FacebookTwitterGoogle+RedditEmail

The Bitcoin Bubble

The price of a rare tulip bulb on the futures market in Amsterdam in January 1637 was equal to ten times the annual wage for a skilled crafts worker. A single bulb was reportedly exchanged for 1,000 pounds of cheese at the height of tulip mania. The market collapsed precipitously starting in February 1637, bottoming out in May 1637

According to economist Brian Dowd, “By the height of the tulip and bulb craze in 1637, everyone.. rich and poor, aristocrats and plebes, even children had joined the party. Much of the trading was being done in bar rooms where alcohol was obviously involved…bulbs could change hands upwards of 10 times in one day. Prices skyrocketed… in 1637, increasing 1,100% in a month.”

Bit coin, the original crypto-currency, was valued at $.08 in July 2010; $8100 on November 20, 2017, and $17,900 on Dec. 15, 2017. The sky is apparently the limit.

The danger, of course, is not just that at some point, the bigger fools, the last purchasers of bit coin and the long term holders (“hodlers” in crypto-speak) will loose some or all of their money. That would be regrettable. But like straight forward pump and dump market manipulations of a stock some will win while others loose.

But, as in 2007 and 2008, the creative greed behind global financialization is creating not just a bubble in bit-coin and many other crypto-currencies as investors , as in Holland in 1637, pile into markets as buyers. There is a real and, I believe, rapidly emerging threat that bit coin and its ilk could follow dynamics similar to mortgage backed securities as the basis for highly leveraged and complex financial instruments, like credit default swaps, that were traded no limits based on the actual number of mortgages.

Cyrpto-currency has now entered the leveraged futures market. Speculators now can leverage futures purchases 15 to one. This means a 7% drop in the price of bit coin (a familiar phenomena) will wipe our your capital, returning us quickly to the momentous margin calls of 2007-8. And there is no limit to the number of futures contracts. Derivative instruments of more complexity and undefined risks are almost certain to swiftly appear as they did in 2007 when, for example, insurance giant AIG took enormous bets to earn premium on credit default swaps on mortgage backed securities. After all were, these were AAA rated! The sudden collapse of mortgage backed securities led to a liquidity crisis. The securities could not be sold for almost any price and the giant financial institutions on wrong side of the bets were suddenly bankrupt.

As Frances Coppola in Forbes points out, “As more and more financial institutions with connections to the real economy pile into the cryptocurrency mania, the chances of a similar disastrous collapse rise ever higher, and along with it, the likelihood of Fed or even a government bailout.”

The intent of those driving the explosion of crypto-currency prices is not a desire use crypto-currency as a low cost, reliable medium of exchange verified by a transparent block-chain, but as a magic carpet to wealth. If you’d bought $100 worth of bit coins in 2010, they would be worth $1.79 million as of Dec. 15, 2017. It is paradoxical that crypto-currency, allegedly meant to free us from fiat currency, finds its liquidity and value in the almighty dollar.

There is much to recommend to block chain for its potential use as a reliable and low-cost means of trade whether is is tied to crypto-currency or not. For example, block chain is being used in Brooklyn, NY to test sale of solar energy from local producers to local buyers, with the exchange medium in dollars not crypto-currency.

The Media Lab at MIT is working on designing crypto-currency projects that could facilitate, for example, trades and transaction by the global poor purchasing and selling locally produced community renewable energy. Crypto-currency and block chain could be an important tool for people not just beyond power lines, but who live unbanked and with little access to cash or liquidity of any kind. Crypto-currency could become a reliable exchange medium and basis for a community controlled economy.

Bit coin is also seeing the transaction costs for bit coin transaction soar rising to $20 charged by block-chain “miners” whose computers verify transaction and at the same time create more blocks and produce more bit coins as part of the solution of the algorithm that verifies transactions. Far from being a means for vey quick cheap, anonymous financial transactions, bit coin is becoming slow and expensive to use. A newer generation of crypto-currencies like IOTA offers an improved block-chain with zero transaction costs and faster transaction all the better to attract investors.

Crypto-currencies could represent a tool for self-management and community economies, a way to use the internet to help challenge the growing netocracy of the Googles, Facebooks, Twitters, Amazons, Ali Babas and their ilk. But by making crypto-currency into an investment who use is part of a get rich quick scheme as opposed to a free instrument of exchange and trade it has become just another arrow in the quiver of making the rich richer and worsening the already grotesque distribution of income. Crypto-currency speculation will make some people rich, as does day trading and house flipping, where many more will loose then win.

I suppose the original sin of crypto-currency was to allow its purchase in dollars, and not, for example, in services provided by one to another based on labor time and materials. But the crypto-currency model is based on a limited quantity that makes it resistant to inflation, but enshrines scarcity and therefore value and the siren calls of greed and desire as it does for scarce commodities like cocaine or diamonds or gold.

The bit coin and crypto-currency bubble will not end well.

More articles by:
April 24, 2018
Carl Boggs
Russia and the War Party
William A. Cohn
Carnage Unleashed: the Pentagon and the AUMF
Nathan Kalman-Lamb
The Racist Culture of Canadian Hockey
María Julia Bertomeu
On Angers, Disgusts and Nauseas
Nick Pemberton
How To Buy A Seat In Congress 101
Ron Jacobs
Resisting the Military-Now More Than Ever
Sonali Kolhatkar
The Left, Syria and Fake News
Manuel E. Yepe
The Confirmation of Democracy in Cuba
Peter Montgomery
Christian Nationalism: Good for Politicians, Bad for America and the World
Ted Rall
Bad Drones
Jill Richardson
The Latest Attack on Food Stamps
Andrew Stewart
What Kind of Unionism is This?
Ellen Brown
Fox in the Hen House: Why Interest Rates Are Rising
April 23, 2018
Patrick Cockburn
In Middle East Wars It Pays to be Skeptical
Thomas Knapp
Just When You Thought “Russiagate” Couldn’t Get Any Sillier …
Gregory Barrett
The Moral Mask
Robert Hunziker
Chemical Madness!
David Swanson
Senator Tim Kaine’s Brief Run-In With the Law
Dave Lindorff
Starbucks Has a Racism Problem
Uri Avnery
The Great Day
Nyla Ali Khan
Girls Reduced to Being Repositories of Communal and Religious Identities in Kashmir
Ted Rall
Stop Letting Trump Distract You From Your Wants and Needs
Steve Klinger
The Cautionary Tale of Donald J. Trump
Kevin Zeese - Margaret Flowers
Conflict Over the Future of the Planet
Cesar Chelala
Gideon Levy: A Voice of Sanity from Israel
Weekend Edition
April 20, 2018
Friday - Sunday
Paul Street
Ruling Class Operatives Say the Darndest Things: On Devils Known and Not
Conn Hallinan
The Great Game Comes to Syria
Jeffrey St. Clair
Roaming Charges: Mother of War
Andrew Levine
“How Come?” Questions
Doug Noble
A Tale of Two Atrocities: Douma and Gaza
Kenneth Surin
The Blight of Ukania
Howard Lisnoff
How James Comey Became the Strange New Hero of the Liberals
William Blum
Anti-Empire Report: Unseen Persons
Lawrence Davidson
Missiles Over Damascus
Patrick Cockburn
The Plight of the Yazidi of Afrin
Pete Dolack
Fooled Again? Trump Trade Policy Elevates Corporate Power
Stan Cox
For Climate Mobilization, Look to 1960s Vietnam Before Turning to 1940s America
William Hawes
Global Weirding
Dan Glazebrook
World War is Still in the Cards
Nick Pemberton
In Defense of Cardi B: Beyond Bourgeois PC Culture
Ishmael Reed
Hollywood’s Last Days?
Peter Certo
There Was Nothing Humanitarian About Our Strikes on Syria
Dean Baker
China’s “Currency Devaluation Game”
Ann Garrison
Why Don’t We All Vote to Commit International Crimes?
LEJ Rachell
The Baddest Black Power Artist You Never Heard Of
FacebookTwitterGoogle+RedditEmail