There has always been a certain paradox to cryptocurrency, one that really extends to libertarianism as a whole. The whole point of crypto, according to its dedicated proponents, is to cut out the evil financial middlemen. The central bankers, the bureaucrats, ministers, etc. will be cast aside and thereby the money supply can be democratized. Yet to accomplish all that crypto needs official recognition from at least some of those entities. Hence there is the crypto crowd’s bromance with El Salvador’s president Nayib Bukele, who has made a global name for himself both for being the first government to adopt Bitcoin as an official currency and for declaring martial law and throwing much of the population into prisons. Bukele is currently running for president again in spite of El Salvador’s constitution. He doesn’t label himself ‘the world’s coolest dictator’ for nothing.
As for the Bitcoin experiment in El Salvador: it has been a flop. It was launched in 2021 with the government giving thirty dollars in Bitcoin to each citizen (a few days’ wages for a farmworker) and placing Bitcoin ATMs in every town plaza. El Salvador was on the verge of defaulting on its foreign debts and Bukele declared to creditors Bitcoin to be “FU money” that would solve the country’s financial problems.
One main goal was to make remittances, which make up a quarter of the country’s GDP, cheaper to send and spur more Salvadorans to open bank accounts (or Bitcoin ‘wallets”), which 70 percent of the population lacked. However, the El Salvadoran central bank estimates that that only 1 percent of received remittances in the first six months of 2023 were in bitcoin. Overall, a recent poll by Central American University found that 85 percent of people questioned did not use Bitcoin to pay for a good or service of any kind last year, and three percent have never ever used the currency at all.
Bukele pumped $120 million of the country’s money into Bitcoin purchases that just last month he declared entered the black (according to these figures he could sell at about $3.7 million profit). Yet even if those figures are correct they don’t factor in the estimated $200 million the government has spent promoting Botcoin to the population, the Chivo Wallet (the government-designed software that processes the payments), and the spotty ATMs. The BBC recently quoted Oscar Picardo, director of the Institute of Sciences at the Francisco Gavidia University, in San Salvador, El Salvador “When you add up all the expenses, the result cannot be positive. The result is in red – and in intense red.”
Considering the obvious limitations now inherent in cryptocurrencies this shouldn’t be surprising. In theory, there is something liberating about currency delinked to the performance, or even the perceived performance of a government. While it usually isn’t a big issue for us most of the time it can bite with a vengeance when an economy is ill-managed or simply run in a way capital markets don’t approve. Restructuring often involves a large devaluation of the national currency such as when the Argentinian peso lost close to 70 percent of its value in 2001-2002. Worse yet is a Central Bank printing its way out of a crisis by issuing more currency and diluting the value of the amount already circulating such as in Venezuela in 2015 which saw a 93 percent depreciation of the bolivar in only a matter of months.
On the other hand, currency not pegged to anything official (most crypto) is only as valuable as other people think it is at a given moment. Plus given the slow latency of crypto, i.e. the delay between the initiation and completion of a transaction, and the confusing process, means crypto is not exactly practical for day-to-day use. Some have said Bitcoin could play the role of gold however gold has practical value beyond its price. More accurate is JPMorgan Chase CEO Jamie Dimon’s recent description of Bitcoin as “the pet rock.”
Still, there have been several things in which crypto has excelled. The most obvious is as a speculative tool. The idea of ‘democratizing’ financial markets has long been a standard siren song for financial bubbles. As of this writing the price of a Bitcoin $39,070. 5 days ago the price was over $41,000. Back on September 10th, it was $25,831. At one point in September 2020 it was under $11,000. In November 2021 it peaked at $64,400. Financially it has simply been a balloon that constantly inflates and deflates.
Another thing it does is use a ton of energy. The masterstroke of Bitcoin as designed by the mysterious Satoshi Nakamoto in the original Bitcoin whitepaper in 2008 is the decentralized structure that eliminates the need for third parties while at the same time mitigating “the double-spend problem” that vexed previous digital currencies i.e. ensuring that the same money can’t be used on more than one transaction. The very complex way it works is transactions are folded into blocks that are validated and added into the permanent record is called mining. Bitcoin requires the computers doing the mining to solve ever more complex math problems. This is meant to impose a cost to deter bad actors from cluttering up the network with forgery attempts. This calculation is called proof-of-work and it is designed to tax computational resources. The miner that completes the process the fastest certifies the blockchain and gets a small reward in the form of a Bitcoin payment. The other 99.9 percent just throw away their result. In the very early days, it was possible to mine on a regular laptop or desktop. Now the network is run on highly specialized machines that run 24 hours a day, 365 days a year. A typical mining center has thousands of such rigs along with advanced cooling systems to deal with the generated heat. Crypto mining now uses more energy, about 173.42 Terawatt hours of electricity, than many countries. In fact, if Bitcoin was a country its energy consumption would rank 27th in the world, ahead of a country like Pakistan that has a population of 230 million people. A recent study led by the United Nations University Institute for Water, Environment, and Health (UNU-INWEH) found that coal is by far the largest energy source for Bitcoin mining (45 percent), followed by natural gas (21 percent).
Most ominously, crypto has proven to have lasting practical value to one group of people: the global criminal class. In his new book Number Go Up: Inside Crypto’s Rise and Staggering Fall, Bloomberg journalist Zeke Faux runs down a racket known as ‘pig-butchering.’ Basically, the scam involves sending friendly text messages, in Faux’s case the stranger was in the form of an alluring woman, to get marks to invest in some form of crypto. In December the Department of Justice (DOJ) announced an indictment of such a scheme that involved $80 million in victim losses. Last April the DOJ announced a seizure of $110 million related to pig-butchering. According to the April 2023 press release, frauds involving cryptocurrency have increased at a “staggering 183% from 2021 to $2.57 billion in reported losses during 2022”.
Somehow worse still, Faux reveals a whole global network, including large apartment complexes, of entrapped workers lured to what they thought were different, higher-paying jobs and held in awful conditions performing the scam. Unmet quotas can lead to beatings and other forms of abuse (actually conditions not too dissimilar exist in the AI sector where a large underclass shifts through internet content to reinforce machine learning).
Of course, crypto’s former golden boy Sam Bankman-Fried is now serving a life sentence after using his FTX exchange to enrich his personal investment fund- eight billion dollars apparently went missing. That affair actually overshadowed another crypto giant, Changpeng Zhao, CEO of Binance, the world’s largest crypto exchange, pleading guilty to failing to implement an effective anti-money-laundering program and for willfully violating U.S. economic sanctions. According to Treasury Secretary Janet Yellen, the exchange allowed illicit actors to make more than 100,000 transactions that supported activities such as terrorism and illegal narcotics and that it allowed more than 1.5 million virtual currency trades that violated U.S. sanctions. Crypto has become the go-to currency for money laundering. Binance was fined $4.3 billion.
In light of all this and with crypto’s reputation in the toilet, one would think that perhaps an official step back was in order. Yet this month the SEC approved rule changes to allow the creation of Bitcoin exchange-traded funds (ETFs) in the U.S., approving 11 applications including by investment giants Fidelity, BlackRock, and Invesco (the agency claims it was forced into this decision by a U.S. federal appeals court ruling last year) . The funds began trading last Thursday and the first day racked up a collective $4.3 billion in volume. It is not yet clear if that level of activity will continue, but if history is any guide the safest bet is on more shoddy bubbles, useless carbon emissions, and scams.
