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Bitcoin: Blockchains and the crypto craze
« on: September 20, 2017, 06:00:06 AM »
Bitcoin: Blockchains and the crypto craze

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  and e-money.

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  procedure.
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  blockchain expansion.

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  Chinese.

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.
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