitcoin consumes 350 kWh of energy per transaction and typically requires 20 minutes for confirmation, it is totally unsuitable for routine transactions. Could you imagine waiting 20 minutes at Starbucks for your $5-equivalent Bitcoin payment to clear, while $50 worth of electricity was burned in the background? It’s absurd.
It has no intrinsic value. It is unsuitable as a currency for routine transactions. The only thing left is speculation, as which point it greatly resembles tulips or old baseball cards. The only true technical advantages Bitcoin has over these classic bubble mediums is that Bitcoin doesn’t die like tulips and it can’t be forged like a Mickey Mantle card can.
The primary driver behind Bitcoin becoming ‘a thing’ is its function as a method of exchange outside the control and actionable observation of the central banks. The speculation crowd arrived much later. I highly suspect too that much of the volatility of Bitcoin is the result of old fashioned central bank driven currency manipulation to undermine faith in the system. Bitcoin and other peer-to-peer monetary systems may very well collapse and fail, but it would not be because of an underlying technical flaw or disinterest in their concepts, but instead would be a result of the serious multifront attacks by the power bases (central banks and their partner governments) that face a serious existential threat to their own hegemonies. It may well be that something like Bitcoin could survive for international trade between the ‘usual suspect’ countries (North Korea, Iran, Syria, Venezuela). The deciding point will be whether the unsatisfied demand for decentralized exchange will overwhelm the pain inflicted to try to stop it. Central bank abuses will always tend to drive the market to alternatives and black markets. The fall of the USSR was in no small part due to the loss of faith in its monetary system.
“The fall of the USSR was in no small part due to the loss of faith in its monetary system.”
Not really…
In theory a Soviet Ruble was worth about a buck fifty from the 1950’s to 1980’s, in practice maybe 30-40 cents in the west, and it didn’t matter what it’s value was, as there was nothing to spend it on back in the USSR.
The citizenry’s lack trust in the ruble drove the internal trade to shift to an increasingly sophisticated black market and foreign currency, which is why “there was nothing to spend it on back in the USSR.” As the ruble lost its share of domestic transactions, the USSR’s ability to effectively observe its own trade went dark, and its ability to tax and execute monetary policy diminished because it was turning the knobs and dials on a system that controlled a smaller and smaller portion of its own commerce; and the real and political power that flows in concert with that commerce. I would suggest an interesting book that describes the collapse of the USSR from a man-on-the-street perspective. Reinventing Collapse by Dmitry Orlov.
I’ve read Reinventing Collapse, and it deals with the post USSR period, not before so much, as the author wasn’t there, he was in the USA since the 1970’s, if memory serves.
Basic salaries & goods and services were meager, but pretty cheap in the USSR if you could find something. It wasn’t a matter of cost or the value of the Ruble. The same scenario played all throughout the bloc party, with the exception of the Hungarian Forint, which had some semblance of exchange value in the west, compared to all the other basketcase currencies.
p.s.
Soviet commodity traders were renowned in Switzerland, as everybody knew they were in theory strictly sellers in order to get hard currency for their wares for Mother Russia, but they went both ways as buyers & sellers, to befuddle those caught unaware of their prowess.
More on bitcoin and cryptocurrencies in general: https://psmag.com/economics/why-bitcoins-value-could-eventually-approach-zero
“The current cryptocurrency mania also leads us to think again about how money relates to real value—which ultimately comes from energy and physical resources like food, forests, fisheries, soil, water, and mineral deposits. Having more currency options will be of little use to us if our real sources of value are depleting, eroding, and disappearing. An ideal currency should give us feedback with regard to the status of these real sources of value and thereby help us conserve them rather than spending them into oblivion.”
“The unit of account has no real value if not ultimately sanctioned by use from the state.‘ — Marshall Auerbach
Illegal drugs aren’t sanctioned for use by the state. But they seem to trade readily for real value despite this allegedly fatal disability.
*blows a lazy hash-oil vape cloud*
Real value denominated in Dollars.
Try buying your drugs by barter.
The legality and profitabiluty of a business venture is managed by government. So called “illegal” activities just have different risk/reward ratios, which is priced into the product or service.
Business is amoral.
I might point out too that for all the
propagandareports of Bitcoin being used to buy illegal narcotics online, the overwhelming number of people who purchased the opioids that killed over 64,000 people the U.S. in 2016 (plus God knows how many nonfatal users) were purchased with good old fashioned U.S. dollars. The highest drug use areas also have the highest levels of robberies and burglaries. It’s a safe bet that the person who stole your flat screen to feed their drug habit did not fence it for Bitcoin so they could make an online purchase and wait for a package to show up.I do not believe that anyone is obligated to accept a bitcoin as payment for any legal obligation, like buying a pizza or paying child support. So the payee could demand that the bitcoin be converted to legitimate currency and that conversion, if I understand this all correctly, would involve a whole new round of mining, and whoever handles the conversion would most likely want to arbitrage the dollar/bitcoin exchange rate.
Wait, so block chain is just an accounting spreadsheet with an automatic refresh rate?
LOL. Or. is it a Wikipedia where everyone with a “Wiki Wallet” authoring account gets their own copy of the most recent validated “block?” Yeah, that’s real bandwidth and data footprint “efficiency.”
Love the Bill Janeway cite. Clear thinker.
Bitcoin is but one of many cryptocurrencies. It is the oldest and has the biggest marketcap, but its age and inefficiency is a major concern. Bitcoin has enough of a status and history that it will probably persist as a wealth store independent of fiat. All it takes is people willing to accept it in trade. But it will not become a daily currency for small transactions. It is too inefficient for that. Currencies like Ethereum, second to Bitcoin, are much faster and do not have the same energy demands as Bitcoin. Other currencies are designed to address microtransactions with zero/low fees and fast transactions. Crypto is like the dotcom bubble. Many will arise, few will survive, but those that do will be important.
Please advise how the value is stored in crypto and whom said fiat was a store of wealth or value, transnational mediums are not to be confused with actual social wealth or value.
ebbflows,
“As the Federal Reserve bank of Minneapolis says, the U.S. dollar is fiat and is valuable only as long as ‘[p]eople are willing to accept fiat money in exchange for the goods and services they sell’—and only as long as ‘they are confident it will be honored when they buy goods and services.’ ” https://www.thetrumpet.com/3237-why-the-us-dollar-constantly-loses-value
Certainly the propaganda, around 1971 when Nixon closed the gold window, was sufficiently convincing the populace that fiat was a store of wealth or value. Difficult in pinning the phrase/concept to one individual.
For what it’s worth dept:
The almighty dollar has lost over 95% of it’s value since 1971, when compared to the spot price of gold then and now.
This is a good thing. Tying prices to the volatility of gold is insanity.
Just the other way around, the dollar has been the agent of change, value-wise.
Gold wasn’t volatile all that much pre-1971, the price remained at $35 for almost 40 years prior-including during WW2, and then $16 to $20 an ounce for a millennium or so before that, not much change, a constant value.
It only exploded in value, once Tricky Dick closed the gold window that allowed foreign countries (not individuals) to trade in dollars for all that glitters.
Miners can start with nothing & get some bitcoin or a part of one. That appeals & is more profitable than writing on FaceBook or Twitter.
I would think that is a major appeal & what would keep it or any similar currency going.
Sounds like the factors of worth are off. Some people make real money playing poker, & you could make the game analogy.
The one who accepts the most bitcoins, winnings, & provides the value back on the losses turned into a fully fungible currency will make the most.
Key is conversion of the bitcoin into a fully fungible unit of transactional value. That depends on the house that takes the bitcoin & gives whatever it gives because this house knows others that
will take it from them for whatever it is it wants.
Who or what now takes bitcoin for land? Let us look at those
entities and see how they are doing?
I do imagine some wisecrack will come up with faster verification.
20 minutes in a real estate transaction is no impediment considering all the other aspects of what it takes to buy or and sell real estate.
Who takes bitcoin as rent yet? Solar as power for bitcoin is energy capture reduces longterm the mines real cost.
The flaw of the bitcoin is that it is finite. Gold is flawed for the same reason. The modern economy depends on the infinite capacity of a national Treasury to create money to spend on the nation and the citizens of the nation.
Finance is finite, & Economics is infinite.
We are all addicted to food. Bitcoin as described in the Pizza story is a great place to start the examination of it.
I believe my own invented currency the Transcendia Insurodollar created in a pro nation model will end up as superior, at least for my territory.
My invented currency is faster explained & more easily adopted by other nations.
More than one nation was on the gold standard.
In the drug business the reseller who gets a seller to sell for bitcoin makes a profit off a real desirable thing.
For the consumer there is no profit excepting their high.
You may have more than one system that works for & with humans.
It is not the system that is important in & of itself. Belief in the system is the determining factor.
Belief in the system is what overcomes the flaw in every system. A system made by humans is always flawed until it is believed in by enough people to provide food, clothing & shelter & food as an addiction has to be as instantly satisfied as cash at the food truck will facilitate.
In a modern world then we might want to ask if bitcoin will ever be matured so as to pay for a pizza anywhere in the world anytime.
“When you see reference to a new paradigm you should always, under all circumstances, take cover. Because ever since the great tulipmania in 1637, speculation has always been covered by a new paradigm. There was never a paradigm so new and so wonderful as the one that covered John Law and the South Sea Bubble — until the day of disaster.”~ John Kenneth Galbraith
Ripple (XRP) is a crypto-currency with real utility that integrates with govt fiat currencies globally and every “Bitcoin” article on this site that fails to mention it causes me to question what degree of research is going into this topic. It’s the #3 crypto by market cap so it’s not exactly dogecoin either.
Ripple is a completely different proposition, correctly marketed at banks, payments processors and other FIs. Articles tend not to mention Ripple because Ripple is not nearly as interesting / challenging / controversial as Bitcoin. Bitcoin is antithetical to traditional finance and that’s what demands discussion.