by Michael Roberts
The cryptocurrency craze seems to have taken a dive in recent
weeks since the Chinese authorities clamped down on speculation in the
bitcoin market. The history of financial markets is littered with asset
price bubbles, from tulips in the early-1600s to more recent examples,
such as internet stocks in the late-1990s and US house prices before
2008. This looks like another. The ascent of the virtual currency
bitcoin, which recently neared $5,000 and has risen about 350% this
year, has now turned round, dropping back to $3000, if still hugely
above its initial start. But it may be heading for a reckoning now.
Bitcoin aims at reducing transaction costs in internet payments and
completely eliminating the need for financial intermediaries ie banks.
But so far its main use has been for speculation. So is bitcoin, the
digital currency that operates on the internet, just a speculative scam,
another Ponzi-scheme, or is there more to the rise of all these
cryptocurrencies, as they are called?
Money in modern capitalism is no longer just a commodity like gold
but instead is a ‘fiat currency’, either in coin or notes, or now mostly
in credits in banks. Such fiat currencies are accepted because they
are printed and backed by governments and central banks and subject to
regulation and ‘fiat’. The vast majority of fiat money is no longer in
coin or notes but in deposits or claims on banks. In the UK, notes and
coin are just 2.1% of the £2.2 trillion total money supply.
The driver of bitcoin and other rival crypto currencies has been the
internet and growth of internet-based trading and transactions. The
internet has generated a requirement for low-cost, anonymous and rapidly
verifiable transactions to be used for online barter and fast settling
money has emerged as a consequence.
Cryptocurrencies aim to eliminate the need for financial
intermediaries by offering direct peer-to-peer (P2P) online payments.
The main technological innovation behind cryptocurrencies has been the
blockchain, a ‘ledger’ containing all transactions for every single unit
of currency. It differs from existing (physical or digital) ledgers in
that it is decentralized, i.e., there is no central authority verifying
the validity of transactions. Instead, it employs verification based on
cryptographic proof, where various members of the network verify
“blocks” of transactions approximately every 10 minutes. The incentive
for this is compensation in the form of newly “minted” cryptocurrency
for the first member to provide the verification.
By far the most widely known cryptocurrency is bitcoin, conceived by
an anonymous and mysterious programmer Satoshi Nakamoto just nine years
ago. Bitcoin is not localized to a particular region or country, nor is
it intended for use in a particular virtual economy. Because of its
decentralized nature, its circulation is largely beyond the reach of
direct regulation or monetary policy and oversight that has
traditionally been enforced in some manner with localized private monies
The blockchain’s main innovation is a public transaction record of
integrity without central authority. Blockchain technology offers
everyone the opportunity to participate in secure contracts over time,
but without being able to avoid a record of what was agreed at that
time. So a blockchain is a transaction database based on a mutual
distributed cryptographic ledger shared among all in a system. Fraud is
prevented through block validation. The blockchain does not require a
central authority or trusted third party to coordinate interactions or
validate transactions. A full copy of the blockchain contains every
transaction ever executed, making information on the value belonging to
every active address (account) accessible at any point in history.
Now for technology enthusiasts and also for those who want to build a
world out of the control of state machines and regulatory authorities,
this all sounds exciting. Maybe communities and people can make
transactions without the diktats of corrupt governments and control
their incomes and wealth away from the authorities – it might even be
the embryo of a post-capitalist world without states.
But is this new technology of blockchains and cryptocurrencies really
going to offer such a utopian new world? Like any technology it
depends on whether it reduces labour time and raises the productivity of
things and services (use values) or, under capitalism, whether it will
be another weapon for increasing value and surplus-value. Can
technology in of itself, even a technology that apparently is outside
the control of any company or government, really break people free from
the law of value?
I think not. For a start, bitcoin is limited to people with internet
connections. That means billions are excluded from the process, even
though mobile banking has grown in the villages and towns of ‘emerging
economies’. So far it is almost impossible to buy anything much with
bitcoin. Globally, bitcoin transactions are at about three per second
compared to Visa credit at 9000 a second. And setting up a ‘wallet’ to
conduct transactions in bitcoin on the internet is still a difficult
More decisively, the question is whether bitcoin actually meets the
criteria for money in modern economies. Money serves three functions
under capitalism, where things and services are produced as commodities
to sell on a market. Money has to be accepted as a medium of exchange.
It must be a unit of account with a fair degree of stability so that we
can compare the costs of goods and services over time and between
merchants. And it should also be a store of value that stays reasonably
stable over time. If hyperinflation or spiralling deflation sets in,
then a national currency soon loses its role as ‘trust’ in the currency
disappears. There are many examples in history of a national currency
being replaced by another or by gold (even cigarettes) when ‘trust’ in
its stability is lost.
The issue of trust is brought to a head with bitcoin as it relies on
“miners”, or members that contribute computational power to solve a
complex cryptographic problem and verify the transactions that have
occurred over a short period of time (10 minutes). These transactions
are then published as a block, and the miner who had first published the
proof receives a reward (currently 25 bitcoins). The maximum block size
is 1MB, which corresponds to approximately seven transactions per
second. In order to ensure that blocks are published approximately every
10 minutes, the network automatically adjusts the difficulty of the
cryptographic problem to be solved.
Bitcoin mining requires specialized equipment, as well as substantial
electricity costs and miners thus have to balance their technology and
energy investment. That means increasingly bitcoin could only work as
alternative replacement global currency if miners became large
operations. And that means large companies down the road, ones in the
hands of capitalist entities, who may well eventually be able to control
the bitcoin market. Also if bitcoin were to become as viable tender to
pay tax to government, it would then require some form of price
relationship with the existing fiat money supply. So governments will
still be there.
Indeed, the most startling obstacle to bitcoin or any other
cryptocurrency taking over is the energy consumption involved. Bitcoin
mining is already consuming energy for computer power more than the
annual consumption of Ireland. Temperatures near computer miner centres
have rocketed. Maybe this heat could be ecologically used but the
non-profitability of such energy recycling may well ‘block’ such
Capitalism is not ignoring blockchain technology. Indeed, like every
other innovation, it seeks to bring it under its control. Mutual
distributed ledgers (MDLs) in blockchain technology provide an
electronic public transaction record of integrity without central
ownership. The ability to have a globally available, verifiable and
untamperable source of data provides anyone wishing to provide trusted
third-party services, i.e., most financial services firms, the ability
to do so cheaply and robustly. Indeed, that is the road that large
banks and other financial institutions are going for. They are much
more interested in developing blockchain technology to save costs and
control internet transactions.
As one critic of blockchain points out: “First, we’re not
convinced blockchain can ever be successfully delinked from a coupon or
token pay-off component without compromising the security of the system.
Second, we’re not convinced the economics of blockchain work out for
anything but a few high-intensity use cases. Third, blockchain is always
going to be more expensive than a central clearer because a multiple of
agents have to do the processing job rather than just one, which makes
it a premium clearing service — especially if delinked from an equity
coupon — not a cheaper one.” Kaminska, I., 2015, “On the potential of closed system blockchains,” FT Alphaville.
All this suggests that blockchain technology will be incorporated
into the drive for value not need if it becomes widely applied.
Cryptocurrencies will become part of cryptofinance, not the medium of a
new world of free and autonomous transactions. More probably, bitcoin
and other cryptocurrencies will remain on the micro-periphery of the
spectrum of digital moneys, just as Esperanto has done as a universal
global language against the might of imperialist English, Spanish and
But the crypto craze may well continue for a while longer, along with
the spiralling international stock and bond markets globally, as
capital searches for higher returns from financial speculation.