In January, cryptocurrency Bitcoin dropped from a high of US$19,850 to US$6000. It has since risen to a more stable value of about US$10,000, but the wild ride of Bitcoin is a dangerous development in capitalism that should make us wary.
Bitcoin is a currency designed by computer nerds. Coins are either “mined” by performing a mathematical calculation, or bought and sold by using other currencies. Bitcoins can be used to buy and sell through a decentralised peer-to-peer network using a software process called blockchain to verify the transaction.
Bitcoin is only one of several such cryptocurrencies. For example, there was an Australian version set up for research purposes called DogeCoin, featuring a popular meme of a Shiba Inu dog. It proved more stable than Bitcoin for quite some time.
Some of the motivation for Bitcoin comes from libertarian ideas about finance. These ideas hold banks and regulation to be the cause of inequality, rather than exploitation based on private ownership of the economy. The idea is to replace the false power of “fiat” currencies backed by governments with something else — something somehow free from government oppression.
The argument goes that because Bitcoin transactions are verified by the encrypted blockchain rather than banks or governments, it frees the flow of money from unnatural regulation. This, it is said, will make capitalism work more efficiently.
The Being Liberation blog explains it like this: “Individuals who worked their entire lives, find their retirement income in their senior years within striking distance of the poverty line, because the 2017 dollar purchases far less than the dollars that went into their retirement savings and investments.
“Take the example of a Venezuelan who invested in Bitcoin — currency their government couldn’t control — this person now finds that the liberated currency is literally the difference between life and death in their ability to purchase food; compared to their neighbor, who cannot, due to their sole reliance on the government-controlled currency.
“Though still in its infancy, and highly speculative, liberated currency offers intrigue, and the hope of emancipating ourselves from central banking in a very real way.”
Bitcoin’s secrecy also makes it easier for users to buy illegal, unrelgated products — anything from drugs to child pornography — and makes tax avoidance easier.
Bitcoin also comes with a variety of other problems.
In a take down of Bitcoin from 2013, science fiction writer Charles Stross explained how Bitcoin is inherently deflationary: “There is an upper limit on the number of bitcoins that can ever be created ('mined', in the jargon: new bitcoins are created by carrying out mathematical operations which become progressively harder as the bitcoin space is explored — like calculating ever-larger prime numbers, they get further apart).
“This means the cost of generating new Bitcoins rises over time, so that the value of Bitcoins rise relative to the available goods and services in the market. Less money chasing stuff; less cash for everybody to spend (as the supply of stuff out-grows the supply of money).”
In other words, Bitcoin encourages its users to hoard rather than spend or invest, as the “value” of Bitcoin will tend to grow. This would take more wealth out of productive investment.
But even if users were inclined to spend or invest, the nature of Bitcoin makes it very hard to do so. Very few stores accept Bitcoin as currency and it fluctuates so quickly in value that it would be hard to price even if they did.
The blockchain may be an effective way to secretly verify a transaction, but it is very slow, taking anywhere between 20 minutes and six hours.
This was particularly nasty during one of the recent falls in Bitcoin’s value. Users tried to sell their rapidly declining Bitcoins, only for the transaction to take so long they ended up losing more than they expected.
Bitcoin’s distribution is vastly unequal. Business Insider Australia reported on June 12 that 4% of Bitcoin holders own 97% of Bitcoin. That elite group is made up mostly of those who invented the currency. In trying to set up a decentralised currency free from manipulation, the supporters of Bitcoin have left themselves in thrall to a tiny centralised committee making decisions that affect the value of their money.
This would simply be darkly comical if Bitcoin were limited in scope to a few basement-dwelling libertarians, but real people have invested their savings in Bitcoin and are losing their shirts. Copycat cryptocurrencies have run scams on investors, running off with all the money.
Producing Bitcoin also comes at a large environmental cost. To run the equations that produce Bitcoin requires ever increasing computing power, requiring growing amounts of electricity.
In a December 12 ABC News column, Queensland economist John Quiggin said it was likely that Bitcoin mining used more electricity than New Zealand. “If allowed to continue unchecked in our current energy-constrained, climate-threatened world, Bitcoin mining will become an environmental disaster,” he wrote.
As the decentralised network of the blockchain does not care whose computers are used, hackers employ “BotCoin” programs to steal resources from other computers and websites. ABC News reported on February 12 that hackers had injected Bitcoin mining software into several government websites.
Bitcoin is a corrupt currency system that encourages its users to hoard money, while helping destroy the environment and creating wealth for criminals and tax avoiders. A world with more Bitcoin is a world we cannot afford.