Blockchains and the crypto craze

The cryptocurrency craze seems to have taken a dive in recent weeks since the Chinese authorities clamped down on speculation in the bitcoin market. The history of financial markets is littered with asset price bubbles, from tulips in the early-1600s to more recent examples, such as internet stocks in the late-1990s and US house prices before 2008. This looks like another.  The ascent of the virtual currency bitcoin, which recently neared $5,000 and has risen about 350% this year, has now turned round, dropping back to $3000, if still hugely above its initial start.  But it may be heading for a reckoning now.

Bitcoin aims at reducing transaction costs in internet payments and completely eliminating the need for financial intermediaries ie banks. But so far its main use has been for speculation. So is bitcoin, the digital currency that operates on the internet, just a speculative scam, another Ponzi-scheme, or is there more to the rise of all these cryptocurrencies, as they are called?

Money in modern capitalism is no longer just a commodity like gold but instead is a ‘fiat currency’, either in coin or notes, or now mostly in credits in banks.  Such fiat currencies are accepted because they are printed and backed by governments and central banks and subject to regulation and ‘fiat’.  The vast majority of fiat money is no longer in coin or notes but in deposits or claims on banks. In the UK, notes and coin are just 2.1% of the £2.2 trillion total money supply.

The driver of bitcoin and other rival crypto currencies has been the internet and growth of internet-based trading and transactions.  The internet has generated a requirement for low-cost, anonymous and rapidly verifiable transactions to be used for online barter and fast settling money has emerged as a consequence.

Cryptocurrencies aim to eliminate the need for financial intermediaries by offering direct peer-to-peer (P2P) online payments. The main technological innovation behind cryptocurrencies has been the blockchain, a ‘ledger’ containing all transactions for every single unit of currency. It differs from existing (physical or digital) ledgers in that it is decentralized, i.e., there is no central authority verifying the validity of transactions. Instead, it employs verification based on cryptographic proof, where various members of the network verify “blocks” of transactions approximately every 10 minutes. The incentive for this is compensation in the form of newly “minted” cryptocurrency for the first member to provide the verification.

By far the most widely known cryptocurrency is bitcoin, conceived by an anonymous and mysterious programmer Satoshi Nakamoto just nine years ago.  Bitcoin is not localized to a particular region or country, nor is it intended for use in a particular virtual economy. Because of its decentralized nature, its circulation is largely beyond the reach of direct regulation or monetary policy and oversight that has traditionally been enforced in some manner with localized private monies and e-money.

The blockchain’s main innovation is a public transaction record of integrity without central authority. Blockchain technology offers everyone the opportunity to participate in secure contracts over time, but without being able to avoid a record of what was agreed at that time.  So a blockchain is a transaction database based on a mutual distributed cryptographic ledger shared among all in a system. Fraud is prevented through block validation. The blockchain does not require a central authority or trusted third party to coordinate interactions or validate transactions. A full copy of the blockchain contains every transaction ever executed, making information on the value belonging to every active address (account) accessible at any point in history.

Now for technology enthusiasts and also for those who want to build a world out of the control of state machines and regulatory authorities, this all sounds exciting.  Maybe communities and people can make transactions without the diktats of corrupt governments and control their incomes and wealth away from the authorities – it might even be the embryo of a post-capitalist world without states.

But is this new technology of blockchains and cryptocurrencies really going to offer such a utopian new world?  Like any technology it depends on whether it reduces labour time and raises the productivity of things and services (use values) or, under capitalism, whether it will be another weapon for increasing value and surplus-value.  Can technology in of itself, even a technology that apparently is outside the control of any company or government, really break people free from the law of value?

I think not.  For a start, bitcoin is limited to people with internet connections. That means billions are excluded from the process, even though mobile banking has grown in the villages and towns of ‘emerging economies’.  So far it is almost impossible to buy anything much with bitcoin.  Globally, bitcoin transactions are at about three per second compared to Visa credit at 9000 a second.  And setting up a ‘wallet’ to conduct transactions in bitcoin on the internet is still a difficult procedure.

More decisively, the question is whether bitcoin actually meets the criteria for money in modern economies.  Money serves three functions under capitalism, where things and services are produced as commodities to sell on a market.  Money has to be accepted as a medium of exchange. It must be a unit of account with a fair degree of stability so that we can compare the costs of goods and services over time and between merchants. And it should also be a store of value that stays reasonably stable over time.  If hyperinflation or spiralling deflation sets in, then a national currency soon loses its role as ‘trust’ in the currency disappears.  There are many examples in history of a national currency being replaced by another or by gold (even cigarettes) when ‘trust’ in its stability is lost.

The issue of trust is brought to a head with bitcoin as it relies on “miners”, or members that contribute computational power to solve a complex cryptographic problem and verify the transactions that have occurred over a short period of time (10 minutes). These transactions are then published as a block, and the miner who had first published the proof receives a reward (currently 25 bitcoins). The maximum block size is 1MB, which corresponds to approximately seven transactions per second. In order to ensure that blocks are published approximately every 10 minutes, the network automatically adjusts the difficulty of the cryptographic problem to be solved.

Bitcoin mining requires specialized equipment, as well as substantial electricity costs and miners thus have to balance their technology and energy investment.  That means increasingly bitcoin could only work as alternative replacement global currency if miners became large operations.  And that means large companies down the road, ones in the hands of capitalist entities, who may well eventually be able to control the bitcoin market.  Also if bitcoin were to become as viable tender to pay tax to government, it would then require some form of price relationship with the existing fiat money supply.  So governments will still be there.

Indeed, the most startling obstacle to bitcoin or any other cryptocurrency taking over is the energy consumption involved.  Bitcoin mining is already consuming energy for computer power more than the annual consumption of Ireland.  Temperatures near computer miner centres have rocketed.  Maybe this heat could be ecologically used but the non-profitability of such energy recycling may well ‘block’ such blockchain expansion.

Capitalism is not ignoring blockchain technology.  Indeed, like every other innovation, it seeks to bring it under its control.  Mutual distributed ledgers (MDLs) in blockchain technology provide an electronic public transaction record of integrity without central ownership. The ability to have a globally available, verifiable and untamperable source of data provides anyone wishing to provide trusted third-party services, i.e., most financial services firms, the ability to do so cheaply and robustly.  Indeed, that is the road that large banks and other financial institutions are going for.  They are much more interested in developing blockchain technology to save costs and control internet transactions.

As one critic of blockchain points out: “First, we’re not convinced blockchain can ever be successfully delinked from a coupon or token pay-off component without compromising the security of the system. Second, we’re not convinced the economics of blockchain work out for anything but a few high-intensity use cases. Third, blockchain is always going to be more expensive than a central clearer because a multiple of agents have to do the processing job rather than just one, which makes it a premium clearing service — especially if delinked from an equity coupon — not a cheaper one.”  Kaminska, I., 2015, “On the potential of closed system blockchains,” FT Alphaville.

All this suggests that blockchain technology will be incorporated into the drive for value not need if it becomes widely applied.  Cryptocurrencies will become part of cryptofinance, not the medium of a new world of free and autonomous transactions. More probably, bitcoin and other cryptocurrencies will remain on the micro-periphery of the spectrum of digital moneys, just as Esperanto has done as a universal global language against the might of imperialist English, Spanish and Chinese.

But the crypto craze may well continue for a while longer, along with the spiralling international stock and bond markets globally, as capital searches for higher returns from financial speculation.

21 thoughts on “Blockchains and the crypto craze

  1. In the 11th paragraph, the word “be” seems to be missing from this sentence: “It must a unit of account with a fair degree of stability so that we can compare…”

  2. Thanks for touching the subject of disruptive technology in the monetary system and it’s effects in the Economy. While I support your conclusion that Bitcoin is a perfect tool for financial speculation, let me just point out a couple of things:

    1. In your analysis you talk indistintly about Bitcoin and other Blockchain based currencies. From a monetary and economic point of view, Bitcoin is quite different from the rest. The deflationary nature and the exorbitant energy consumption of money creation has to be attributed to Bitcoin. Most other currencies based in Blockchain technology don’t have a predetermined maximum amount of units, as Bitcoin is programmed to have, and don’t spend the huge amount of energy Bitcoin requires for money creation (called “mining” by their users).

    2. Let me bring to your attention other currency currency systems based on Blockchain aiming to create new ways to manage credit risk for monetary creation based on P2P trust as a way to create interest-free collaborative finance systems. For instance Trustlines, which follow the original Ripple idea, or my own proposal “Trust capital” ( or in English (

    3. Bitcoin has been an invaluable tool for people like me to draw the attention on the fact that the monetary system can be changed, so even if it is not a good monetary system, it is good it exists, as before Bitcoin the possiblity to change the financial and monetary system was not in the agenda in the least.

    1. I also have a monetary system proposal but let me point you to one important crossroad to all these proposals.

      The majority of the p2p movement tries to change Capitalism by building alternative economic systems inside it. They either reject politics or try to influence the ruling party.

      The revolutionary left tries to have the people democratically decide to (and) overthrow Capitalism, ie it is using politics, not economics.
      Any proposals for new monetary systems could take part in this political struggle by inspiring people that there exists a better world. It could also take part in organizing Society when the revolution has broken the previous social relations and new ones need to be created as soon as possible.

      I hope you make the correct choice.

      1. Have you looked at Faircoin?

        FairCoin is an innovative decentralized virtual currency platform that seeks to act as a global means of exchange. It seeks to create the most stable, global and incorruptible digital currency. The value of this currency is determined by its community and cannot be devalued. The project has initiated a fair distribution of wealth within the community. It is also the most ecological and resilient cryptocurrency platform. FAIR coin utilizes Proof-of-Cooperation (PoC) consensus mechanism and its t premined. This mechanism is unique as it requires less energy as compared to other blockchains, enables super-fast transactions and is ecological and resilient.

      2. Why would that “choice” be made by an individual? Blockchain technology per se won’t change anything, true. It will be part of the technological environment going forward, and it will be up to post-capitalist governments to use it or not based strictly on technical merits, will it not?

  3. I appreciate that you are bringing up this topic, Mr. Roberts. However, I can’t help but feel that your analysis of bitcoin so far has been on a superficial level.

    Pointing to a recent price increase by itself as evidence of a speculative bubble is insufficient. If bitcoin’s recent price increase were the result of an increase in its price of production, then there would be nothing speculative about it at all. In this case, the new price plateau would be a sustainable one.

    For example, imagine that the price of bread suddenly went up 1000%, but only because its cost of production—and thus its price of production (assuming a constant rate of profit)—had likewise increased by 1000%. In that case, the new price of bread would be a sustainable one over the long-term, even if people were unaccustomed to paying it initially. It would NOT be a speculative bubble.

    Even if people might choose to forego bread at this new price and drive the price back down due to a temporary oversupply of the bread at the new price of production, this would only be a temporary phenomenon. This drop in bread’s market price to its old levels would no longer be sustainable because, with the price of production being higher now, bread production would be making below-average profits (or even outright losses). Bread production would cease, and assuming that anyone at all still cared to purchase bread, bread inventories would be drawn down until shortages developed and the bread market once again became a seller’s market. The bread market would remain a seller’s market until the remaining buyers were once again willing to pay the price of production for bread, thus incentivizing a certain portion of bread production to re-commence. It is true that the quantity demanded and supplied might be lower than before with bread’s price of production suddenly higher. But the price of production would still exert its imperious force over bread’s market price over the long-term.

    My point is that you cannot look at a symptom like a price spike and automatically declare that it is a bubble. That is superficial, vulgar analysis worthy of neoclassical economics. Instead, you have to try to figure out what the commodity’s “natural price” or “price of production” is, and see if, in fact, the new price is actually sustainable due to an underlying increase in the production price.

    The real scientific, Marxist question to ask is, “what is bitcoin’s price of production”? If you investigate this question, you will find that bitcoin does not have a price of production.

    “But bitcoin takes tremendous electricity to produce, and that has a price!” At the moment, yes. However, imagine that bitcoin’s price suddenly drops to 0.01% of its current value (so, a bitcoin would be worth about 35 cents).

    If something like this were to happen to a real commodity such as gold, then production would cease. That is because gold’s cost of production is a socially-necessary cost of production, not a contrived cost of production. Gold’s socially-necessary cost of production would not budge, and any remaining gold producers would be making horrendous losses. So, gold production would cease. Assuming that there was any continuing demand for gold at all, the market for gold would become a seller’s market, with shortages developing. The only way that gold producers would be incentivized to address these shortages is if gold production once again obtained an average rate of profit. So, gold’s market price would be forced back up to its production price. Its production price, in this way, acts as an anchor of its exchange-value against temporary speculative flights of fancy on the market.

    And note that this has NOTHING to do with gold’s use-value. (Gold is, in fact, quite worthless as a use-value, as is proper for the universal equivalent). Most bitcoin analysis dwells on analyzing its use-value as a financial intermediation instrument. But its use-value is irrelevant to its price of production, and thus its long-term market price. Bitcoin could be the most useful thing in the world (like air), but if its price of production is (like air) zero, then its long-term market price MUST converge to zero.

    So, what happens if bitcoin’s price falls four orders of magnitude? The first consequence will be that it will be uneconomical to be a bitcoin miner. Almost all bitcoin miners will repurpose their machines for something else, or just shut them down entirely to save on the electricity. This could happen until there were literally just a handful of bitcoin miners left on the planet.

    If bitcoin were like gold and had a socially-necessary cost of production, then bitcoin’s cryptographic problem for each block would remain just as difficult as before, and with just a few miners working on these cryptographic problems, bitcoin production would cease. However, just as bitcoin’s cryptographic problems become harder as more people attempt to attack them, they become easier as fewer people (or rather, their computers) attack them. Production of new bitcoins is pre-programmed to follow a certain schedule regardless. Thus, bitcoin’s cost of production at any given moment is arbitrary, not socially-necessary.

    If bitcoin’s price dropped to 0.01% of its former value, then its apparent “price of production” would follow suit. With the cryptographic problems suddenly being a lot easier to do, it would take much less electricity—perhaps even a trivial amount—to compute them.

    Would this cheap bitcoin mining encourage new miners to return to the fold and cause the cryptographic problems to become harder once again? No. Although the cost of mining bitcoin is suddenly much less, so will be the reward. A bitcoin will only be worth 35 cents.

    If the price of bitcoin then suddenly shot up a trillion percent the next day, then its apparent “price of production” would adjust likewise. And if the next day the price of bitcoin fell to 0.000000001% of its former value, then the price of production would adjust likewise. In this way, bitcoin’s “price of production” is no real price of production at all! It is certainly no help for anchoring bitcoin’s market price against temporary flights of fancy.

    Regardless of its use-value, bitcoin’s price of production is indeterminate, and its only sustainable long-term market price is zero.

    1. I think we agree. Yes, bitcoin as money has no price.

      “Gold has neither a fixed price nor any price at all, when it is a factor in the
      determination of prices and therefore functions as money of account. In order to
      have a price, in other words to be expressed in terms of a specific commodity
      functioning as the universal equivalent, this other commodity would have to play
      the same exclusive role in the process of circulation as gold. But two commodities
      which exclude all other commodities would exclude each other as well. (Cr. 75)”

      But it’s not money yet. Instead as a financial asset to be speculated in, it does have a price, just as gold investment speculation does – in dollars or euros etc. People are not really betting on bitcoin becoming money as a universal equivalent but simply trying to make dollars by buying and selling bitcoin in a craze. Its price in dollars has no relation to its price of production, say the cost of mining, just gold’s investment price in dollars bears little relation to its cost of production in South Africa.

      1. Careful thought needs to regarding Moseley’s argument– that gold, as money, has no price, and thus no price of production; that its production is immediately, and realizable immediately as value, and indeed, that an increased volume of gold is equal to an increased value, as gold is directly value.

        Moseley’s purpose is to undercut and refute the “transformation problem.”

        I think this is very problematic, and not any less problematic because it follows Marxist orthodoxy.

        Work through the detail and you get to the point where gold as a commodity is not a commodity, where value is determined by the labor time time socially necessary for its reproduction.

        So getting rid of the transformation problem by undermining (sic!) the labor theory of value? Doesn’t seem right to me.

      2. “People are not really betting on bitcoin becoming money as a universal equivalent but simply trying to make dollars by buying and selling bitcoin in a craze. Its price in dollars has no relation to its price of production, say the cost of mining, just gold’s investment price in dollars bears little relation to its cost of production in South Africa.”

        I think you are correct about bitcoin but wrong about gold.

        Gold might not have a “price of production,” strictly speaking, but it does have a “golden price-level of production”—i.e. a price level in terms of golden prices of commodities that must not be too high. If the golden price level of commodities is too high, then gold production becomes uneconomical, as it takes too great of a cost in terms of inputs to mine a given amount of gold, which will fail to yield an average rate of profit in terms of gold mined versus gold invested. Gold mining must, like any other business, make an average rate of profit in order for it to be worth doing for capitalists.

        Gold’s dollar “price” is not a “barbarous relic” or a product of speculation, but an iron necessity of Marx’s Law of Value. Without a high enough dollar “price” of gold (i.e. without a low enough golden price-level of commodities), gold production ceases. If gold production ceases, the market for commodities stops growing. Effective demand and purchasing power on the world market stops growing. The ability of monetary authorities to allow growth of fiat money supplies without those monies rapidly depreciating against gold ceases. Gold production—and thus a suitable golden price-level of commodities—is an absolute necessity for the world capitalist economy, even today.

  4. Reposting without links :

    You can have a look at my proposal of a production / monetary system in which there is no profit.

    Here is an introduction :

    I am looking into a Marxist critique if you have the time.

    As for your article, it would be interesting to look at the reasons that the speculation into the cryptocurrencies exists. In my opinion, the reasons must be the same as the speculation in the rest of the financial sector.

    There are also other voices in the crypto community that you do not give credit to. There is a left anarchist tendency. Prominent people of the tendency :

  5. “Money in modern capitalism is no longer just a commodity like gold but instead is a ‘fiat currency’, either in coin or notes, or now mostly in credits in banks. Such fiat currencies are accepted because they are printed and backed by governments and central banks and subject to regulation and ‘fiat’.”
    From this should we accept that money in modern capitalism is gold-free, just like Keines and Friedman dreamed of?

  6. Banks have made it harder for money originating from tax evasion activities eg drug and gun running. Crypto currencies have emerged to fill the space…

  7. I think It’s amazing ho so many people are beginning to click on to the power of cryptocurrency, lol.

    I remember making my first investment way back 4 years ago.
    When it was no where near as popular as today!

    So glad I bought ETH back in 2015 tho! 😀

  8. The price retracements in hindsight have followed the bubble phenoma almost hand in hand. For that reason I have sold the majority of my crypto assets and only left what I am ok with losing 80% of. What are you thoughts viewing this in hindsight?

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