- Created: Friday, 09 March 2018 16:33
- Written by Jack Clayton and Brian Henry
In 2009 the creation of Bitcoin marked the start in the huge growth of ‘cryptocurrencies’. An astronomical rise in prices and amounts traded – in what is no more than virtual money – has followed. The total price of all bitcoins in circulation as of February 2018 was £112bn, up from around £1bn in 2014. Invented by the elusive Satoshi Nakamoto, Bitcoin has been hailed by right-wing libertarians as a decentralised structure that empowers the individual over the evils of the state by circumventing the regulation of a central authority or bank, moving society on a step towards ‘pure’ or ‘real’ capitalism – that is, the libertarian fantasy of a stateless capitalism. In reality, this is just another investment bubble fit to burst. Cryptocurrencies are nothing more than a new form of speculation in which to channel surplus capital, a reaction to diminishing opportunities for profitable investment and the deepest economic crisis in a century. Jack Clayton and Brian Henry report.
Understanding how cryptocurrencies function is difficult without practical familiarity. One of the latest in a string of unproductive phenomena coming out of Silicon Valley, they are created through a system called Blockchain, a network that is considered to be a game-changer in transaction technology. Unlike normal currencies, which are backed by central banks and governments, the Bitcoin network works in a similar way to Wikipedia – it is maintained by volunteers, who receive bitcoins in return, a process known as ‘mining’. Blockchain acts as a ledger of all transactions ever made, of which every Bitcoin user has a copy. This decentralised setup makes it impossible for one person or entity to control; instead any changes have to be agreed upon by a majority of the ‘community’.
The way all cryptocoins function is less like currency than collectables or stocks; they have to be transferred into fiat currency like the US dollar before purchasing a commodity on the world market is possible. Only a few small online stores accept cryptocoins directly.
Economic reality has exposed the supposed ideal behind Bitcoin as either bluster or delusion. Like everything else under capitalism, its need to grow has resulted in its monopolisation, whereby more and more bitcoins are concentrated in fewer and fewer hands. According to Bloomberg, 1,000 traders own 40% of the ‘market’. When they sell even a portion of their holdings, prices tumble. No wonder Bitcoin has been repeatedly dismissed as a ‘Ponzi scheme’, in which fraudsters lure in small investors with promises of huge returns and then keep everything for themselves. Because it is a digital currency and not a security, there is no prohibition against a trade in which a minority colludes to buy enough to push the price up and then immediately cash out.
Cryptocurrencies have also been used to move large sums of money around the world for fraud, laundering and tax evasion, and for illegal payments on the internet for drugs and weapons. As a result, the Chinese and Russian states have shut Bitcoin down in their respective countries. Furthermore, the process of mining wastes large amounts of energy, with Bitcoin mining alone using more electricity than Ireland every year.
Seen by most users as a get-rich-quick scheme, many have lost large amounts of money by trading in cryptocurrencies. In 2013, Bitcoin’s overall value soared by 60 times before suddenly falling by 50% at the end of the year. In the first month of 2018, the value of an individual Bitcoin fell by 30% from a record high of $20,000. The smaller cryptocurrency BitConnect collapsed after the value of each coin plummeted from over $300 to less than $10 in the space of a day, mirroring other historic crashes like the 2000 DotCom bubble and the famous 17th century Dutch ‘Tulip Mania’ bubble.
No intrinsic value
Value under capitalism is created only by the human labour that goes into commodity production. The magnitude of value stored in each commodity is determined by socially necessary labour time. Therefore, Bitcoin adds as much value to the world economy as printing paper money – none. It is only worth what someone is willing to trade for it.
Nor can it replace money. Capitalism without money is not possible and would be the equivalent, as Marx once said, to having Catholicism without the Pope. The money-commodity, a universal equivalent, is required to enable the exchange of commodities and the value they store. Gold has historically played this role.
Bitcoin, along with all the hype, will inevitably come crashing down. Blockchain may well be a technological innovation that could be put to better use, but cryptocurrencies are just another free market nightmare.
Venezuela adopts ‘Petro’ digital currency to circumvent sanctions
Bitcoin and other cryptocurrencies have previously been used to get around sanctions in Venezuela, but now the PSUV government has created its own national digital currency called the ‘Petro’. Unlike cryptocurrencies, which hold no intrinsic value, it is backed by Venezuela's natural resources, primarily its large oil reserves. The Petro was launched at the beginning of December 2017 and as of the beginning of 2018 nearly one million people are ‘mining’ the new currency (Telesur English, 4 January 2018).
According President Nicolas Maduro, the aim of the Petro is to allow Venezuela to ‘advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade [imposed by the US]’.
Each Petro is valued at the price of a barrel of oil in US dollars. Currently only registered Venezuelan citizens can mine the Petro, and those who sign up are also allowed to trade in other government recognised cryptocurrencies. The Petro and other types of crypto or digital trading will now be monitored and regulated by the Venezuela Blockchain Observatory, making it one of the first fully government regulated cryptocurrencies.
The creation of the Petro is part of Venezuela's plan to overcome the US sanctions which have devastated its economy by enabling more foreign investment and providing a new way for Venezuela to trade oil.