Home > Uncategorized > Making merry on Bitcoin

Making merry on Bitcoin

from C.P. Chandrasekhar

Bitcoin has left the world of finance gasping. Though the total market value of all of that cryptocurrency in circulation is only a fraction of the value of the world’s financial assets, the rapid rise in the value of the currency has made it the most wanted of those assets. On January 1, 2017, the currency was trading at between $972 to $990 a unit. By December 7 that range had risen to $14,063 to $17,363. According to a calculation by Reuters, an investment of $1000 in bitcoins at the beginning of 2013 would be worth around $1.2 million now. Sensing the opportunity this offers by serving as a platform for speculation, the Chicago Board Options Exchange and Chicago Mercantile Exchange launched bitcoin futures on December 10, with the contracts opening at $15,460 a unit and rising more than 20 per cent to $18,700, before shedding some of those initial gains. With these developments, a shadowy currency with a still elusive originator named Satoshi Nakamoto, moved to centre stage in financial markets.

Launched in 2009, the role of bitcoin has always been in question. What its advocates regard as its strength, decentralised management by a community that can ensure integrity through verification of transactions over a ‘public’, peer-to-peer network, many of its critiques see as its weakness, because of the absence of an issuing authority in the form of a central bank and the backing of a state. Moreover, while there are a few establishments that accept bitcoin payments, the currency is still nowhere a ubiquitous means of payment in day-to-day exchange and commodity circulation. At the end of 2013 researchers from the University of San Diego and George Mason University had estimated that 64 percent of the 12 million bitcoins that had been mined till then had not been used in an exchange transaction.  

One advantage the currency has is that transactions involving movements of large volumes of money across space and borders can be conducted without revealing the actual persona of the transactor. Not surprisingly, criminals of various kinds have been using the currency to anonymously transfer funds. For example, demand for bitcoins initially rose because drug dealers were making payments with the currency on the Silk Road website. Since then there have been many reports about the links between illegal activities and the bitcoin market. A high profile example is Alexander Vinnik, arrested in Greece in July this year. He is accused by the US Ministry of Justice of laundering more than $4 billion derived from activities suspected to be illegal, using the bitcoin exchange BTC-e he is alleged to have been running.

Besides transactors of this kind, most miners or buyers of bitcoins are looking to gain from appreciation in its value as the currency is adopted. If indeed the currency gets to be widely adopted its price is bound to rise, since there are limits set on the volume of bitcoins that can be put into circulation. Bitcoins are “mined” by interested players by solving complex mathematical puzzles which requires combining guesses with running algorithms. Each step creates a block of transactions, linked or chained to the puzzle in the previous block—hence the term “blockchain”. When the puzzle is solved the miner is rewarded with an allocation of bitcoins.

However, the process of generating new bitcoins is planned and the total volume to be generated is to be capped. The cap is 21 million bitcoins, and the pace of generation would be adjusted downwards so that the cap would be reached only in 2140. As of now around 16.7 million bitcoins have been released. Since it is a store of value, there is no reason why anybody “earning” bitcoins by sale of a good or service need immediately spend that money. So as GDP increases and the volume of transactions expands, the volume of currency in circulation must increase. The fact that this is not expected to happen with bitcoin implies that its creators assume that a combination of increase in value and the easy “divisibility” of a digital currency would solve the problem. A bitcoin is divisible to eight decimal places, with the Satoshi being equivalent to one hundred-millionth of a bitcoin.

So, the fact that there is only a limited amount of the cryptocurrency that is available indicates that if demand for the currency increases for some reason, such as it being an alternative store of value to money and financial assets of various degrees of liquidity, then its price determined by auctions in bitcoin exchanges would rise to accommodate the value being demanded. When the value of the currency appreciates, investors looking for capital gains would join the game, and prices can spiral.

Interestingly bitcoins were launched at the time of the global financial crisis in 2008-09, when the value of most financial assets and even of others like real estate had fallen sharply. Simultaneously, central banks in the US, UK and subsequently Europe, resorted to a policy of quantitative easing to save banks and financial firms. This involved buying up financial assets to inject large volumes of cheap liquidity into the system. Starting 2008 the US Federal Reserve has bought bonds worth around $4 trillion. The Bank of England, Bank of Japan and the European Central Bank followed. All told, six central banks that opted for this policy hold four times as much assets on their balance sheets as they did before the crisis.

With interest rates too at long term lows, this liquidity has found its way into speculative investments in asset markets, resulting in asset price inflation that has been troubling institutions like the Bank of International Settlements. In a speculative environment like this, financial institutions fearing that traditional markets are saturated are always looking for alternative assets. Even an asset like gold, the price of which rose sharply over the decade starting 2001 is losing its sheen in recent years.

In itself there was no reason to expect that bitcoin would emerge as an alternative asset, since there were nothing endowing it with value other than the state of demand relative to the limited quantity being put into the market. So long as that demand was restricted to those from the “bitcoin community” the virtual currency had little value in terms of real currency. Moreover, safety is by no means ensured. According to reports more than 980,000 bitcoins have been stolen from exchanges, a stark example being the hack of mining exchange NiceHash in early Decembr 2017, through which around 4,700 bitcoins worth around $70 million were stolen and transferred to one mystery account. Despite such developments, over time, small increases in demand were enough to keep bitcoin prices rising. Those price increases attracted new investors, and in keeping with the tendency to run with the herd typical of financial investors, demand soared and so did prices.

In the event, bitcoin has become the much-discussed, or even most-discussed, of all new assets in the market. That is surprising given the size of the bitcoin business. According to estimates, despite the spike in price, the total value of the bitcoin “market” is around $270-280 billion, which is a fraction of that of traditional financial assets. Moreover, the bitcoin shortage means that if investors hold on to the available currency in the hope that prices would rise further, trading in the market would be limited. It is the recognition of this that is triggering the launch of bitcoin based securities so that there is more space for speculative bets to be placed, especially by new investors.

To spur the futures markets, interested “analysts” are predicting that the value of the currency could touch $50,000 or even $100,000 a piece. This frenzy says more about the financial markets these days than it does about bitcoin. Commentators from Nobel Prize winners in Economics to so-called financial market leaders have describe the goings on as a bubble. Yet the cryptocurrency has become an instrument for an industry that remains drunk on speculative profits, despite the 2008 financial crisis. Whether this was planned or is accidental is, however, not clear.

(This article was originally published in the Frontline Print edition: January 5, 2018)

  1. culturalanalysis.net
    January 4, 2018 at 9:39 pm

    Big finance and members of the FED are quietly increasing their control of the crypto exchanges and of Bitcoin itself, via investment in Blockstream for example. IRS has recently won a court order to obtain access to user identification via Coinbase Exchange. Several countries are also beginning to regulate and de-anonymise crypto currencies. I have summarised the latest developments of this kind here: http://culturalanalysis.net/2017/12/15/bitcoin-de-anonymisation-and-the-block-chaingang/

  2. Paul Davidson
    January 4, 2018 at 10:15 pm

    Bitcom is NOT money. As Keynes noted in his TREATISE ON MONEY, the State write the dictionary as to defining what is money! Since in a money market economy, all markets for goods and services are legally determined and organized by the use of monetary denominated contracts. And the State’s LEGAL civil law of contracts therefore determines what is the money that can be used to discharge any contractual obligation..

    Like gold, silver, diamonds, and even used postage stamps (for stamp collectors) Bitcoin can be sold fo r money in an organized resale market. But likegold, silver,, or even used postage stamps, one can not legally discharge a contract by tending these it e

  3. January 4, 2018 at 10:49 pm

    Bitcoin is now in competition with some 1500 other alternative cryptocurrencies all bidding for speculators’ fiat money . Ripple , issued by Goldman Sachs is moving up , along with other competitors listed on Coinbase. Bitcoin miners waste as much fossil energy annually as countries the size of Ireland ( 30 terawatts,!) as well as computer power ,as I describe in
    ” Hey COP23 : Bitcoin Miners’ CO2 Emissions Exploding ! ” at http://www.ethicalmarkets.com Meanwhile, financial media reporting on the battle between cryptos and fiats show fake pictures of shiny coins , which are non-existent , since all these crypto currencies are just strings of numbers in computers.

  4. Risk Analyst
    January 4, 2018 at 10:58 pm

    I know someone making money in this and other similar cryptocurrencies. His explanation to me is that if someone were to regularly invest in Lotto they would lose perhaps two thousand dollars a year, so why not “invest” in these cryptocurrency things instead. So for him, it is not a money substitute so much as a lottery substitute with much better odds.

    • Rob Reno
      January 4, 2018 at 11:37 pm

      I think that explains a lot. Thanks.

      • Risk Analyst
        January 5, 2018 at 12:03 am

        And thank you for the reference to Evolution in Four Dimensions in a discussion elsewhere.

      • Rob Reno
        January 5, 2018 at 12:47 am

        My pleasure. Great book, got one for each of my daughters.

  5. January 5, 2018 at 12:47 pm

    What happens when all the wealth of the world, whether in fiat money or cryptocurrency, is held by the 1%?

  6. Philippe Frémeaux
    January 7, 2018 at 11:41 am

    Il anyone can read french in your organisation, as far as you’ve been interested by the former french election, i just present you my new book, Après Macron (After Macron).

    Philippe Frémeaux

    Columnist and former Editor

    Alternatives Economiques

    Je me permets de vous signaler la sortie de mon nouveau livre – Après Macron – qui vient d’être publié aux éditions Les Petits matins (110 pages, 7,50 euros). L’idée de ce livre m’est venue au soir des élections présidentielles et législatives, en réfléchissant aux raisons qui avaient conduit au succès d’Emmanuel Macron, et aux interrogations que suscitait cette réussite notamment sur le plan de sa capacité à être une réponse efficace à la montée du populisme d’extrême-droite qu’il s’incarne dans le FN ou dans une droite radicalisée.

    Mon objectif, en écrivant ce livre, n’a donc pas d’abord été de critiquer les politiques conduites aujourd’hui mais de comprendre de quoi l’élection d’Emmanuel Macron est l’aboutissement afin de nourrir le débat au sein de la gauche. Les trois premiers chapitres sont ainsi consacrés à faire un bilan des politiques conduites depuis 1981 par la gauche, de François Mitterrand à François Hollande en passant par Lionel Jospin, revenant sur leurs échecs, leurs réussites, et surtout leurs non-dits, notamment en termes de politique économique, de politique d’emploi et de choix européens. Je m’interroge ensuite sur les transformations de la société française et sur les nouveaux enjeux qui ont émergé, afin d’analyser les raisons qui expliquent l’affaiblissement de la division entre gauche et droite au profit d’autres divisions. Tout cela afin donc de comprendre les raisons du succès d’Emmanuel Macron, mais aussi de commencer à réfléchir à ce que pourrait être une gauche qui tirerait les leçons du passé et serait « en même temps » réformiste et radicale, écologique et sociale, démocrate et européenne (sans mésestimer la nécessaire refondation de l’UE). Afin de réussir l’après Macron.

    De fait, l’élection d’Emmanuel Macron n’a pas seulement été due à un incroyable concours de circonstances. Elle couronne aussi l’évolution politique des trente dernières années en officialisant l’union de la gauche réaliste et de la droite modérée avec cette promesse de garder le meilleur des deux. Macron, à l’entendre, c’est la réussite individuelle et la justice sociale. La fin de l’ISF et de la taxe d’habitation. La relance de la croissance et la transition écologique. Une France où les riches seront plus riches et les pauvres moins pauvres. Une France qui n’aura plus peur de la mondialisation et cessera de voir une menace dans une construction européenne relancée.

    La promesse se heurte désormais à la réalité de l’exercice du pouvoir. Dossier après dossier, sujet après sujet, les arbitrages rendus penchent (presque) tous du même côté, au point qu’on peut douter que notre nouveau président parvienne à tenir sa promesse d’une modernisation inclusive, qui profiterait à tous au-delà des seuls « gagnants ». Quant à sa pratique du pouvoir, si elle répond certes à la demande d’autorité qui s’exprime, elle n’est pas de nature à nous sortir de la crise démocratique que connait le pays.

    Le risque est donc bien de voir grossir à nouveau le ressentiment qui fait le lit du Front national au-delà de l’affaiblissement actuel de sa cheffe.

    Face à cette situation, s’il est urgent de reconstruire la gauche, ce n’est pas pour tourner le film à l’envers. Pour autant, si le clivage droite-gauche a été affaibli par de multiples raisons que je m’efforce d’analyser, il demeure pertinent à mes yeux même s’il faut renouveler la promesse portée par la gauche si l’on veut redonner de l’espoir aux classes populaires et rallier les classes moyennes séduites par Macron. Pourquoi l’idée de gauche demeure pertinente ? Parce qu’elle porte une conception de la liberté et de l’égalité qui n’est pas celle d’Emmanuel Macron. Lui met en avant la liberté d’entreprendre alliée à une pseudo égalité des chances qui permettrait à chacun, s’il en a le talent, de devenir millionnaire. On peut tout à fait considérer que la liberté d’entreprendre est une excellente chose. On doit se féliciter de l’autonomie croissante des individus et de l’émancipation qu’elle apporte, tout particulièrement pour les femmes. Mais être lucide sur les limites objectives à la capacité d’une la plus grande partie de nos concitoyens à être les entrepreneurs de leur vie au vu des des conditions d’accès à l’éducation, au logement, aux soins, à l’emploi, au revenu, au pouvoir d’agir, qui sont les leurs. Or, je doute que les politiques actuelles soient de nature à les faire réellement progresser au-delà des intentions affichées. Plus au fond, la gauche doit porter une autre conception de la « bonne société » qui repose sur l’idée que toute action qui concourt à l’égalité de tous étend la liberté de chacun.

    Après Macron a donc d’abord pour but de faire réfléchir sur le passé de la gauche et de redonner espoir à ceux qui aujourd’hui ne se résignent pas à voir leurs idéaux jetés à la poubelle. Il y a eu un avant-Macron, il y aura un après-Macron ! La base sociale de sa majorité est étroite au-delà de ce que nous indiquent des sondages de popularité par nature fluctuants. Une autre majorité politique pourrait tout à fait se dégager demain autour d’une vision porteuse d’une nouvelle conception du progrès, libérée du vieux logiciel social-démocrate productiviste, loin de celle portée par Emmanuel Macron, qui plonge ses racines dans le 19ème siècle. Sortir par le haut de la quadruple crise économique, sociale, écologique et démocratique dans laquelle notre pays est englué appelle une toute autre politique.

  7. January 7, 2018 at 1:18 pm

    Such “panics” as Tulips, Mississippi and South Sea, and Bitcoin underline the madness of modern capitalism. Generally unnecessary things like Tulips and cryptocurrencies are priced due to speculation so that few can afford to purchase them. These things thus have little societal value, but still often dominate and even ruin economies upon which millions of members of society depend. Thus, leading to more poverty, dysfunctional economies, and bad public policy. But a select few gain great wealth. Like racism, panic items provide no benefits to societal welfare.

    • Rob Reno
      January 7, 2018 at 1:40 pm

      Totally agree Ken.

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