Cryptocalypse

I’m sorry. I hate to see people lose money. But the spectacle of the crumbling crypto edifice is truly enjoyable to watch.

Put aside all of the debate about the investment merits, about what it might do for (or to) its holders in the future. It’s the economic equivalent of cancer. The sheer amount of energy used to mine bitcoin alone is a human tragedy. Doesn’t matter if it’s “green” … it’s still energy that could have been put to work making things, moving them around, growing food, heating people’s homes, ad infinitum. Whatever is used for bitcoin mining is not available for those purposes.

Then there’s the immense waste of human time and brainpower. Producing, trading, analyzing, accounting, marketing … all this time and talent is not available for making truly useful things that people need and want. It cures no disease. It produces nothing. It’s nothing but a pure wealth transfer mechanism. Every iota of gain realized by one holder or trader is a loss to someone else. Yet a very expensive one for society as a whole. I’m not about to blame shortages of vital food, energy and other products on the crypto phenomenon alone, but there can be no doubt it’s been a contributor.

The best thing that crypto could do for humanity is crash, burn and disappear into the nothing from whence it came.

14 thoughts on “Cryptocalypse

  1. jk says:

    i’ve come across 1 good use case for bitcoin- the holding or transfer of money in less developed, and especially authoritarian countries. holding dollars in a bank account could result in waking up one morning to discover your dollars have been turned into e.g. argentine pesos. taking money out of such a country can be done by memorizing a code. transfer of funds, such as workers’ remittances to relatives in poor countries require no significant fees, as they would via western union or bank wire.

    i’m not sure these are sufficient to outweigh the craziness, waste and grift, but they are real uses.

  2. Milton Kuo says:

    The utterly despicable cryptocurrency bubble is yet another catastrophe that can be blamed squarely on the Federal Reserve. Without a decade-plus of ZIRP and neverending rounds of QE, it’s possible that such speculation would have never occurred or would not have become as obscenely large. As it is, I suspect that a lot of naive people are going to be financially ruined and it’s possible that even institutional investors will get hurt, which if it gets bad enough could result in a bail-out at the expense of those who fastidiously avoided this scheme.

    An idea that I’ve had about cryptocurrencies is a variant of the idea that it is something created by the government or some other quasi-government institute (such as the Fed). However, rather than being some scheme to entrap people into committing illegal acts, I’ve pondered the possibility that, in the wake of multiple rounds of QE, it is a tool to keep inflation in check by providing a sink for money.

    1. Bill Terrell says:

      Insightful observations, Milton. Central banks have made capital artificially cheap for years, and when something is too cheap it gets wasted. The Austrian school has a name for this: malinvestment. We’re witness to the results now … immense allocation of scarce resources to frivolous projects while basic human needs go unmet. The crypto bubble is one prominent example … we could also cite the proliferation of millions of smartphone apps and interplanetary travel as destinations for excessive deployment of scarce resources.

      Looked at from another angle, reliable, functioning currency has become scarce. Central banks have spent years trying to debase and destroy their own issue. Monetary commodities like gold have been the time-honored alternatives in such times, and that remains the case, but the ease of movement cryptos provide has drawn them into the mix as well. Even looked at charitably though, does that justify the incredible expense society has sunk into literally thousands of species of digital junk? Anyone tempted to think years of artificially low interest rates have been cost free need think again.

  3. shiny! says:

    In addition to jk’s point, bitcoin also makes it possible for small micro-businesses to do direct peer-to-peer transactions across borders for minimal transaction fees, without SWIFT or bankers taking a cut.

    If you think about it, the U.S. dollar consumes a lot more more energy than bitcoin mining. In order to have a U.S. dollar you need a military to defend it, and the military doesn’t run on windmills and solar. Our military consumes more energy than any other entity on the planet. They aren’t deposing leaders, bombing and occupying countries in order to make the world safe for democracy. They’re defending the petrodollar. This is not a slur against our brave servicemen and women. They deserve better.

    And miners are getting very creative with their energy use. As an example, Hut8 is building a facility in Norway that will buy electricity from the grid, collect the heat generated from the mining machines and pipe it to a massive greenhouse close by. That greenhouse will grow fruits and vegetables year ’round that normally can’t be grown in Norway. Instead of burning diesel to grow produce in Spain and transport it to Norway, they’re going to use energy from mining bitcoin to grow fresh food locally.

    Money is units of energy. Bitcoin is just stored energy. I’m not talking about “crypto”. 99.99% of crypto is garbage. I’m just talking about bitcoin.

    1. Finster says:

      Thanks for the counterpoint, Shiny! There’s more than one side to every issue and if we only looked at one on this site, not only would it be less balanced and informative, but it could get really boring! All good points … but in particular I’m skeptical about the “stored energy” one … doesn’t “stored” imply there’s some way of getting it back?

  4. Bill Terrell says:

    We haven’t been talking much about crypto on Financology mostly for the foregoing reasons. And since intrinsic value is zero, there are no fundamentals on which to value it. But with that mind, I think in the coming months we’ll see bitcoin around $10,000.

  5. Chris Coles says:

    All it would need would be the US Treasury to declare a bitcoin value of say $5, and the entire edifice would collapse. Seems to me what one needs is the use of the concept of very low cost money transfer, place to place; without the need for any form of a bitcoin.

    Bill you open about Gold being the time honoured alternative; but again, as was once normal; what would be the result of a declaration by the US of a value for 1 oz of Gold at, say, again, $5 as a way of getting their own back on other nations holding large quantities of Gold, when, (not if), the value of the US$ collapses?

    1. Bill Terrell says:

      First, welcome to Financology, Chris. With the demise of iTulip and Finster’s Comments, it’s great to see our little community survive and thrive.

      Interesting ideas … of course my hope is that the entire edifice collapses on its own. My greater worry is that the government will take action to prop it up … that it’s grown to the point of being deemed “systemically important” and in need of being bailed out. In such a case, it’s nearly certain that it will be used by the financial elite to further enrich itself at the expense of the public at large. The prospect that it might at least shrink to a point well below that threshold is the most encouraging development.

    2. shiny! says:

      Governments can reprice gold if they have it in their vault. They can declare by fiat that an ounce of gold is now worth X amount of their fiat dollars or pounds or pesos or yuan. It’s impossible to do this with bitcoin.

      Bitcoin is a global money that is extraneous to governments. It’s held on an internationally distributed ledger over thousands of nodes spanning many countries. Unlike fiat currencies that have an unlimited supply, bitcoin has a limited supply of 21 million. Timothy Peterson has calculated that 1500 bitcoins are lost each day meaning only 14 million bitcoins will ever circulate.

      Bitcoin’s price is determined by a quaint, old-fashioned, nearly forgotten concept called “free market.” That’s why it’s so volatile, because there’s no Plunge Protection Team and Central Bank to prop it up like they prop up the stock and bond markets.

      Governments have absolutely zero power to decree its worth. They can make it harder to do bitcoin transactions. They can be like China and block internet access to exchanges but they can’t stop peer-to-peer transactions or decree its price.

      Central banks raise interest rates leading to margin calls that cause overleveraged investors to sell. There’s been way too much leverage in bitcoin and crypto just like there’s way too much leverage in the stock markets and the housing markets. Perhaps reforms should be focused on limiting leverage rather than the asset.

      All government-issued fiat currencies are subject to debasement, inflation and outright confiscation (bail-ins). For people who live in countries such as Zimbabwe, Argentina and Venezuela, bitcoin is a godsend. For refugees fleeing their countries with the clothes on their backs, bitcoin is a godsend. This is why “19 out of 20 of the leading countries in the Chainalysis Crypto Adoption Index are developing countries. In general, people in these countries deal with lower levels of property rights, lower levels of financial freedom, and higher levels of currency inflation” than we do. (H/T to Lyn Alden for that stat)

      Most people in the prosperous West have never experienced economic collapse and war so they don’t understand the appeal of a money that is outside government control and has a finite supply that cannot be subjected to inflation (but they’re about to).

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