Taylor C. Noakes
Fearing the crypto bubble mostly depends on whether you’ve drank the proverbial Kool-Aid: crypto needs people to believe in it for it to work. Whether the bursting of the imaginary currency bubble affects those who were smart enough to avoid this get-rich-quick-scheme remains to be seen.
If previous cases of widespread unregulated investor speculation are any indication, though the profits are private and benefit a few, the losses will be great and absorbed by the public at large.
Eswar Prasad, the Tolani senior professor of International Trade Policy at Cornell University, has stated that Bitcoin investors “seem to be relying on the greater fool theory” wherein all that’s needed for investors to profit is to find someone else willing to buy a given asset at a greater price.
Journalist and digital currency analyst David Gerard is less courteous, arguing that the only people who will make money on cryptocurrencies are those who are “better sharks than all the sharks who built the shark tank.”
The current mania surrounding digital currencies (and the even more absurd world of nonfungible tokens — NFTs) is a perfect fit for this particular stage of terminal capitalism. Declining living standards, out-of-control housing costs, and global instability brought about by the triple threat of the pandemic, the climate catastrophe, and the unravelling of the American Empire have, perhaps understandably, led to declining levels of faith in both government and financial institutions.
It should come as no surprise that Bitcoin was not only launched during the Great Recession, but actually includes a line of code referring to the Jan. 3, 2009 headline of The London Times: “Chancellor on brink of second bailout for banks.”
The possibility of a currency and economic system that could continue to operate normally and unaffected by the poor choices of speculators (or their enablers in government) is certainly alluring, but a crucial flaw of cryptocurrencies is that their values are driven by speculation.
Conservative party leadership candidate Pierre Poilievre wants to use cryptocurrencies as a means of decentralizing the Canadian economy and reducing the influence of central bankers, unironically arguing that the road to a stronger national economy is paved in deregulation and currency speculation.
It very clearly isn’t: nearly every major economic catastrophe of the neo-liberal age — including the Great Recession — has been caused by deregulation and speculation. If economic stability is the goal, we would be much better off appointing a Marxist economist to run the Bank of Canada than going all-in on resource-intensive imagination money whose value can disappear entirely with a forgotten password.
Crypto boosters like Poilievre would like you to believe that digital currencies are no different than any other fiat currency (and for good reason too — their investments are dependent on maintaining the illusion), but whereas the value of the Canadian dollar might not be backed by gold or silver, it is backed by the economic, political and societal stability of the nation, as well as its use by 38 million Canadians who make about 30 million daily transactions with it.
Unlike cryptocurrencies, the Canadian dollar has never lost 10 per cent of its value in a day, or 30 per cent of its value in four months. Unlike Dogecoin, the Loonie’s value isn’t linked to what some Silicon Valley billionaire said on social media.
Getting a straight answer as to whether the cryptocurrency bubble will burst is difficult for two reasons. First, those speculating on its growth are disincentivized from critically analyzing their investments. Second, the failure of business journalists to notice potentially debilitating trends and fads (such as the subprime mortgage crisis) is so well known it is now a matter of academic study.
The problem is now much greater than mainstream media’s lack of aggressive investigation, but rather of its own ideologically driven support for that which deserves scrutiny. It is small comfort that the public reaction to the National Post’s limited edition “Invisible Hand Society” NFT auction was apparently so negative the paper cancelled the auction and scrubbed any mention of it from the internet.
Though the likely collapse of crypto is indeed a concern, it isn’t the collapse itself that is most concerning, but of the likelihood that the generalized economic disruption will be absorbed by the public who, once again, will have to subsidize the losses of those who gambled on get rich quick schemes.
Since the start of the pandemic, house prices in Canada are up 50 per cent, most essential construction materials are up a staggering 20 to 50 per cent, and gas is at an all-time high. At the same time, the stock market has boomed, property moguls are drowning in profit and anyone who has invested in the commodity markets is enjoying a similar windfall.
This is credited to the devaluation of the dollar and most of the world’s currencies, a process accelerated by COVID-19.
This inflation is essentially the process of transferring wealth from ordinary people to asset owners via a stealth tax. And it’s getting worse. So, what can be done?
The Bitcoin Network supports a global, rules-based monetary system, and houses its native asset BTC on a distributed ledger. A worldwide network of computers keeps a copy of the ledger listing every Bitcoin transaction that has ever happened. This ledger is resistant to alteration, is permanent, and cannot be controlled by any individual party.
Bitcoin is accessible to anyone with an internet connection and is not controlled by any central authority. Nor can it suffer inflation. Its supply is hard-capped at 21 million, which means that no matter how high demand gets, the supply can’t be altered. Unlike fiat dollars, it cannot be devalued by government policy.
Bitcoin’s critics are usually people who are insulated from the reality of rising prices and eroding civil liberties. They can’t see Bitcoin’s value, so they claim it is a Ponzi scheme. But for those of us who are being paid in the financial equivalent of a melting ice cube, the value of an inflation-proof asset is clear.
Take Warren Buffett, the most famous investor in the world. In 2018, he called Bitcoin “rat poison squared.” Well, two of his top three holdings are financial service companies that stand to lose lucrative transaction fees if Bitcoin gains acceptance. Hmm.
Ire Aderinokun, a Nigerian entrepreneur quoted in CoinDesk, admitted that Bitcoin isn’t perfect but “takes issue with Western elites saying there is no upside, or that it is a Ponzi scheme, or that it is just for fun.”
“They do not understand,” she said, “how important Bitcoin is for those who cannot get dollars. Billions [of people] are trapped in a flawed currency that does not fulfil the purpose of what currency is supposed to do.”
When Ether (ETH), the second-largest cryptocurrency by market cap that lives on the Ethereum Network, launched in 2014 at $0.33 per coin, it was open to anyone. Today, the price is over $3,800. This is the ethos behind crypto: equal financial opportunities for all.
But still, critics say, we must protect the plebs from dangerous investments like Bitcoin. After all, Bitcoin doesn’t produce any revenue so every dollar earned has come from someone else buying in at a more expensive price. See? It’s just a massive Ponzi scheme.
Wrong. Bitcoin doesn’t earn revenue because it’s not a business; it doesn’t have shareholders or a CEO. It’s a digital asset similar to gold insofar as it takes energy and expertise to “mine” and can be used as a store of value. It’s not a competitor to the dollar; it’s a digital commodity.
If you want a crypto project that makes money, look at Ethereum. It is essentially a business that sells space on its blockchain. Users paid more than $10B last year for this service.
But what about the criminals? Doesn’t crypto make it easier for them? Actually, it’s very difficult to launder Bitcoin given that every transaction is recorded on a public ledger.
Despite pointing out the major flaws in the current financial system, I’m not arguing that it should be replaced with Bitcoin. I’m not even arguing that Bitcoin is a good investment for everyone.
What I’m arguing for is our right to decide what we invest our money in. With Bitcoin and the rest of crypto, we have a historic opportunity to own a piece of a brand new asset class and we should be the ones to decide how to play.
Oh, and remember Warren Buffett who called Bitcoin rat poison in 2018? This year his company Berkshire Hathaway invested in Nubank, a crypto-friendly bank based in Brazil that helps customers invest in Bitcoin. Nice.
Read More: Opinion | The Saturday Debate: Should we fear the crypto bubble bursting?