Summary: Bitcoin and its cousins are the latest symptom of the cancerous growth of our financial system. Once useful markets have become casinos. Now we are literally burning resources to create nothing of value to society. But we still can regain control.
Bitcoin is in the news a lot lately. As usual, journalists see only the small story. But a few point to larger issues about Bitcoin.
- NPR: “How The Tiny Nation Of Georgia Became A Bitcoin Behemoth” by Andrew North.
- Quartz: “Iceland will use more electricity mining bitcoins than powering its homes in 2018” by Akshat Rathi.
- MIT Technology Review: “Bitcoin is eating Quebec” by Kathryn Miles — “A Canadian hydropower operation put out the welcome mat for bitcoin miners. Shortly thereafter, it was overrun.”
- Recode: “Bitcoin is the greatest scam in history” by Bill Harris — “It’s a colossal pump-and-dump scheme, the likes of which the world has never seen.” Harris is the former CEO of Intuit and founding CEO of PayPal.
The big story: Bitcoin and its cousins are the natural development of our out-of-control financial sector. When small, it provides vital services. But it has become not just parasitic but cancerous (much like out health care system). Bitcoin consumes ever-increasing resources but provides no value to society (there are ways to provide fixed value currencies that are easier and cheaper). Just profits to speculators.
Investment markets are valuable mechanisms. They provide price discovery, risk transfer, capital raising services. But in our current mad system, profits to speculators are the driving force. Markets have become casinos. Everything is a token. Everything is bitcoin.
We have been warned.
CNN: “Bitcoin boom may be a disaster for the environment” by Daniel Shan.
The Guardian: “Bitcoin’s energy usage is huge – we can’t afford to ignore it” by Alex Hern.
Grist: “Bitcoin could cost us our clean-energy future” by Eric Holthaus — “Given its rapidly growing climate footprint, Bitcoin is a malignant development, and it’s getting worse.”
New Republic: “The Environmental Case Against Bitcoin” by Emily Atkin — “Mining the cryptocurrency requires a staggering amount of energy – contributing to global warming and providing little public benefit. …One transaction can use as much energy as an entire household does in a week.”
Conclusions
I planned to write my usual thousand words explaining this problem. But by now anybody who does not see this either does not care or is part of the system. The rise of Bitcoin and its cousins is just the latest – and maddest – manifestation of this cancerous growth in our society.
Sadly, like so many of our problems, the well-proven solution is obvious (again, like health care — where our peers use several forms of systems, all superior to ours). Some sectors require regulation. Finance is one of those. Effective regulation was created by the New Deal. Updated forms of that would work for us today.
Getting there will be difficult. Our massive cancerous financiers have used their vast profits to buy both major parties. Each election we get an echo, not a choice, of ways to coddle Wall Street.
Their corruption is a gift to reformers, providing a popular issue to rally the public around. The Tea Party movement briefly did so, before being quickly and easily co-opted by the Republicans. We can look at our history for more successful examples. Such as the various populist movements, for whom hatred of banks for a core value.
We need not supinely accept the power of the banks. The machinery bequeathed to us by the Founders remains intact, decisive when energized by citizens’ energy.
For More Information
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- Bitcoin, the deep web, & the big conflicts of the 21st Century.
- Today’s mythbusting: the Fed is not suppressing interest rates.
- FDR explains one dimension of our problem: bankers own the government.
Books about economics
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Introducing Keynes
Due to a WordPress system problem, a batch of comments were lost in the trash, including this one.
Another way of looking at this is that the electricity companies should be happy that the bitcoin miners are around as they are making good business out of them.
Due to a WordPress system problem, a batch of comments were lost in the trash, including this one.
Larry-
By cousins, are you including Blockchain and Distributed Ledger Technology?
Mike
Due to a WordPress system problem, a batch of comments were lost in the trash, including this one.
Larry-
Do you consider Blockchain and Distributed Ledger Technology as “cousins” for this assessment?
Mike
I’ve read that US banks a few decades ago would capture about 10% of all corporate profits yet today that has risen to 30% (i.e. tripled), which, if true, is plenty enough to turn huge numbers of profitable companies into unprofitable ones and create headwinds for the profitable ones as well. All for the simple purpose, we are told, of connecting capital with people who can put it to profitable work.
As to bitcoin, it has not and does not provide the financial benefits its proponents have claimed, and has become a tool of scammers (and true believers) to fuel a speculative mania. The power requirements for “mining” are about eight million dollars a day, so it needs to take in 8M/day just to cover that and break even. And it’s caused a worldwide shortage of GPU cards, affecting not just gaming but legit science and business as well.
Like any successful Ponzi scheme, a few people will get rich and everyone else will lose money. People who bought at the height in December have lost half their money. If they bought on margin, as many did, they were wiped out. Semi-amusingly, many who did take profits pumped them back into other cryptocurrencies and lost money, only to be surprised by a large tax bill for the capital gains on their profitable sales.
Even now the price of bitcoin fluctuates and has “fought its way back” to $9300.
I think the analogy to mining is apt. There is tons of scamming involving gold mines. People burn huge amounts of energy to dig holes in the ground to find a shiny metal that is valuable because people believe it is.
But is bitcoin really that different from all the other innumerable ways that have been created for people to lose their money? If you grant people economic freedom then that includes the freedom to trade their money for magic beans. In the long run capital does seem to mostly flow to the companies that do the best job of shepherding it and using it to make more.
The Iconoclast,
(1) “I’ve read that US banks a few decades ago would capture about 10% of all corporate profits yet today that has risen to 30%”
Yes. The exact number depends on the measure of business profits used. But all show that financial sector profits have risen several fold since the mid-1960s. Also note: this does not include the financing activities of corporate subsidiaries (i.e., their in-house lending operations). Including these, the role of finance in our economy has increased many-fold since the 1960s.
(2) “{this} is plenty enough to turn huge numbers of profitable companies into unprofitable ones”
No, because overall corporate profits have risen. Corp profits averaged roughly 10% of GDP from 1950 to 1980. They were 6% to 10% from 1980 thru 2003. Since then they have been 11 to 13%.
(3) “Like any successful Ponzi scheme, a few people will get rich and everyone else will lose money.”
This is not at all like a Ponzi scheme. More like a tapeworm, a parasite that sucks up energy from the larger organism.
(4) “I think the analogy to mining is apt. …People burn huge amounts of energy to dig holes in the ground to find a shiny metal that is valuable because people believe it is.”
I have a different take on that. Most mining produces long-lasting benefits to humanity. Like most benefits, it is produced at a cost. A philosopher might consider the microscopic fraction of mining done to produce gold to be wasted. Most of it is used as jewelry or decorations — I consider aesthetics an important part of life. About one-fifth is held by nations as gold reserves, a historical remnant in our global financial system.
(5) “But is bitcoin really that different from all the other innumerable ways that have been created for people to lose their money?”
How many other methods of “losing money” consume a significant and rising share of the world’s electrical production? With the looming threat of climate change, we need to make our energy use more efficient — not less.
The rise of the finance sector is a symptom. It is on the same level as some other symptoms, bitcoin being one, the asset price bubble, very low interest rates, the rise in wealth and income disparities. Bitcoin is not really a finance sector issue, its something that the expansion of free money allows as a wild speculative vehicle. Its fairly independent of the finance sector. Its similar to crazy house prices, or crazy bids for Madonna’s underwear or bits of art. Its the froth on asset inflation and asset speculation, and its all driven by free money and cheap credit. Or the current market value of Tesla.
It is quite common to look at the symptoms, conclude they are the problem, and not see the underlying cause. Galbraith in ‘The Great Crash’ did this – he presents the fact that working wages were not rising, so that goods were becoming unaffordable, as a main cause of the crash.
The real underlying cause in both the present bubble and that of 1929 is a government created credit bubble. In the 20’s it was created by reductions of reserve requirements by the creation of the Fed. In our era its due to large fiscal deficits and QE on a grand scale. In the case of the French Mississipi bubble under John Law, and the South Sea Bubble in England, it was caused by government debt manipulation into a miracle holding company.
It is always the same basic story, though with different names, mechanisms and implementations. Government creates huge amounts of credit, which distorts the economy and leads to investment in unprofitable ventures, which are financed by low interest rates. Its this that gives rise to the increase in power of the finance sector, who issue and roll over the debt, and profit. And the media sector which feeds off it. And in the tech bubble, the companies that run on debt and vast operating losses. This also leads to stagnation or recession in the manufacturing and service sectors who are not participating in the sectors who profit from the free money.
You cannot deal with this by regulating the finance sector, which is just one actor subject to the underlying causal mechanisms. There is only one way to prevent this, and that is not to allow government to sponsor credit bubbles. How to do this is much harder to see. There are also only two ways this ends. The debt is bad and has to be liquidated. It can either come in a crash, or in runaway inflation. Either one followed by large scale restructuring and probably social unrest.
I say two. But there is the interesting apparent counter example of Japan, which seems bent on stagnating its way out. We shall see.
Due to a WordPress system problem, a batch of comments were lost in the trash, including this one.
“Bitcoin consumes ever-increasing resources but provides no value to society (there are ways to provide fixed value currencies that are easier and cheaper”
There is no other way to create an electronic currency that doesn’t require trust in third parties (governments or companies). Yeah it’s using a lot of electricity, but the incentive is to use either renewable or excess (cheap) electricity, and bitcoin further incentivizes research into/ expansion of those types of electricity. And it’s worth it if you find yourself being censored by the government (like Wikileaks, one of the first real-world cases of Bitcoin’s censorship-resistance utility) or if you find yourself the victim of a government’s devaluing of currency causing skyrocketing inflation (Venezuela currently, but this happened to first-world countries like Germany as well).
And another use case that might be more particular to men reading this blog is when they find themselves the victim of insanely unfair, unilateral alimony/child-support decrees. Bitcoin can be used to transfer all of your liquid assets to anywhere in the world without your government being able to stop you.
Yes, there is a ton of stupid speculation occurring in the space. Yes, most of the alt-coins should be valued at zero and are functioning like pump and dump schemes or straight ponzi-schemes. But, don’t throw the baby out with the bathwater. Bitcoin is revolutionary and will change the world. It’s not a cancerous growth of the financial system. It’s the cure that kills the cancer.
Don’t go invest your life savings hoping for a quick retirement. Don’t buy or trade on leverage at all. Do go research this new revolutionary tech. At the very least, read and understand the bitcoin white paper.
A lot of stuff gets below my radar, but two things served notice on me that something very big and probably very stupid was going on with Bitcoin. The first was when the owner of a Mom And Pop restaurant I frequent was asking me about it. Apparently he had some thought of getting into it. I told him that I knew nothing. I said that in poker there’s a saying that if in ten minutes you haven’t figured out who the fish is, get out, because it’s you. I stay out of Bitcoin because I have no idea who the fish is. I hope he listened, but anyone who would turn to me for investment advice is in trouble to start with. I am not, and have never claimed to be, qualified.
The second came when I was doing some research for some fiction I was writing and I found that when I tried to research Bitcoin, I’d get a bazillion hits, but no matter how I worded the search terms every one of them was an attempt to get me into it.
the Man,
Interesting news from the front lines!
After 30 years in the investment biz, I thought I was beyond surprise about new fads. But this is bigger than most, and crazier than most.
I was at a Christmas dinner with a family and one of their relatives at the far end of a separate table was droning on and on about Bitcoin. I asked what it was all about and I got an earful from the younger relatives explaining it what it was all about while saying they are going to put a stake in it. All I understood from it was computer mining “rigs”, “proof of works”, and “hash” before I nodded a few times.
On the bright side, I get to brush up on Keynes and capitalism!
Der Maiden
I suggest caution when hearing laypeople talk about Keynes and capitalism. They often know little of each (little that’s correct).
On the bright side, you had a nice meal with family!
I tried to buy some of this as a medium of exchange but it has waaaaay too much volatility. Companies who use it for electronic transactions immediately convert it into the local currency. It was claimed to be a way of making anonymous payments, but that’s only true if you give cash to someone else to make the BTC payment for you since every transaction is recorded in the blockchain. I couldn’t figure out how to use it so I didn’t buy any of it. The act of establishing a Bitcoin wallet scared me off too.
It seems to be in an obvious bubble when Joe Sixpack starts asking you about it. I guess theoretically there’s no reason more currencies can’t be established by non nation-states. That idea actually intrigues me since I like the idea of having currency denominated in something the Fed doesn’t control. Hacksilver works I guess.
PRCD,
“That idea actually intrigues me since I like the idea of having currency denominated in something the Fed doesn’t control.”
Why do you care?
Larry,
I guess I don’t care. I would like a bank account or brokerage account that was out of the reach of the USG. I would still declare it on my tax return for legal purposes, but I’m increasingly uncomfortable with the idea that the government can freeze all of my money on the order of some corrupt judge.
The Oregon bakers who were fined for refusing to bake a gay wedding cake paid the plaintiffs with funds raised by donors.
https://www.washingtonexaminer.com/record-breaking-358k-raised-for-sweet-cakes-bakery-for-christians-who-refused-to-make-lesbian-wedding-cake/article/2568325
The government came in and drained their bank account of the last $10k even though they had already paid.the fine.
I don’t disagree with your comments about Bitcoin and its current valuation/price.
1. That said, blockchain applications could provide some value in terms of reduced transaction costs, decentralization and automation. In particular, Ethereum has become the frontrunner for this potential application.
2. Ethereum is planning on switching to a proof-of-stake algorithm, which would not require GPUs and vast amount of electricity as per proof-of-work algorithms (what Bitcoin uses).
3. In terms of fixed value currencies, the Ethereum platform currently supports two major ones (“major” for crypto/blockchain):
* DAI – which is a token pegged to the USD. So 1 DAI is equal to 1 USD.
* DGX – which is a token pegged to gold. So 1 DGX is equal to 1 gram of gold (and incidentally every 100 DGX can be converted into 100g of physical gold, shipped to you).
I found the book “Blockchain Revolution” by Don Tapscott a useful read.
I’d be careful to throw the baby out with the bathwater. The current prices of blockchain currencies are wildly overhyped, but I do believe blockchain technologies will indeed be the next big thing. Internet 3.0 as they call it.
Yvasa,
Cryptocurrencies are just one application of blockchain tech. That they are a tool without a use does not mean that the underlying blockchain tech has no value.
Anonymous (truly anonymous) transactions indeed can be done, but only on the privacy-focuses blockchains, for example Monero.
But agreed otherwise, right now all these coins are mostly used for speculation purposes. Until their value can be stabilized, I’m not sure many people will use it as a medium of exchange.
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In my observation with crypto currencies appear to be a huge bubble. There’s no true scarcity, no limit to the number of cryptocurrencies created, and most are indistinguishable from bitcoin apart from being cheaper, faster — better. At the same time, bitcoin has no perceivable utility (unlike gold or silver) except as a gift.
It’s become too expensive and inefficient for consumer use as a currency alternative, and extreme volatility limits pricing and actually dis-incentivizes acceptance as a payment method.
It’s a speculative asset at best, but anybody who buys it runs the risk that the price could collapse any day.
Of course it could keep going up in market value, but eventually it’s going to implode, so you really can’t say it’s a safe haven. It’s a highly speculative asset.
The underlying concept is not without merit.
Bitcoin was born as a solution to a real problem, but what we are slowly learning is that this is not the solution.
Bitcoin and crypocurrencies can’t protect owners in the case of a monetary crisis because it has no intrinsic value and is not backed by anything substantial.
Larry,
For the first time I flat out disagree with you. For the sake of this discussion, I am referring to BTC aka Bitcoin (not any alt coins or forks).
The use of electricity for bitcoin is one of four components that provides the network security. The rates and usage have and will adjust. The ‘Bitcoin is eating the World’s Electricity’ Articles are outlandish hype on the same level of the doomsayers you note regarding climate change. Where the price exceeds profit, bitcoin mining has done one of the following: moved, reduced it’s hash rate, or improved it’s efficiency. Mining is only one component of the network (especially as the technology has advanced to beyond nodes performing both mining and validation….now they can do one or both).
The unique value of bitcoin is that it is a decentralized, easily conveyable, stable and secure store of value and time (via timestamping). It exists as forex to all forex with no political affiliation of it’s own. Finally, it is a scarce value with limited issue and no easy way to increase the issuance (unlike all fiat currencies and other cryptocurrencies). That security, scarcity, and ease of conveyance make it a good store of value….especially for citizens of countries with poor fiat currencies.
I am not a libertarian and do not believe bitcoin will replace the strongest National currencies. However, it does provide a balance to those currencies and the current banking system. It also still has a leg in the experimental stage, with the other leg in the price discovery / early adoption stage. It is strange to grasp the concept of a digital currency that is secured through proof of work, decentralized peer to peer validation, and encryption without the involvement of a third party / government. It is important to avoid confusing the entire crypto sector with Bitcoin itself.
The idea of ‘the underlying blockchain technology may have value’ is akin to saying an aircraft as a system may not have value but the underlying wing technology does. That is a dodge on why Bitcoin as a technology works. Bitcoin works because of: 1) decentralized peer to peer network 2) public transaction ledger (blockchain) 3) distributed mining and 4) decentralized transaction verification. Someone mentioned the Tapscott book: I think the Tapscott’s are a great example of pumping blockchain over bitcoin for ridiculous uses in the short term interest of a VC(for example, why do you need a decentralized Blockchain Uber? Blockchain public health records? The biggest problem in health records is stove-piping of record data standards.).
Finally, the one comment I do agree with and I think the most important: “The rise of Bitcoin and its cousins is just the latest – and maddest – manifestation of this cancerous growth in our society.”. And, as always, I agree with your emphasis that in any case we grab ahold of the reins provided for us by the founders to guide the Republic….not look for another dodge from responsibility.
P.S. You wrote “there are ways to provide fixed value currencies that are easier and cheaper”. We haven’t seen these in practice…can you elaborate?
Thank you for your work on the site….always good food for thought.
I am not sure if this is to off topic, but here goes anyway.
I am a believer in the theory of free markets and have worked 80% of my working life as a business owner and self employed, but a free market is not what we have now in too many areas. I work both in training (construction, business and economics) and property development. I have been to meetings where larger firms have asked for regulation, yes asked for regulation from Government (despite what they say to outside press etc). The reason is simple small guys like me can’t afford a full time member of staff just completing paper work in government, commercial buildings or larger developments (for me that is 5 of more on one site – after 4 houses the requirements in impact statements, environment requirements etc just get very time consuming).
The result is the profit margin for us highly competitive small guys in a free market isn’t great, for the bigger guys it is cosy oligopoly.
Internationally our multinationals shut up shop slowly in the West and moved East, wages started to stagnate for workers, but the cosy managerial class (senior and board room level) kept seeing wages rise, The result was we could not pay for the rising costs of goods and services, so we started to borrow to do so. At a personal level savings levels dropped to nothing and debt rose (all OK when attached to the rising housing market, now an issue for most working people). Falling wages meant falling tax returns and increased welfare (transfer) payments, so Government borrowed like a drunken sailor, too.
Now obviously banks are doing well, we save less and borrow more, government borrows constantly, business makes less (one off loans on machines that are depreciated over 30 years plus some times), now it is too often just speculation. and M&A to avoid the real truth neither business has much in the way of real long term prospects.
Bit coin, is a replacement for stock market and housing speculation.
I started out in the building industry with my Father, but the 1980’s recession wiped us out, he retired and I went to University (degree and Masters in Economics and Business). I then taught at College for a while, hated the politics and left. I have done renovations and small developments ever since, with casual teaching and private training through a company for cash flow.
We can’t sell to China, I have had really good Chinese students and have looked into setting up a small English Language and Business School in China.
If we can’t compete with low wages countries and can’t get a well paid job, what is left? Gambling and speculation – housing until 2007, Stock Market even now and Bit Coin. What can government do to help repay debt if the tax revenue per person is falling? Increase the number of people, especially rich people?
China gave us money to allow us to buy their goods, now we are inviting their rich and educated young people in (for a fee) to help repay China the debt we borrowed. While all the time gambling to pay for the current imports and over priced houses and stock.
Why are we in danger of lurching left or right? I think most people can guess; too many young people have no real future, and too many older people have no pension, job or future. They gamble on bit coin and hope for a miracle profit to make the meagre money increase to a house deposit or for the old just last longer.
Large multinationals definitely create barriers to entry for small businesses. You have my sympathy. It’s not easy to start a company anymore, but Americans have also become much more risk-averse and less entrepreneurial. Much of this is a function of how we raise our kids. We also tend to buy products from these big multinationals because they’re cheaper.
Most of our budget is being gobbled-up by entitlements which we’ve voted for ourselves. Congress passes a spending bill which is always more than we receive in annual tax revenues. The Fed offsets our fiscal policy with monetary policy: it buys bonds to dump more money into the economy. Consequently, by 2032 interest on our national debt and entitlements will gobble-up all annual tax revenue. As you stated, there is no more to be squeezed-out of taxpayers. We voted for all of this. Medicare, Medicaid, prescription drug benefits for the elderly, social security, military spending. Your average American has $11k in credit card debt and our national budget looks like the budget of your average American scaled-up. Just drive past a neighbor’s open garage and see how much useless junk they have piled-up in it and how new their car is and how much bigger their house is than they need.
I once asked my Chinese-Canadian friend for stereotypes of Americans. He said they believe we can’t hold onto money and a lot of other things which were all true.
Larry,
Check your email and the spam filter for this site. Whenever I link something here the comment gets caught in your spam filter.
PRCD,
Did you post anything recently? The last comment from you was from April 25.
PRCD,
I found dozens of comments in the trash! Not even in the spam filter, which I check. I’ve reported this to WP.
Thanks!
Thanks PRCD.
I am 54 now, so been in this game a few years, on and off since 17. I think our kids are not entrepreneurial as it takes so much money now to start a business, but I concede they are a lot less inclined to start a business outside coffee or food.
Sometimes I think all we can do is watch the debt mountain grow, until it gets so big we default and start again. I try to teach my child to be thrifty, but we are in a world of consumption and over spending. Perhaps we in the West just need to learn humility, thrift and perseverance once more.
I read the Richest Man in Babylon, years ago, to save 10% and invest it well for a life time. Now we over spend by 1-3% for a life time and wonder why we are getting poorer. Individually and nationally.
I also have Chinese friends, one day we discussed savings, she said it is matter of factors and decimal places, Chinese people save by a factor of two and decimal place further to right, 2% vs 40%, mainly. Simple, sad and true.