The veil has long since fallen on cryptocurrencies: the essential thing about them is the fact that they are not money but speculative financial assets. To understand their success within the thousand speculative investment possibilities offered by today's financial markets, we need to understand briefly what the technology on which they are based is like and what things it allows beyond the usual possibilities in "normal" speculative assets.
This post was originally published in Spanish in January 15th, 2018
Description of how the blockchain system checks the veracity of a transaction. Blockchain is the technology at the basis of cryptocurrencies.
The main "novelty" of cryptocurrencies is that they work on a technology called blockchain which allows a record to be kept of who has what amount and who exchanges it with whom, without the need for an organization -company or bank- to centralize it. What's more, the system itself issues new coins automatically as their use grows according to a function designed so that new supply is less than proportional to demand and therefore the price of each unit tends to rise.
The particularity of the kind of "distributed record" produced by the blockchain system is that each user keeps a complete and up-to-date copy of the transactions made with the currency... which makes any system based on it technologically very inefficient from several points of view:
Firstly, each user has to keep the complete history of the currency, secondly the checks to avoid manipulations in the transaction record are computationally complex... which means hours of specialized computers. When the volume of use grows, as in bitcoin, the energy consumption of these computers - the infamous "miners" - multiplies, slowing down transactions and increasing consumption. Today bitcoin "mining" consumes more electricity than 159 countries.
However blockchain is almost unanimously praised by consulting firms and banks because:
Cryptocurrencies are used commercially to engage in opaque, near-instantaneous currency exchanges.
- It allows them to create cryptocurrencies with which to organize virtual markets. To the extent that they become issuers of the currency, the profitability of creating the market is assured because they keep a part of the original stock that they can resell while benefiting from its appreciation.
- They eliminate exchange rate or default risks: to operate in such markets you have to start by buying currency, so, in fact, the operators finance the owner of the market.
- The market operations register is transparent for the agents: everyone can see it but no one can manipulate it.
- And at the same time it is opaque to the financial and regulatory system: one can perform a currency transfer almost instantaneously by the simple mechanism of buying cryptocurrencies with one currency and selling it in another, without going through clearing houses, regulatory authority controls or central banks. What's more, if I want I can make the owners of the currency anonymous and their accounts and activities untraceable by anyone.
'Silk Road', the first mass online marketplace to use cryptocurrencies openly for illegal trades.Home page of "Silk Road", the first mass online marketplace to use cryptocurrencies openly for illegal trades.
Blockchain was born in the Californian techno-libertarian environment, as a technological solution to the problem of creating an opaque currency, independent of state regulation and that would not devalue over time. In other words, a currency whose logic would be "as similar as possible to the gold standard" and which would also make it impossible for the states to follow the trail of illegal businesses, vindicated by anarcho-capitalism. The first currency thus created, with blockchain as its basis, was called bitcoin.
But unlike state-issued currencies, bitcoin had no economy underneath. No one collected their salary in bitcoins and no one shopped at the supermarket with them. Put another way: bitcoin is not money because it is a phenomenon off-center to the accumulation of capital and the exploitation of labor, i.e. it lacks a social character, it is not a tool for value extraction (=unpaid labor).
It was, at first, a hobby and a plaything of techno-fanatics and libertarian theorists. Until it became clear that it was a secure payment method for punishable or regulated activities. The first major online marketplace to use bitcoins was Silk Road, the eBay of drugs, and although it was shut down by the FBI and its founder tried and jailed, it became clear to everyone that what had "failed" was not the opacity of the currency, but the opacity of the website.
From that moment on, bitcoin became an increasingly widespread way of bypassing exchange regulations in countries like Venezuela or Argentina, of circumventing the impossibility of making direct payments in countries under international sanctions, of laundering money and, above all, of storing it.
Groups and organizations such as former Ukrainian president Yanukovich's network redefined their operations to use bitcoins and cryptocurrencies in their money laundering and arms trading systems, turning the currency into the new global payment system for secret services, transnational mafias and clandestine groups.
Once black money began to flow and be deposited in this type of financial asset, speculation in bitcoins became a gamble: as long as the amount of black money going into bitcoins was greater than the amount being converted to be spent, bitcoin's price would rise. And it went up to the point of attracting "pure" speculative investors, not interested in principle in anything other than bitcoin's own revaluation.
Never before had black money enjoyed such a high profitability. The result, as it could not be otherwise, was, is being, a "cryptocurrency fever" in which the impoverished US working class is invited to gamble their pension savings.
The degree of distortion that expectations about cryptocurrencies, or, for that matter, about the rise of dark money, can produce in companies going through difficult times can be seen in Kodak. The former home of photographic equipment and cameras has been reconverted into a marketplace for photographers in which participants are practically guaranteed, upon payment and regardless of their activity or success in the market, a profit. That profit would come from financing bitcoin mining activities. Life Hacker magazine explained the "value deal" as follows:
Essentially, the company is asking you to pay $3400 as an initial investment to buy a Bitcoin mining platform, Spotlite, which is licensing the Kodak brand for this business, will cover maintenance costs and split the profits. The company estimates that you will earn $375 per month ($9000 over two years) based on the current value of bitcoin and current mining rates.
It is this "exuberance" which frightens away old pirates and sharks like Warren Buffet or the CEO of JP Morgan, but also the South Korean government, which is considering banning the exchange of currencies for bitcoins, and VISA itself, which fears being swamped by a regulatory wave aware that cryptocurrencies and dark money go hand in hand.
What does the cryptocurrency phenomenon teach us?
According to some estimates, black money could eventually represent more than the value of the annual output of China and the US combined.
The rise of cryptocurrencies reflects several characteristics of an exhausted and destructive capitalism:
1 Black money is not a one-off phenomenon or a more or less contained disease of capitalism. Corruption is a consubstantial consequence of the organization of state capitalism; transnational mafias are not four drug traffickers wanted all over the world, they are a growing part of the bourgeois classes and their power and capacity increase with the decomposition resulting from the permanent crisis of capitalism and the authoritarian development of the states.
The gigantic capitals they mobilize are mostly within the "legal" economy... but with some extra costs, the famous "laundering". What has happened with cryptocurrencies is that when even experimental ways of saving these costs have appeared, a small amount of the total black money has moved into the new tools and become visible.
2 The decadent capitalism in which we live is characterized by the absence of sufficient extra-capitalist markets to realize surplus value. One of the consequences of such absence is the concentration and over-accumulation of capital. There are immense amounts of capital that have nowhere to be invested in a productive way.
But the aim of capital is not to be productive, it is to reproduce itself, and that is why large speculative exchanges flow from one market to another in search of opportunities in what are in reality nothing more than bets on the profitability of capital, the productive kind of capital this time... These floating fictitious capitals leave a trail of frustrated "hypes", burst bubbles and social disasters. The cryptocurrency bubble, based on the expectation that black money will be stored in them, is only the latest in a long series over the last 15 years: dotcoms, real estate, renewables... and now cryptocurrencies.
The capitalization of the bitcoin market, and the cryptocurrency market in general, is small compared to the rest of the speculative markets.
3 Big capital looks down on bitcoin and its effects because for them they are "peanuts": as the Bank of England has repeated, it is "too small to be a threat". But they go crazy about blockchain, the inefficient technology that underpins it.
Why? Because its needs are the same: to gain independence from state control and to secure the ability to operate globally in an environment where trusting the players in its own markets is increasingly difficult for it.
4 As a result, the boundaries between black money and "clean" money that were always blurred are, increasingly, unrecognizable.
Total capitalization of securities traded on the New York market compared to the equivalent of the cryptocurrency market. The entire cryptocurrency market is equivalent to half the market value of Netflix.
Cryptocurrencies are the counterpart of "ethical funds": one and the other exist as extreme and anecdotal poles of a capital market that cannot but be speculative and destructive as a whole.
In today's capitalism, capital cannot reproduce itself without generating floating capitals, masses of money that, failing to find productive occupation, bet on the outcome of other capitals in a struggle for increasingly exhausted markets.
Cryptocurrencies are the debut with its own name of black money in the capital market. But it is capital, and not only black money, that is a heavy burden for Humanity. It is capital as a whole and its logic of reproduction - which once revolutionized the productive capacities of the species - which has become today a hindrance, a fetter and a permanent threat.