Cooking the Books 1: Bitcon
‘Bitcoin “will never replace money”’ ran the headline of a news item in the Times (18 June) about a report by the Bank for International Settlements:
‘Bitcoin and other cryptocurrencies can never replace conventional money because they lack centralised backing and are riddled with problems, not least that they can simply stop working and have their value totally wiped out … In contrast to traditional money, cryptocurrencies become more cumbersome and unstable the more they are used.’
As the BIS is the international of state central banks, which issue conventional money, it is tempting to think ‘they would say that, wouldn’t they?’ They would, but that doesn’t necessarily mean that they haven’t got a point.
Bitcoin was a free marketeer project, a scheme to create a currency that had nothing to do with the state, in accordance with the view that the state was a hindrance to the proper functioning of a genuine market economy. From a technological point of view, its creators succeeded – they did devise a way of making an electronic payment without using state fiat money.
However, although dubbed a ‘cryptocurrency,’ bitcoin has never really functioned on any large scale as a means of payment. It has served two other purposes – speculation and a means of making transactions without states knowing.
People have bought bitcoins, speculating on its price rising; which is why some have suggested that bitcoin is more a ‘crypto-asset’, something to hold to keep or enhance what you paid for it like paintings or gold. Since bitcoins are intrinsically worthless the price is just a bubble that would burst if there was no other reason for holding them.
It so happens that there is another such reason. Very few of those who use bitcoins are anti-state idealists. The vast majority are shady capitalists such as drugs barons, arms dealers, tax dodgers, sanctions busters, money launderers and others who don’t want the state to know about their financial dealings. It is their demand that determines the bitcoin price, so enabling it to be a subject of speculation. As one critic has put it, the bitcoin price is an index of money laundering. This is shown by the fact that, following state authorities taking measures to try to stop bitcoins being used for these purposes, the price of one bitcoin slumped from nearly $20,000 just before last Christmas to nearer $5000 today.
Although a technologically elegant solution to what the free market computer geeks wanted, it is a waste of time and energy. New bitcoins are created by using computers to solve a complicated mathematical problem. This requires a huge amount of computer time and so of electricity, all pure waste from a rational point of view. Further, each time a bitcoin is used this is recorded, so the string of computer code representing it gets longer and longer. It’s as if every transaction using a particular paper note or metal coin had to be recorded. The BIS calls this ‘cumbersome’. Crazy is more like it.
Having said this, the computer technology which is used to do this – blockchains – does have other uses. Since it is almost impossible to tamper with it could be used, for instance, to confirm the origin of meat so that horse meat can no longer be passed off as beef.
So the BIS is right. Bitcoins will never replace state fiat money. State fiat money isn’t that stable itself of course but nowhere near as unstable as bitcoins. No doubt it will last till the time when capitalism is replaced by socialism and all forms of money become redundant.