Only a year after the financial crisis in 2008 the crypto-currency bitcoin was created as an alternative to a questionable financial economy. The founder of Bitcoin, Satoshi Nakamoto, wrote both code and protocol based on new blockchain technology. Only now, ten years later, we sense a possible economic breakthrough for cryptocurrency – crypto for short.
Hype or opportunity?
For many people crypto may create alternative, non-capitalist and more solidary forms of economy. Many feel a need to liberate themselves from capitalism, where it is getting too powerful or oppressive, and by using cryptocurrency they gain hope for more reciprocal relations and autonomous communities. Others see cryptocurrencies as pure sabotage – undermining and stealing from bigger companies, banks and governmental institutions.
It seems fair to ask if the intrusion of cryptocurrencies on the world market changes or even deranges society – being a truly «disruptive technology». And is it really as liberating as «crypto anarchists», free-thinkers and liberalists wants us to believe? Some people regard the new economy to be as important as the appearance of the internet, while others disregard it as hype – an unfounded sensation – «same shit, new wrapping».
Yet the market is enormous: Today there are 4-5 billion people who don’t possess a bank account, and for many of these a cheap smartphone with cryptocurrencies can probably serve as a «digital wallet». People in developing countries who don’t belong to the typical upper middle class, will be able to effectively receive and pay with money that isn’t traceable by the tax collectors of corrupt governments, while also avoiding banking and credit card fees. Governments around the world will probably do their utmost to prevent or regulate the use of such new technologies – at the risk of being confronted with a billion opponents rejecting control measures.
Banking system in a crisis?
Since its humble beginning, the value of a bitcoin has risen from 1 to about 6000 US dollars. Even if the currency dropped this year, its value would remain seven times that of its price one year ago. The fact that trust in bitcoin is on the rise also means that the dollar might be trusted less. Are we at risk of experiencing another financial crisis like the one in 2008? Without a doubt. The debt situation we have now is worse than that of 2008 before the eruption of the crisis.
As an example, let’s have a look at Norway’s financial situation: Differing from a real economy where expenses don’t exceed production or assets, the Norwegian state ran a deficit of 225 billion kroner, subsequently recovered from the Oil Fund, the national fund for long-term investment of Norway’s oil revenues. Private sector markets lost about 300 billion in the same period, and the trade deficit hit approximately 250 billion. Measured in GDP this equals an «overconsumption» of nearly 800 billion.
«We now have bitcoin, ethereum, litecoin, tron, neo, monero, geocoin, wetrust, verge and over 1600 other cryptocurrencies.»
Since the crisis in 2008, Norwegian households have also chosen to double their debts. Debts have increased in accordance with home prices (85 per cent of debt conforms with the real-estate market), and currently the collective debt is about 3000 billion kroner. At the same time, Norwegian municipalities have doubled their debts to about 2000 billion kroner. In other words, a substantial part of Norway’s welfare is built on debt.
How long will the creditors keep faith that their loans will be reimbursed in the future – before the bubble bursts? If housing prices should fall during a crisis and homes are heavily mortgaged, people will be left bankrupt with no chance of settling up. Alas, one fifth of the Norwegian population owns 80 per cent of the assets, so these will be barely touched, neither by the tragedy nor by the protests that will come in its wake.
Will crypto be an alternative to normal monetary value, if for instance the US dollar loses credibility? The US debt has doubled nearly 20 times in a little more than 30 years, to the staggering current sum of 20 trillion dollars. Debts are partly rising as a result of printing «new money» (see below). Adding expected deficits of 750 billion dollars (roughly equalling Norway’s total Oil Fund), the «company» might not be deemed reliable for much longer. Nationally and internationally the trust in the US dollar also diminishes when the USA steps up their military budget instead of investing in products directly related to people’s needs. In this way the dollar might drop in value. The state of the «company» USA is worsened by its senior citizen class: In 1995 for each pensioner 4.9 Americans were working. In 20 years about half the labour force must cover the expenses of the elderly – whose life expectancy is constantly on the rise. Will the average American tolerate sharing a third of their income with strangers in a swelling class of retirees?
China’s currency is getting ready to inherit the role as a global currency, held by the US dollar until now. China has invested substantially in Africa, where many countries consider changing their currency reserve over to yuan. The US dollar is, in other words, not what it used to be, and if other countries pull out, crypto or other currencies are waiting in line to take over.
Many expect an «hour of reckoning» – where the bubble will burst and start a new financial crisis. Loans must be renewed, there is interest and compound interest, and credit doesn’t extend into eternity. Central banks aren’t at liberty to cancel mountains of debt, since this would create a negative state capital and create a quake that would cause the trust-based world economy to crumble.
Today, 17 million bitcoins and 4500 billion dollars are in circulation. Both units work as singular loans based on the expectation that you will get something back when you give them to someone. So long as the trust prevails.
Reduced spending power
Unlike ordinary money (called fiat currency), the number of crypto is inscribed in the protocol itself, so that they can’t simply be stamped or minted. Bitcoin resembles gold, in the way this precious metal worked as a currency for over 5000 years, as a limited value resource. The freewheeling of the finance market was a direct consequence of the 1933 decree making it a criminal offence to own gold, followed by the effective abolition of the gold standard in 1971. George Washington’s signing of the «Mint and Coinage Act» in 1792 is a faded memory, as is the time when a 10 dollar «eagle-coin» contained 16 grams of pure gold.
The monetary system is now credit-based and inflation-driven – it must grow to persist. Simultaneously, galloping inflation will water down spending power in the government’s favour. Here, governmental central banks – as the Modern Times Review has described earlier – are virtually running their money printing presses in the basement. The money issued is lent out with bond funds (and government debt rises, even though the transaction goes from one pocket to the other) between the Central bank and the Ministry of Finance, where the state issues three per cent interest to itself. The US hasn’t issued money since 2014 but might soon do it again. Some would see this as short-sighted, since the effect of such measures is to reduce the purchasing power of the population. Imagine buying some rare graphic prints, but then the artist makes 100 new copies: the collector’s value of the original prints would immediately drop. With crypto such dilutions of value would be reduced.
The current crypto situation
We now have bitcoin, etherum, litecoin, tron, neo, monero, geocoin, wetrust, verge and over 1600 other cryptocurrencies. Via blockchain, «distributed database» chains of transactions are extracted with freshly encrypted keys, making the systems irreversible and reliable. The transactions are civilian money transactions – contracts and agreements between individuals – where the government and larger institutions are kept out.
«Is crypto a merchandise, a currency or a tradable security?»
So far, cryptocurrency has been used under the speculation that in the future it will increase in value. Many of the early birds who invested in crypto with normal money have harvested enormous gains. According to the news agency CoinDesk, the first quarter of this year saw more than 5 billion dollars invested in crypto – more than in 2017 as whole. These transactions are made through so-called ICO’s («Initial Coin Offerings») where different startups put their own cryptocurrencies up for sale. According to The Economist (April 28), the fact that China has banned such ICOs only confirms the enormous power that resides in the crypto-economy.
People don’t buy stocks, but rather become owners of new crypto. For example, again according to The Economist (March 31), a system called Fetch will be initiated next year to gather sets of questions and answers on the internet using crypto. Based on Artificial Intelligence – of a slightly different mark than Google – big data will be harvested for use in searches and information gathering. Fetch declares itself to be non-profit and will be a new «watchdog» on the internet. The users of the net will be rewarded and paid with crypto – both the users who ask and those who provide answers. The main investor in Fetch, Outlier Venture, asked for coming cryptocurrencies, rather than stocks, in return for their investments.
What is crypto, after all?
It is hardly possible to put a stop to this «gold rush». We have met people who’ve sold crypto for almost a 100 times more than the investment value. One such fortunate investor could afford to move into a new sailboat in the harbour of Barcelona. Today, every fifth student in the US has invested part of their student loan in crypto, according to the «Student Loan Report».
But is crypto a merchandise, a currency or a tradable security? Conceiving of it as a tradable security would cause the government to demand transparency, and for this reason the preferred definition is that of a means of payment or a digital safe-deposit box. Crypto can be a reserve for savings and pension – akin to gold and silver.
Crypto can indeed take over as «cash» in a society where – as already mentioned – normal money is getting too vulnerable because of financial and bank speculation. Modern Times Review has previously discussed the risks of normal bank accounts, as a bank’s guarantee fund only possesses about three per cent of a customer’s actual savings. In Norway this fund is private. At the same time the «guarantee» is two million kroner, whereas the bank’s real capital is minimal since most of the money you have in your bank simply circulates. In a scenario where everyone lost confidence in the banks and rushed to the bank to cash out their money (a «bank run») – or alternatively chose to change their money for crypto – only 5-10 per cent of the money would be available at all. Unless the Norwegian government stepped in to cover the losses through the Oil Fund, your bank savings would be lost. Still, since the Oil Fund belongs to the citizens and tax-payers, the crisis will affect people the same, no matter what the government choses to do.
Might crypto also suffer under a financial crisis where people’s trust in money diminishes? As of now, bitcoin accounts for less than a thousandth of the world’s debt. We are dealing with a future that is hard to predict, but where crypto has an enormous potential. Evidently crypto will be employed for a wide range of transactions beyond renting videos, car sharing and shared housing.
On a practical level, crypto works effectively. Many are keen on cutting back on the added expenses of money exchange and transactions. It seems unreasonable that you need to pay up to seven per cent of your requested withdrawal when you cash your money abroad. Bank fees also tend to consume the interest you ought to earn from your savings.
Bitcoin algorithms for crypto transactions come without fees. The transactions aren’t free, but those who contribute with processing power for the extraction of encryption keys get paid in bitcoin or other crypto directly from the system. Bitcoin has a built-in limitation of 21 million units, so what will happen when the remaining 4 million are mined – will a transaction fee need to be introduced?
Will the «hard fork» of crypto, such as the newcomer Bitcoin Cash, be a way to multiply the number of units, thus making it similar to the minting of the central banks? Well, these offshoots don’t water down an existing stock of money, as long as the market buys them. Also, the bitcoin system doesn’t depend on inflation, the way the fiat system does. Can crypto be seen as a set of exchanges between equals – peer-to-peer?
Still, normal money is needed to buy and sell in small arenas resembling auctions or trading venues where you shop for the best offer. Some take a profit from this. Interestingly, sellers are rated based on previous transactions they have conducted, so internal regulations do exist.
Anonymity is another peculiarity to crypto. Granted, the transaction needs to be made internally between different cryptocurrencies, with an encrypted and secret key, for anonymity to be guaranteed.
Whenever you want to change back to other normal currencies, like kroner or dollar, you remain under surveillance. You leave traces behind. Also, transactions may come at a price, for instance if you need a so-called wallet – a secured digital purse for crypto and cryptographic-keys. Should you lose your key, you also lose your crypto. There is no bank for you to call for a new card or complain that someone hacked your account. Your crypto has simply vanished.
Also, bitcoin miners need to acquire new, expensive computers if they are to earn new bitcoins. According to The Economist (May 19) the market now offers a range of tailored computers, like Antminer, offered by the Chinese Bitmain, that specifically helps you to process bitcoins. In each of these computers 189 small Taiwan-built ASIC-processors solve the cryptographic puzzle faster than ordinary computers. Some investors have established vast halls, for instance Hangars in Iceland, where computers are «chewing» data to extract crypto that subsequently can be sold on the market. The energy consumption for these purposes is vast. Bitcoin requires an enormous processing power to generate cryptographic keys, even if the 256-bit block itself is miniscule. As of now the internet’s total monthly data traffic is about one zettabyte – enough to fill 16 billion 64 GB iPhones.
As a reaction to bitcoin the Russian Vitalik Buterin created the new ethereum (ether). The extraction of this popular crypto runs on the graphic processor of normal computers, but, on the other hand, this procedure takes up more space when it is sent online. Another crypto, litecoin, acts as «silver» with respect to the «gold» of bitcoin, being suitable for quick small transactions. Where transactions of foreign currencies take days in the heavily charged banking system, crypto accomplishes the same in seconds.
Is the crypto/blockchain technology ultimately secure? If a miner’s crypto-key or digital wallet is hacked, he or she is left in dire straits. For example, an etherum-based DAO (decentralised autonomous organization) with 10,000 members hacked a couple of years ago, resulted in a loss of 35 million US dollars. The ensuing discussion pitted those who wanted to reverse the transaction chain against the classical purists who preferred just keeping the ball rolling.
The currency of the future
Criminals use crypto, no doubt. But crypto purchases aren’t untraceable, and criminals might still prefer dirty or black money to circulate as banknotes. Globally between 750 billion and 1800 billion US dollars are whitewashed every year (The Economist, April 28). Still, this sum makes up only 2.5 per cent of the world’s total GDP. Among the cases where crypto was used for whitewashing, a good example is of the case disclosed by Europol where European drug organisations paid for cocaine from Colombian drug cartels with crypto. The middlemen changed euros for crypto that were subsequently transferred to digital wallets in Colombia and then changed to pesos in a dozen banks – who in turn transferred smaller amounts to the seller.
«Imagine buying some rare graphic prints, but then the artist makes 100 new copies: the collector’s value of the original prints would immediately drop.»
General tax evasion with payments in dirty money is a problem for the government as well as a motivation for many users of crypto. Understandably governments try to control the transactions. For the same reason they also want to get rid of banknotes altogether. This would give them increased control over state income, but also more control over their citizens’ money. In this manner, they can avoid «bank runs» if the fiat money game was ever fully disclosed.
If ordinary people want to take care of their own savings and remove them from current banking systems, crypto may be the solution. In this case the expectation must be that this system has come to stay and that crypto keeps engendering new activity, productive environments and new values. Many of the aforementioned 1600 cryptocurrencies will probably vanish. Trust and interest are finite resources. Crypto is evidently the new hype, and some speculations will end up as pure Ponzi schemes where the last buyers lose everything.
At the same time, the Modern Times Review has great expectations for more solidary systems of payment and wishes this future welcome. Even further, a future in which crypto makes its way into the real market economy.
Unfortunately, a financial economy based on credit is irreversible – making us all participants in the financial game. Thus none of us can escape debt and its permanent state of exception.