Charlie Buckley
One of the recent developments in the drive from Silicon Valley to ‘innovate’, mostly by making our lives the same except worse and more expensive, has been the emergence of cryptocurrency. Created by an anonymous programmer in the aftermath of the 2008 financial crisis, Bitcoin has risen from being literally worthless in 2009 to costing nearly $60,000 each in 2021. Its rise has been touted as one of the wonders of modern technology; part of the ‘digitisation’ of our lives. Its proponents claim cryptocurrency is far more future proof and trustworthy than fiat currencies like the Dollar, Euro, or Pound, whilst its detractors consider it to be nothing more than a Ponzi scheme.
All cryptocurrencies are recorded and generated on what’s known as a blockchain – a form of data logging invented by the same anonymous programmer using the pseudonym ‘Satoshi Nakamoto’, that created Bitcoin. For cryptocurrencies, the blockchain functions as a ledger, recording transactions. In blockchains, data is arranged in ‘blocks’, and each new block contains a reference to the previous one, creating a chain. As a result, the process of generating new blocks gets more complicated as the chain gets longer.
New Bitcoins are created to reward people who generate these blocks of data (known as mining), which they do with computers. As the complexity of the code in blocks has increased, so has the computing power required to mine. In the early days of Bitcoin, mining was something that could be done with a graphics card in an ordinary computer. But in 2021, entire warehouses full of state-of-the-art computers, working as hard as possible, are needed to do the same thing. While not the focus of this article, it should be noted that the environmental cost of this is staggering: as of February this year, Bitcoin consumes more electricity than the entirety of Argentina.
Even as Bitcoin has moved from relative obscurity – used mostly for money laundering or ordering drugs and hitmen on the dark web – to the household name it is today, its inner workings continue to be extremely inaccessible and confusing to the average person. If you Google “Why is Bitcoin worth so much money?”, or ask a friend who trades in cryptocurrency, you’re not going to get a straight answer. You’ll probably get something written by a libertarian asking you to read Ludwig von Mises or Friedrich Hayek. The general idea is that it’s comparable to existing currencies that we use today, but instead of its value being backed by the state, it’s backed by a hodgepodge of mathematics, transparent digital technology and the ‘online community’. Or, as economist Paul Krugman puts it: "… a bubble wrapped in techno-mysticism inside a cocoon of libertarian ideology."
The fact is, however, that Bitcoin does not function as a currency. Unless you’re looking to buy a Tesla anytime soon, there are few places that accept Bitcoin as a means of legitimate payment. Your friends aren’t buying Bitcoin to move their money across borders without the prying eyes of the tyrannical nation-state, they’re likely buying it in the hope of selling it later for a profit. In other words, it’s a commodity being traded by speculators, no different to shares in a company.
But why is Bitcoin rising in value? What does it do? Well, not much. As we’ve already seen, its function as a currency is massively overstated, and is rudimentary at best. You have a better chance of using goats as a means of payment in a Starbucks than you do using Bitcoin. For most people, Bitcoin is valuable because they can trade it for normal currency which they can actually use, and if this ability was suddenly removed, Bitcoin’s value would evaporate overnight. The rise of Bitcoin’s value can only really be attributed to the techno-mysticism that Krugman talks about; we don’t understand it, but we’re told that it’s innovative and that it can only go up. It’s essentially just hype – collective excitement that outpaces people’s understanding of what’s actually going on. Comparisons between Bitcoin and the ‘Tulip Mania’ of the 1630s are almost cliché at this point, but they’re entirely justified. In a sense, Bitcoin’s value is derived from what’s in our own heads, not from any practical use-case in real life.
The rise of cryptocurrency has caused a bit of a panic in the financial world. Until recently, established bankers and investors were coming out in droves to condemn Bitcoin as volatile, a scam, a time-bomb, or all of the above. The billionaire investor and finance celebrity Warren Buffet denounced Bitcoin as a “mirage” in 2013, while former chairman of the Federal Reserve Alan Greenspan, perhaps getting flashbacks to his own role in the Dot-com crash in 2000, claimed Bitcoin was a “bubble”, with “no intrinsic value”.
The established financial system is no better however. Events surrounding the share price of Gamestop in January exposed the issues surrounding modern finance: professionalised gambling, socialised risk and privatised reward, market manipulation by the people in charge, and, crucially, market prices completely divorced from tangible value. The ability of national governments to simply conjure up billions of dollars to support floundering economies during the Covid-19 pandemic has shown the value of money, cryptocurrency or otherwise, seems to be completely detached from reality.
While proponents of cryptocurrency certainly enjoy the ‘subversive’ label attached to it, and figures in traditional finance seem to regard crypto as a threat, sooner or later cryptocurrency will likely become just another overvalued tech commodity, bought and sold by amateur and professional traders alike. This is because traditional investors are already speculatively trading shares from the tech world that are fuelled by exactly the same vague, techno-utopian bullshit as Bitcoin. Anything tech-related has a tendency to be massively overvalued on the stock market; one look at the soaring share prices of companies like Uber, Tesla and AirBnB compared to their chronic inability to make money suggests that their utopian, futurist PR is doing most of the legwork. In the case of real estate company WeWork, simply pretending that your completely ordinary business is somehow high-tech seems to be an easy way to get it valued at $50 billion overnight. It appears that Bitcoin is symptomatic of a wider problem in the global economy: fantastical sci-fi buzzwords and promises, and speculators’ desires to make money in the short term, have driven almost every important economic player to take leave of their senses and lift up the global economy on nothing but hot air.
If you’re considering investing in Bitcoin yourself in the hopes of making money, however, then go for it. It seems no different, ethically speaking, than trading on the stock market. Assuming you’re not Jeff Bezos, an individual trading Bitcoin or company shares is unlikely to bring harm to anyone else, and you’ve got a chance of making some money for yourself if you know what you’re doing. Better yet, if you can find enough like-minded friends, you could even kneecap a billion-dollar hedge fund. Instead, the problem here is a systemic one; markets are becoming increasingly predicated on things that are more-or-less the ‘magic beans’ of the 21st century. Whenever this bubble finally pops, economies will go belly-up and institutions will collapse and we’ll be left with a catastrophe like the one we faced in 2008. The finance world has allowed itself to get caught up in the hype of technology, trading stuff that will make gains in the short-term, even though they’re aware that this can’t last forever, and the house of cards will eventually collapse. If the global response to the 2008 crash is anything to go by, it’s likely that the general population will pay the price, not the companies and banks that created, promoted and gambled with the bullshit that actually started it all.
