On crypto-currencies

The future is already here – it’s just not evenly distributed.

William Gibson, The Economist, 4/12/2003

The crypto-currency thing has been going for a while now, but this post has been precipitated by the recent story that the government of El Salvador has expressed the desire to adopt Bitcoin as legal tender. Leaving aside the question of whether of not this would be a good move for El Salvador – spoiler alert: nope – it raises the issue of whether crypto-currencies are a good bet in general. Can they ever hope to function as actual money?

I’m not here going to rail against their spectacular volatility, which calls into question their utility as a store of value. It could be argued that this will smooth out over time, and indeed I agree, in that I expect their value to stabilise at zero. I’m not even going to complain about how cumbersome most of them are as a medium of exchange. If El Salvador does adopt Bitcoin as legal tender, I guess it would meet David Graeber’s loose definition of money as that which is accepted as payment of taxes. On the other hand, there’s something to be said for the attitude of Roosta in The Hitchhiker’s Guide to the Galaxy: “If you can’t scratch a window with it, I don’t accept it.”

My issue is more with the physical realities underpinning all crypto-currencies. They appear to rely on a strange perversion of Marx’s theory of value: crypto entities have value, not because of the labour that went into them, but because of the computational effort required to create them. There are issues with Marx’s theory, of course, but I don’t need to debate those here, because there is a more fundamental issue at play.

The photo at the head of this post depicts an electricity substation. Now you may well have grown up with the vague notion that electricity is something that naturally seeps out of wall-sockets, but this is not so. Human agency puts it there, and is required to keep it there. There is a huge infrastructure, mostly invisible to us, that generates the electricity – whether by means of coal, natural gas, nuclear, or renewables, each of which entails its own vast infrastructure that has to be maintained and sustained, using finite resources – and distributes it. That infrastructure itself has to be maintained and sustained, also using finite resources.

I am not suggesting that some or all of this might go away at some point in the future. I am stating baldly that it will go away, and has already started going away. Californians already know this. Many people in Louisiana will also have noticed this fact, I imagine. Now that can be dismissed as a temporary blip, just like the current shortage of computer chips is a temporary blip, and the shortage of transportation to get the computer chips to where they’re needed is a temporary blip. The occupation of North Africa by the Vandals was doubtless seen as a temporary blip by the officials of the Western Roman Empire, until it wasn’t, and the empire fell. In the long run – and that may not be as long as you think – it’s gone. Kiss it goodbye.

Even if the chips were available to build the necessary computing resources to support crypto-currencies, those resources will be useless without electricity. And I am talking here about reliable, clean electricity, available every hour of the day, every day of the year. (I could also talk about the price of that electricity, but I’m in a generous mood today.) The whole point of crypto-currencies is that the calculations which underlie them cannot be performed in a reasonable time other than by the use of a computer. Without computers, what would you have?

It could be argued that you’d have another fiat currency, just like all the others in general circulation. That is to say, it would have value because people generally believe that it did. But why would it be more credible than any of the others? Is the possible endorsement of a temporarily (or permanently) dead computer network more valuable than the endorsement of, say, the government of the USA? Admittedly, there are people still trying to cash in things like this, more than a century since the demise of Nicholas II:

A bond issued by the Tsarist government of Russia to finance the railway system. Good luck!

But I’m not sure people are going to accord much value to a digital entity when the digital world goes away, as it inevitably must.

Incidentally, I’m also not arguing here that currencies backed by a precious metal are any improvement on this. Gold and silver, shiny though they may be, don’t seem to me to possess any magic “intrinsic” value – the Inca, for example, seem to have been fairly nonchalant about both. There is ultimately a strong flavour of the fiat about all currencies. I don’t, however, assume that all fiat currencies are equally plausible. If I offer you a piece of plastic, paper, or metal in payment for a good or service, I depend on your accepting it. I wouldn’t expect to use a Costa Coffee loyalty card to fuel my car.

Without reliable, clean electricity, available every hour of the day, every day of the year, I’m not even sure a Bitcoin owner would have something as substantial as a Costa Coffee loyalty card to offer in payment. It’s certainly not something I would be comfortable relying on when things get rough, and you don’t need to be Nostradamus these days to expect things to get pretty rough indeed, and sooner than any of us would like.

I must say that I have some sympathy behind the wish to develop an alternative currency safe from the manipulation of banks and governments. I just don’t think crypto-currencies meet that requirement. The answer, it seems to me, is to invest in real value: actual physical goods and services that people need, or at least really, really want. I discussed this in more detail in my post on wealth, but that is what it boils down to.

Obviously I am not a qualified financial adviser, whatever that might imply, and in any case I assume that readers of this blog are perfectly capable of making up their own minds. My advice is worth no more than what you pay for it, and maybe less. All I will say is this: if I had any money invested in crypto-currencies, I would get it out now, if not sooner. I might be getting out less than what I put in, but I should get something, at least. And wisdom is cheaply bought at any price.

Comments are welcome, but I do pre-moderate them to make sure they comply with the house rules.

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