Cryptocurrency is all the rage. Today it is hawked by the likes of billionaire Elon Musk, big names in tech and a host of celebrities. Bitcoin, the first and most popular, has gone from a fringe idea in the 2010s to trading for thousands of dollars. Other digital currencies include ethereum, tether and dogecoin. Some tout crypto as the means to reform capitalism or even dethrone it. So, what is the reality and what is hype?
Origin and growth. Cryptocurrency was intended to be digital money. It was implemented after the 2008 “great recession” as a means to avoid state authorities and the banking system. Designed to be controlled in a system visible to everyone, it was supposed to be more democratic but quickly proved to be its opposite.
Crypto is an idea cooked up by anti-government, anti-regulation libertarians. They hold that all capitalism’s problems can be solved by the “free market.” They conveniently ignore the fact that the modern market is anything but “free;” it is dominated by monopolies and cartels and cryptocurrency is no exception. The National Bureau of Economic Research found that just 0.01% of bitcoin holders controlled 27% of the currency in circulation in December 2021.
The founders of cryptocurrency wanted to replace fiat money, i.e. money backed by the government that issues it. One feature of bitcoin is that its creators put a ceiling on the number of units (coins) to be made. The idea was that this limit would end inflation, which is caused when central banks expand the money supply, notably during financial crises. But the capitalist system needs these flexible monetary policies. That’s why governments went off the gold standard, when paper money was backed by gold in government vaults.
The scarcity idea is also counteracted by the fact that while there are a limited number of bitcoins, there is huge growth in new types of currencies. It is estimated that between 2021 and June 2022, new currencies doubled, growing to 12,000.
Through persistent promotion on social media, the price of bitcoin, which started out minuscule, began to rise (and fall) thousands of dollars at the end of 2017. When the Covid pandemic hit, prices skyrocketed and plunged again. Bitcoin reached $68,000 in November 2021 and as of November 2022 had fallen around 70%.
Not good as money. Extreme volatility is why crypto isn’t practical as money. Most of the companies that a few years ago announced they would accept cryptocurrencies as payment, including Microsoft, Overstock.com and Tesla, have reversed course. And middlemen now charge to convert them to dollars. At this point, crypto is almost completely reduced to a highly volatile means of speculation.
It is also extremely susceptible to hacks and scams. Over $2 billion disappeared in hacks in the first half of 2022. Solidus Labs, which monitors crypto markets, says that 15 crypto scams are launched every hour.
The technology behind bitcoin and many forms of crypto is also an environmental disaster. Since there is no central authority, an open-source electronic ledger system called blockchain is used. Transactions are verified by the first entity to solve a complicated math problem. This process is hugely energy intensive because the many parties involved in the competition (which nets the winner free bitcoins) use enormous server farms to solve the calculations. The energy usage is now comparable to that of mid-size developed countries.
Real vs. fictitious value. Despite arbitrary increases in the supply of money introduced by central banks (which do cause inflation), fiat currency has an underlying value. Fundamentally, money exists to facilitate the exchange of commodities. And the value of commodities comes from only one thing — the amount of human labor needed to produce them. So, government-backed fiat money is tied to the actual value represented in a country’s total commodities produced, its gross domestic product (GDP).
This is the fundamental basis of economic value under capitalism. But this fact tends to be obscured under modern capitalism, which is dominated by the financial industry — banks, insurance companies and stock markets with their ever-expanding forms of speculation. Marx pointed out that most of the apparent value of this kind of riches is fictitious. This fact is regularly exposed when crises cause collapses in markets.
The value of cryptocurrency is also fictitious. It has no inherent worth at all, its price is determined solely by supply and demand. This is the real reason why it is so volatile and is a menace to the small investors who are drawn into it.
Crypto can’t fix capitalism. No technological tweak, including crypto, can save capitalism. Its problems are baked in. It is prone to economic crashes, creates greater and greater concentration of wealth in the hands of a few and is rapidly destroying the earth’s ecosystems.
Crypto is not a cure for but a reflection of capitalism’s growing tendency to become a giant Ponzi scheme.
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