Cryptocurrencies created by anarchists to bring monetary system down
The total market capitalisation of all cryptocurrencies is now a bit more than $US100 billion ($132bn), about the same as CBA — so, not all that much yet, but growing fast.
There are apparently more than 700 of these blockchain seedlings now, sprouting at the rate of about 30 per month through what are called “Initial Coin Offerings”. The oldest and largest is bitcoin — 42 per cent of the market — with ethereum at 30 per cent market share, and gaining.
ICOs have overtaken IPOs in both number and popularity among the money-hungry; they have captured the fervour of the tech-spec world, in the same way as dot.com IPOs captured it in the late 1990s.
And having watched it for a while, and considered the matter carefully, I think the analogy is apt. That was a bubble then, and this is one now. In fact it’s worse: it’s a giant scam.
Or else it’s a sort of global counterfeiting conspiracy, carried out by anarchists intent on bringing down the global system of money and government.
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And here’s another metaphor: it’s like the Gold Rush of the 1850s, because then, as now, the fortune hunters were mining money.
In the 19th century, gold really was money, directly convertible, and the diggers in Victoria could mine and pan it without too much trouble, or capital.
The modern miners of cryptocurrencies use stupid amounts of electricity and are hoping their “coins” become money one day. For the moment they are just tokens for speculating with.
Gold and cryptocurrencies have two very appealing things in common: they are truly international, and can’t be devalued by governments using inflation as a form of taxation — they mostly go up in value instead of down, like money does.
But there are also two very big differences: when gold was money, up to 1971, the supply was effectively unlimited and the price was fixed, whereas with bitcoin and ethereum (not sure about the 700 or so other cryptos) the supply is limited and the prices fluctuate.
And boy do they fluctuate. Bitcoins were $US7 each five years ago, got as high as $US3000 last month, and are now trading at $US2576. That means someone who was prescient enough to sell their $20,000 second-hand car for bitcoins five years ago is now sitting on $8.5 million — a compound annual growth rate of 48 per cent, and not bad for an old bomb.
Ethereum’s rise has been even more startling (read: crazy), from $US10 a year ago to $US263 now — a 12-month rise of 2530 per cent.
What do the speculators think they are doing, apart from playing the old “bigger fool” game?
They are hoping that the world’s governments and central banks take leave of their senses and make cryptocurrencies legal tender. In fact one government — Japan — has already lost its mind and started to do it.
Since the supply of bitcoins and ethers is limited to 21 million and 230 million respectively, for either to become global legal tender — so that you could buy a cup of coffee with them in Zagreb or Anchorage — they would have to be divided up into millions of smaller units.
The more that happened, and the more that small bits of bitcoin or ether were used for transactions, the more each whole unit would be worth.
The problem is that money can’t have a limited supply, can’t be unstable and can’t be separated from government and central banking.
(At least I think the right word is “can’t”, but I’m conscious that we used to think that bleeding was the right way to treat sick people, and that you can’t have a wireless phone that you instruct verbally, or a car that drives itself, so “can’t” is a dangerous word these days). But money is, in essence, a piece of information that relies on trust. I wave my credit card for a $4 cup of coffee and the barista trusts that she will be able to get $4 worth of something else in return for that piece of data that has appeared in her bank account.
The trust comes from the system of legal tender, in which the community, through the government and the central bank, effectively guarantees payment in full — $4 for $4.
Can the trust bestowed by a blockchain record of a bitcoin’s transaction history replace that guarantee? Maybe it can sometime in the future, but I doubt it.
And what about the weird mining process, in which algorithms churn through trillions of calculations, burning gigawatts of power. That’s no way to run a monetary system, you would think.
Mind you, the current system has plenty of flaws. Let’s face it: money is created by economists in the ivory towers of central banks and by licensed banks lending what has been deposited with them, which stays deposited at the same time as being lent, thereby multiplying.
Money creation by banks is a privatised demand-driven system that periodically comes unstuck because banks either over-lend, or lend unwisely, so that the money gets lost and the original depositors’ savings evaporate — although these days most banks are “too big to fail”, and therefore implicitly guaranteed by taxpayers.
The other problem with the current system is that although the value of money is fairly stable, it tends to devalue over time as a result of deliberate inflation. Central banks have been trying to get inflation up for a decade, in order to reduce the face value of the world’s excessive debt.
Following the adoption of independent “price stability mandates” by central banks in the 1970s and 1980s, prices have been anything but stable: inflation has averaged 3.5-4 per cent per annum, dramatically reducing the value of money ($1000 40 years ago would now be worth a quarter of that).
So those pushing for non-fiat money, that is money not controlled by central bankers and/or politicians, have a point: under the current system, governments debauch the currency for their own purposes and periodically banks blow it up through greed and incompetence. But the people trying to build an alternative system are basically anarchists.
In fact, I’d say that global governments will soon need to declare that cryptocurrencies will never become legal tender, and legislate to that effect. You can play with them, and have fun trading and gambling, but actual money? Nah.
That’s not to say blockchain, the technology behind cryptocurrencies, is also a scam, far from it. In fact, it looks a truly revolutionary technology that is likely to change the world through mass disintermediation — but not disintermediation of government.
Alan Kohler is publisher of The Constant Investor.