I’ll get to the Bitcoin bit soon, but first let me explain what prompted this idea. Thanks to a Twitter thread by Cory Doctorow (archived here), I’ve been listening to this great interview with Greek economist Yanis Varoufakis. In the video, Varoufakis explains the historic decoupling between stock markets and the economy that they are supposed to follow. This decoupling heralds the end of capitalism as we know it, and marks the start of the post-capitalist world. This historic junction has been brought about by Covid-19, but not necessarily has been caused by it.
Some background first (for a more detailed background listen to the video). Modern capitalism is predicated on the existence of stock markets, where investors will purchase shares in a company, and the value of those shares will correspond to the wealth that is generated by the company. Good companies will have higher valuation, this is calculated by the fact that they make a profit by both being well run and producing goods that consumers want to buy. These profits are then distributed to the shareholders. Society benefits because investors get returns on their investment, and we get better goods and services. Everybody wins.
Varoufakis goes a long way in explaining how these assumptions about how money markets operate have been increasingly false, and that since the financial crisis of 2008 modern capitalism is practically a zombie, the walking dead husk of capitalism. This is because the fundamental assumptions on which the existence of the stock market exists no longer hold.
This is evidenced by the fact that a company’s worth no longer matches its worth to society, this has been evident for a while now with companies that are wildly over-valued (coughTeslacough). Moreover, the Coronavirus crisis of 2020 has completely decoupled the value of the stock market from the economy that supports it. Varoufakis explains that this was evident when we got the news that the UK’s GDP had fallen by a record 20.4% in the second Quarter of 2020; at the same time the UK FTSE reached a record high of 6280 on August 12 (currently hovering around 6000). How is this possible? How can an economy lie in ruins, yet the stock market that is supposed to mirrot it be doing so well? The key rests in the fact that governments of the world have been bailing the financial sector since 2008, and as they have once more been pumping money into businesses in the hopes of keeping the economy afloat, these funds haven’t made it back to society, but actually have been invested into the stock markets. Cory Doctorow explains it quite well, so apologies for the long quote:
“The European Central Bank gives a bunch of free money to Deutschebank in the hopes that they will lend it out to businesses who’ll hire and invest in capital infrastructure.
But Deutschebank can’t force businesses to take out loans, and they hew to the banker’s adage that one should never loan money to people who need it. So the businesses that are struggling and so might spend in ways that preserve jobs and firms are disqualified from loans.
DB’s loans are on offer for very cheap, so firms that DON’T need them take them out, because when someone offers you money that cheaply, why wouldn’t you take it?
These borrowers have no productive use for the loans, though. Due to the lack of capital in the rest of the economy, there are no consumers who can afford to buy their products and services.
So they use those loans for financial engineering: the autophagic stock buy-back, in which companies splurge on their own shares, driving the price of the remaining market shares up.
This is the process: Central banks make cheap loans to commercial banks, commercial banks make cheap loans to firms that don’t need them, the firms spend that money on buybacks.
That’s why share prices rise on news of economic collapse, because economic collapse triggers new central banks loans to giant commercial banks, which triggers share rises through buybacks. It’s socialism for the very, very rich, and brutal austerity for the rest.
This is brutal, but entirely accurate. For a while we have lived in a system that privatises the profits and socialises the losses, and the current crisis is the inevitable conclusion to that phenomenon.
You may be wondering, what does this have to do with Bitcoin?
When I was listening to Varoufakis, I got a strange sense of deja-vu, and it was not just a glitch in the Matrix, or the fact that we’ve been living through an economic collapse foretold since 2008, but it was the fact that what is happening to the stock market right now is exactly what has been happening with Bitcoin and the rest of the cryptocurrency scene.
I’ll stick my neck out and claim that Bitcoin is wildly over-priced. When it was first created, the idea was that it would be the currency of the future, a cheap and secure way to send money without intermediaries, a currency supported by maths. The problem is that it has proven to be completely useless as an actual currency, and even its most ardent proponents now sell it as a “store of value“, in other words, it’s just an investment. So, something that is supposed to be a currency is no longer a currency, it’s more like digital gold, what’s the big deal?
The problem lies in the fact that Bitcoin requires constant amount of money to flow in even to operate as a store of value, this is because it is a cryptocurrency that relies on “mining” for its maintenance and for the coining of new coins. Mining in cryptocurrency terms is a computational operation that requires computing power, which requires electric power. Miners need to be paid in order to keep their rigs running, and nowadays that is so expensive that it is done by mining pools (which is problematic in its own rights, but I won’t go into that for now).
So in order for miners to stay in business, they need fresh money to come in, so that they can sell their bitcoins to new people, keeping the business profitable. An article in June calculated that the price to mine a single bitcoin is $8206 USD, so as long as the price of Bitcoin remains above that threshold, it remains profitable. The problem is that if Bitcoin is not drawing more buyers, and no more money is coming in, that could spell trouble for the currency.
Enter Tether, the reason why the price of Bitcoin has remained high. Tether is what is known as a stablecoin, this is a cryptocurrency that is pegged to fiat currencies in order to provide some sort of stability to the market and diminish the problems caused by price volatility. The idea is that each stablecoin is supported by a real fiat equivalent held in a financial institution, so investors know that the price of their investment won’t change considerably, and it can be used to purchase other cryptocurrencies.
The problem with Tether is that there is growing evidence that it doesn’t hold the reserves that it says it has. Tether is currently nearing an eye-watering $13 billion USD, yes, you read correctly, there is supposedly a bank that is holding that amount of dollars, the problem is that there’s never been an audit, so we’re supposed to believe that every Tether out there is supported by real currency.
What many people believe is that Tether is acting like a Central Bank in fiat economies. Bitfinex (the Tether operator) prints Tethers out of thin air, which then are used to provide liquidity to exchanges that have difficulty getting fiat money, this helps to pay the miners and also helps to keep the price up. This means that the price is independent from the usefulness of the cryptocurrency market.
In other words, the value of Bitcoin is uncoupled from the economy that supports it. Sounds familiar?
I am starting to wonder what came first, the stock market inflation, or the cyrptocurrency market inflation. I do wonder if some clever cogs at financial markets saw how Tether was keeping the price up, and wondered if they could do the same with stocks, or if it was the other way round.
The problem for us can also be seen in what could happen with cryptocurrencies. When Tether falls (it’s really not a matter of if, but when, as there’s a pretty damning criminal case against it), it’s almost certain that it will crash the cryptocurrency market, as it’s evident that nowadays it’s very reliant on the liefeline given to it by Tether. I don’t think that it would be the death of Bitcoin (at the moment it operates almost as a cult), but it could prove to be a pretty big reality check.
The same thing could happen with the stock market. At some point the disconnect between the stock exchange and the economic reality will be such that people will start asking questions. It could take a central bank asking for a social investment requirement, or a prohibition to buy shares with public money, and we could witness a full collapse.
Things could get pretty interesting. And not for the first time I point out that “may you live in interesting times” is a curse.
(Edit) Thanks to the anonymous readers on Tildes for the feedback. I’ve been accused of many things, but not understanding Bitcoin is not one of them, so thanks for the smile. Someone commented that the statement that BTC doesn’t work as a currency is not true because of the Lightning Network. I’m afraid that Lightning rather proves the point of Bitocin’s failure as a currency, when you have to build an entire secondary solution on top of the technology in order to fix its inherent flaws, then it sort of proves the point. Moreover, Lightning is still extremely limited, and while it certainly grew a bit in 2019, it’s stalled, 2020 should have been the perfect proving ground for it as everyone was working from home, but it’s just not moving (stats here).
As to mining, the equation on mining is simple, the price of Bitcoin is highly dependent on being able to keep mining profitable, and while difficulty is a manner of reducing the cost if needed, electricity will always cost money, so the network is dependent on getting money in the network. Two solutions have arisen, first is to reduce the cost of mining by having large centralised mining pools, right now there are three major mining pools, if prices drop, it could get to be unprofitable. The second solution is to continue to inject money into the system, as no new investors are coming in (sorry BTC enthusiasts, but it’s just not that attractive of an investment), then you have to rely on Tether’s money printer going brrr…