Crypto-currencies are compelled to find credibility, literally speaking, in the "old" currencies. While tapping on the door to the future, they are also tapping vast amounts of electric energy.
Crypto-currencies, with bitcoin as the most renowned one, are in many ways beguiling. They can help us avoid that every transaction we make gets monitored and logged by the authorities. We can borrow from anyone. Banks, interest rates and fees could become a thing of the past. The people could, so to speak, become masters of their own means of exchange.
Sadly, this beautiful story is too good to be true.
We will look into this. But first, let's investigate what a crypto-currency is and observe the reasons behind today's bitcoin fever.
In January 2017, a bitcoin was traded for approximately $1000. By the end of that same year, the price of a bitcoin was $ 17,000. Thus, a value increase of 1700 per cent within twelve months. Most of the price development appeared to be driven by the Asian countries like South Korea, Japan and Vietnam, according to a recent survey. Before Christmas 2017 almost all the digital currencies plummeted. Bitcoin had the biggest loss, around 40-50 percent.
Crypto-currencies appear in numerous kinds and with different encryption technologies. Cryptography is used to secure and anonymize transactions and to issue new, digital currency units. Bitcoin is by far the most well-known, and therefore the one we will concentrate on here.
Basically, bitcoin is enveloped with a great deal of mystery. Satoshi Nakamoto founded the technology in 2009. Nobody knows to date who this Nakamoto is or whether it's an actual person at all. It could be a group of people or, for that matter, an intelligence service. The mysterious guru Nakamoto, who for two years was very active in many online forums, apparently ceased to exist in 2011. But the technology and currency is very much alive.
The functions of money
Money traditionally has three functions: It can serve as a means of exchange, as a way to accumulate values and as a an expression of measurement of value. All these features assume that there is a minimum of general social consensus and trust in that the monetary unit in question represents a real underlying value.
Taking the form of currency, money is an international means of exchange that represents the relative economic, developmental and military strength of a state in comparison to other states and their currencies. Typically, the sovereign currencies of smaller states are especially prone to speculation and manipulation in the international currency markets.
Whilst control and supervision over "normal" currencies (such as Norwegian kroner, euro, etc.) is managed by a central bank, usually an institution with authority to issue bank notes (such as Norges Bank), crypto-currencies are decentralized. Algorithms will ensure that transactions and generation of new digital coins are done in a planned and predictable manner. Bitcoins have a maximum limit of 21 million "coins". Every four years, the number of new "coins" is halved. These may be split again.
The process usually takes place by means of a blockchain where the digital information is spread to a number of nodes that mutually control each other more or less continuously. The bitcoin network mines (or "generates") a new bit of bitcoins about every 10 minutes, with a capacity limit of 1 megabyte.
As cash becomes less common, crypto-currencies are an obvious option for anyone who wants to ensure anonymity and avoid monitoring. This can be completely legitimate, but is, of course, particularly interesting for criminal networks – as well as for intelligence agencies from different states and their disinformation campaigns.
The iota is a partially Norwegian digital coin, which instead of blockchain uses what they themselves describe as a new phase of encryption technology, named Tangle. While Bitcoin and similar currencies take transaction fees and have a limit to how many transactions they can process per second, Iota claims that it does not have these limitations.
Here we must add that in the bitcoin system paying a fee is voluntary; however, by not doing so, you face the risk that the transaction is delayed or may not be processed at all.
The whole system relies on the fact that there are persons and institutions who provide available data capacity as "miners" who conduct and monitor transactions. Miners are paid based on how many transactions the system processes through his or her computers. The payment they receive is in form of a share of newly issued bitcoin. A continuous queue of transactions is desirable in order that a sufficient number of "miners" find it profitable to act as a settlement office.
It is clear that a bitcoin hype makes it more interesting to contribute to the transaction flow and get a part of revenue in the form of bullish bitcoins. The other side of the medal is that the revenue gets smaller the more miners who join the game.
A vast need for energy
The crypto-currencies are faced with another big problem: the enormous energy input required. Huge amounts of data power are necessary to generate new digital coins. The total power consumption is currently 29 TWh a year, more than the electricity consumption in Ireland. Compare this to the total Norwegian production of electricity in 2016 being approx. 150 TWh (Norway is a large producer and net exporter of hydro power – translator's note). If the current growth rate continues, the bitcoin networks will demand more energy power than the whole of the United States within a couple of years.
Bitcoin mining consumes more electricity a year than Ireland.
Not least due to our relatively low electricity prices, some Norwegians have embraced the hype and have invested in high-tech machinery for several millions. They depend on the fact that the equipment must run non-stop to process the complicated algorithms needed to extract new bitcoins, they also hinge on that there are plenty of investors interested in leasing machine capacity. The power costs for operating a medium-sized rig of 15 machines, amounts to 14,000 kroner a month [approx. €1,500 – translator's note].
Anxious banks and stock markets
States and banks are irresolute on how to deal with crypto-currency. In some countries, bitcoins are prohibited as means of payment, while in others they are legal. Some banks convey sales and purchase of and with bitcoins, others do not. The Norwegian government is also concerned about the ramifications, and has summoned a group of experts to look into the possibilities for regulation of bitcoin and other crypto-currencies.
In the US, Wall Street has opened up to short bitcoin as the latest form of fictive capital. The Chicago Mercantile Exchange (CME), an American financial and commodity derivative market, has followed suit, while the Nasdaq Technology Exchange is preparing to start trade with crypto-denominated securities in 2018. Short-sale and derivatives are speculative exchange operations that can greatly benefit from an upturn or fall in the price. Investment banks and brokerages like JP Morgan and Goldman Sachs have invested in bitcoin-related companies. All of this obviously helps to push demand and price further upwards.
A whole set of new companies with their own crypto-currencies have entered the markets and attract investors, assisted by the media hype. It all reminds us of the stock exchange fever in the 1990'ies, when a large number of dotcom companies entered the scene. The so-called dotcom wave ended with a drowning splash on the Nasdaq Stock Exchange in 2000. Not only the newcomers were severely injured. A company like Microsoft had its stock market value cut in half that year.
Trading in derivatives is a casino operation, it was a triggering cause of the so-called financial crisis in 2007–2008. It is part of the pyramid scheme that has escalated again in recent years; greatly assisted by the central banks and the authorities of the imperialist countries who are mass-producing money out of thin air ('quantitative easing').
Digital phantasy money
The real "value" of the crypto-currencies is the opportunity they present for speculation. These currencies are even more frail than normal currencies, because almost all of them are based solely on faith, hope and trust, i.e. they lack any kind of material bolster.
Admittedly, any other currency is also based on trust; that is, the buyer and seller agree on the value the currency represents as a means of transaction and as a source of savings. In the era of imperialism, all currencies have become more and more paper values, as ever fewer of them are bound to gold reserves, like they used to be. For example, Norges Bank has sold all of its gold deposits. Nevertheless, the Norwegian krone does have a socioeconomic backing in national resources and the country's economic potential, whether we speak of hydropower, fisheries or oil. The same applies to most other currencies.
The US dollar is still the world's leading currency, as it has been since the end of World War II. Today it is immensely overpriced on the world market. The US no longer has the economic strength to uphold a strong dollar, but the greenback keeps its position because it is the oil denominating currency and because China and a number of other countries have made heavy investments in US government bonds. The hegemony of the dollar ultimately depends on US military strength. In short, the world is threatened to accept the dollar as the global currency number one.
The crypto-currencies have no coverage in underlying values and have no state or central bank to sustain them. The number of places where they can be used as direct payment are few, even if this is changing rapidly. Thus, they are hugely vulnerable to speculation, as the stock change roller-coaster bitcoin demonstrates.
A hacker attack could render a crypto-currency completely worthless.
Moreover, encryption technology is far from impervious. While currency speculators like George Soros can provoke a certain devaluation of national currencies, an advanced hacker attack on a decentralized international crypto-currency could render the entire currency completely worthless.
A bitcoin user is dependent both on the fact that the miners actually perform his transaction, and that the company that acts as a kind of deposit for his bitcoin money is reliable. In 2016, such a company, Bitfinex, was exposed to data burglary and bitcoins worth about $ 72 million were stolen. Of course, they have never been recovered.
When money becomes redundant
Does all this mean that crypto-currency and the technology they are based upon is socially useless? Not at all. The technological revolution as such is a major advancement with enormous potential if it is used to the benefit of society, completely independent of the speculative activities that are always part of capitalist societal relationships. The same goes for crypto-currency.
In a socialist society, where technological innovations are not aimed at generating profits for the capital owners, digital currency may in one way or another imply major social gains.
The socialist state has the task of narrowing the scope of the law of value and of restricting commodity production to consumables. But still there will be a need for trade between cities and countryside, and effective methods of budgeting and accounting will be necessary. For all this, a digital coin unit and fully automated accounting methods can be of great benefit, provided that this "currency" is centralized in the hands of the socialist state and strictly detached from the capitalist stock market and banking market. It might be used for trade between socialist countries on a socialist world market. However, in order to do foreign trade with the capitalist world, it will still be necessary to have reserves of "old-fashioned" convertible currency (or any digital imperialist monetary equivalents).
Under capitalist conditions too, digital money units could mean rationalization, but most probably as a new way for monopoly capital to attract fresh capital from big and small investors. The public company of shareholders (Societé Anonyme) meant a "massive expansion of the scale og production and of the companies that had been impossible for a single capital", to quote Marx. The stock company is an expression of the fact that production has become socialized, while a small elite can control huge values with perhaps only twenty percent of the shares in the parent company. Stock funding has been a method of acquiring new capital through "democratization"; crypto-currencies could be another.
For "average Joe" who wishes to acquire some shares and participate on the stock market without going through banks, brokerage houses or mutual funds, the process is quite complicated. Crypto-currencies may in the future make the threshold for investing in a stock portfolio lower, by-passing leeching intermediaries. This may be a tempting alternative to individual pension savings, where the management fees ensure that the nominal value decreases rather than increases from year to year. For capital and their state, the gain is that they firstly acquires a deferred salary in the form of a pension, and secondly that working people who can afford it help increase the assets of the same bourgeoisie who already reap the fruits of their surplus labour.
A capitalism "without owners"?
The crypto-currencies could in theory mean an additional "decentralization" of capital, while effectively being monopolized and concentrated on even fewer hands. Some bourgeois elements imagine a capitalist model where the institutions of today are replaced by autonomous and "ownerless" organizations. This is a new version of the idea of a "people's capitalism" where everyone is a content citizen.
That illusion is not new. It is in the nature of capitalism that the added value that is produced does not come into the hands of those who produce this surplus value. If that were the case, the entire process of capital accumulation, where wealth is gathered in the hands of a small minority, would simply come to a halt. Just as with stocks or gold reserves, the one who controls five or ten percent of the world's bitcoin assets has is in fact total control.
It could well happen that crypto-currencies would make some sneaky intermediaries redundant, but the bitcoin-wave has already entered the major exchanges and brokerage houses. Especially the most speculative of the kind. In the foreseeable future it is here, on the major exchange markets, that the majority of the transactions will take place, and not peer-to-peer.
The self-contradiction of crypto-currency
One of the the crypto-currency paradoxes is that they are dependent on the "old" currencies for their value to be rated.
Nobody would purchase a single bitcoin if he could not relate it to some sort of measurable market value. Since bitcoin is not anchored in a national economy, in precious metal (like gold) or in other constant capital (such as a capitalist corporation), it makes no sense to speak of crypto-currency value without relating it to an existing currency, e.g. the greenback dollar.
The rising market worth makes the bitcoin increasingly popular, simultaneously making it more and more useless as a means of payment and exchange. Imagine that you raise a loan in bitcoin equivalent to NOK 400,000 to buy a car, and after one year find that you have to pay back an amount equivalent to four million for the same car. The interest rate is not taken into consideration, as it's not part of the bitcoin universe.
From the point of view of the monopolies and the capitalist governments, it is equally important to control bitcoins as it is for them to control telecommunications. More or less autonomous crypto-currencies constitute a potential threat to the divison of the world market among the imperialist powers. The major powers, monopolies and central banks will therefore do all they can to ensure that crypto-currencies are nominated in comparison to the main currencies of the imperialist powers. It is these, such as dollars, pounds, euros, yen and yuan, who define the relative power and strength of the "national" monopolies and states.
For the time being, crypto-currency, which does not have nor represents any material coverage or value in itself, must litterally find credibility in the old currencies in order to have a conveivable market value.
Technologically too, the the complex algorithms that control the bitcoin process are undermining it. The system depends on a sufficient number of miners who provide advanced data capabilities. They do not do that for idealistic reasons, but to reap new bitcoins. "But the more miners, the more difficult it is to get a piece of cake", as one of the Norwegian bitcoin miners says to Finansavisen on December 20th 2017.
Venezuela's petro experiment
The oil-rich Venezuela is attemtping new ways to unleash itself from the shackles of the dollar and thereby counter the economic extortion from the United States, Canada and other countries. President Maduro launched the crypto-currency petro in December 2017. The currency is supposed to be fixed to the country's vast oil and natural resources, but it is very unclear how it will function in coexistence or in competition with the country's currency, the volatile bolivar. A petro shall at all times equal the value of a barrel of oil, which means that it is extremely unstable from onset as oil prices fluctuate violently and have a "normal" rate anywhere between $30 and $100.
The bolivar is plummeting against the dollar and other world currencies. In a Venezuela tormented by the crisis, trading and mining bitcoin has become an increasingly widespread method of bypassing the massive inflation in that country. This bitcoin-mining is adding to the crisis by draining extra electricity from an already overloaded power grid.
It will be interesting to see whether the government in Caracas is able to realize its own digital currency, especially if Venezuela has found a method of keeping it under state and national control, shielded from foreign manipulation. That would really be a breakthrough. Otherwise, the petro can hardly be anything but a creative speculative counter-move against the imperialist subversion of Venezuelan economy.
Rubles in the ether
The Russian central bank has previously viewed crypto-currencies as a financial pyramid scheme. In spite of this, president Vladimir Putin has requested a crypto-ruble built on the blockchain technology of the bitcoin competitor ethereum. The temptation for Russia is that an encrypted parallel currency provides opportunities to circumvent the sanctions imposed by the United States and the EU.
The digital token or coin itself, is called ether. Source code and unique scripts provide opportunities, inter alia, to create and save future contracts and debt claims. The Russian ether is meant to be shackled to the ruble and supervised by the central bank. How the Russians intend to ensure that there are enough nodes available to generate the transactions, remains to be seen. Each single node must also calculate these smart contracts in real-time, which leads to greatly reduced performance.
Article from Revolusjon, January 20th 2018.