Bitcoin was set up in 2009 in accordance with a design drawn up by a person, or more probably a group of persons, calling themselves ‘Satoshi Nakamoto’. In a paper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ (bitcoin.org/en/bitcoin-paper), he/they stated that:
‘A purely peer-to-peer version of electronic cash would allow payments to be sent directly from one party to another without going through a financial institution.’
What, you might wonder, is the advantage of such a system over the electronic payments systems such as Paypal and Visa that already exist? None as far as most people are concerned. However, those who set it up had been influenced by ‘libertarianism’ in its American sense, such as anarcho-capitalists, ‘minarchists’ and other advocates of an unregulated market economy. They wanted a ‘cash system’ that was independent of the state and, also, didn’t want to involve a ‘financial institution’, in particular not banks, which, like the state, were accused of issuing unsound money by creating too much.
The basis of the system is a network of computers without a central server, all the computers being in direct contact with all the others. Hence peer-to-peer. The problem with such a decentralised, or, rather, non-centralised, system is how to verify that the person making the payment has not already spent the ‘electronic cash’ attributed to them. The innovation here was to apply ‘blockchain’ technology, as explained in the Pathfinders column of the December Socialist Standard:
‘When you make a Bitcoin transaction, the details are distributed across the entire network. To be sure the transaction is unique (i.e. not a ‘double spend’) it must be validated. To do this, the system triggers a competition in which freelance ‘miners’, acting somewhat like accountants, race to validate the transaction in return for a diminishing new-issue Bitcoin payment, which also helps to grow the currency at a controlled rate. Once validated, the transaction is then written into an encrypted public ledger as a permanent record or ‘block’. This block is linked to previous blocks and in turn becomes the anchor or link to the next created block, forming an unbroken chain.’
The decision to call the validators ‘miners’ was another reflection of the ‘libertarian’ ideology behind the project. It was explicitly chosen to be like gold mining. As Nakamoto wrote:
‘The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case it is CPU [computer] time and electricity that is expended.’
In this respect Bitcoin’s aim was to create the digital equivalent of a gold currency, to realise on the internet Ron Paul’s dream of a return to the gold standard.
It is not clear whether Bitcoin’s originators really intended their electronic cash to replace state fiat money or even just to compete with it. They seemed more concerned just to show that their ‘electronic cash’ could be created and that their system could work. If so, they proved their point; they did manage to transfer Bitcoins from one member of the network to another. A few cafés and other establishments agreed to accept payment in Bitcoins but more to appear trendy than for business reasons. At first Bitcoin was little more than a toy for computer whizz-kids.
Bitcoins didn’t have a price until 2010 when it was made convertible into fiat money at the rate of 1 Bitcoin = 0.003 US cents. The first recorded purchase using Bitcoins is said to have taken place in May that year when a computer whizz-kid paid 100,000 of them for two pizzas. By the following year, however, it had achieved parity with the US dollar.
The money changers come back
Bitcoins have never been independent of state fiat money or prices expressed in it. The businesses that accept payments in Bitcoins price their goods or services by converting their fiat money prices into Bitcoin ones; when someone pays for an item in Bitcoins the business doesn’t keep them. In fact, normally they don’t even receive them (what use would they be to them?) as the Bitcoins go to a Bitcoin dealer who converts them into fiat money and pays that to the business. Not that, with the price of Bitcoins as it is, many will be using it to buy anything.
From 2010 people who were not part of the peer-to-peer network began to buy Bitcoins. But why? There was a feature of the system – disguising payers and payees – that was attractive to those who prefer to be paid in cash rather than by cheques. Not plumbers and other handymen but bigger fry such as drugs barons, arms dealers, money launderers and others wanting to avoid financial regulations. This is why Blackrock CEO Larry Fink recently described the Bitcoin price as ‘an index of money laundering’. At the moment North Korea is being accused of hoarding Bitcoins to use them to get round the latest sanctions. Secrecy didn’t have to be part of the system but was incorporated into it by the designers, either because they were ideologically opposed to the authorities knowing or because they wanted to replicate on the internet the equivalent of payments in cash.
Despite the original intention of Bitcoin being a system of payment ‘without going through a financial system’, that is precisely what you have to do to buy or sell Bitcoins. Bitcoin exchanges have grown up where you can buy Bitcoins with state fiat money and where you can convert Bitcoins that someone has paid you into fiat money. For a fee of course.
And the speculators too
Technically a Bitcoin is a token enabling you to access Bitcoin’s money transfer service. Bitcoins only exist as strings of computer code, and are intrinsically worthless. But so are fiat money’s notes and coins, only behind them is the state guaranteeing their face-value. There is nothing behind Bitcoins. Yet last year the price of a single Bitcoin overtook the price of an ounce of gold and reached $19,000 in December from less than $1,000 at the beginning of the year. No wonder people are comparing the current Bitcoin bubble to the Tulip-mania that swept through Holland in 1636-7. At the moment Bitcoins are being bought purely for speculative purposes to make a gain out of their rising price. Sooner or later the bubble is going to burst and some suckers are going to lose their money and could end up holding something worth less than a tulip bulb.
It is this aspect – as an object of speculation – that has led some commentators to describe Bitcoins as a ‘crypto-asset’ rather than a ‘crypto-currency’, something people can invest in that will hold or increase its monetary value over time. In any event a fluctuating price conflicts with Bitcoin’s original aim of being a payments system. There is an irony in this. Its creators wanted to create an electronic version of gold. They seem to have succeeded in that gold, having been demonetised, is now an asset subject to price fluctuation due to speculation. Real gold would of course be a safer investment as it will always be worth more than a tulip bulb because of the considerable labour time spent finding and fashioning it.
Ironically too, governments and banks have become interested in the blockchain technology behind Bitcoins as it offers a cheaper way of registering transactions (and not just financial ones) and transferring money. To get in on the act could be a more rational capitalist reason for buying and holding Bitcoins as, at some point, the system or a part of it might be sold as has happened to other inventions by computer whizz-kids.
Bitcoins are not the only tokens to access electronic services provided by a network of computers using blockchain technology. There are over a thousand other so-called ‘crypto-currencies’. Many are offshoots of Bitcoin and the exchanges that deal in Bitcoins deal in other such tokens as Litecoin, Dash, Ripple and the appropriately named Ether.
What a waste
From the point of view of satisfying human needs, all the human ingenuity that went into developing the Bitcoin system and all the computer time and resources involved in operating it have been so much waste. In a socialist society, based on the common ownership of the means of production and access to the products according to need, there would be no need for an electronic payments system, in fact no need for any sort of payments system since buying and selling will have been replaced by giving and taking, and so need for money at all. There would, however, still be a need for computing skills and computer technology. In socialism the skills and enthusiasm of the type of people who first developed Bitcoin could be put to much better – and more satisfying – use.