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And now for something completely different

Posted By quixote On In energy,finance,government | Comments Disabled

Let’s talk about bitcoin. This was brought on by the news that the hunt for bitcoins is using as much energy as the entire country of Ireland now [1]. And, at the current rate of growth one possible trajectory has it using all the world’s energy by 2021.

Which it won’t do, of course. People are going to insist on having a little bit of heat to cook and stay warm, but it does tell you how crazy the bitcoin path currently is.

What is bitcoin? The idea behind it is to have a cash equivalent when financial transactions are increasingly electronic. There is a value to having anonymous, untraceable money, just as there is value in anonymous, untraceable speech. It makes it harder for anyone to grab control over people. The downside, of course, is that it also makes it easier for criminals and hatemongers to do their thing.

Without going into the computerese of it all, you’re using processing power to do the calculations necessary to keep a transaction both secure and untraceable. (Although there’s some dispute about the perfection of the untraceability of it in all cases.) Secure untraceable transactions could actually be very useful in the case of, for instance digital voting.

A couple of points about bitcoin: there is a finite number of bitcoins allowed by the bitcoin system. I think the idea was that this was necessary for it to retain any kind of value. Obviously, if you can just “print” infinite numbers of bitcoins, they’re meaningless. It’s the same characteristic that makes gold valuable. There’s just so much of it and no more.

The second thing is that the closer you get to that limit, the more processing you have to do to get the computer to say it’s produced a secure untraceable transaction, a bitcoin. Producing a single bitcoin now takes as much energy as a US household uses in a month, very approximately. When this folderol started, I could have generated a hundred of them on my little laptop in minutes.

What is money? To understand what bitcoin actually is, I think it’s helpful to think about what money actually is. There’s a lot of dispute about the latter, so this is my view [2]. (Which is right, of course. You at the back, pipe down.) It agrees with some of the Great Grandads of Economics (Keynes, for instance, unless I’ve totally misunderstood him), but not others.

At it’s most basic, money is a measure of value that allows us to exchange things that have real value — cabbages and houses and medical services and classes in Japanese flower arranging — without having to use barter. Barter isn’t bad, it’s just terribly inefficient. It depends on the buyer happening to have whatever the seller wants in exchange, and then both agreeing how much of A, say 5 cabbages, is worth how much of B, say on class on flowers. (And then, if you’re the teacher, what are you going to do with the 50 cabbages your students have given you?)

If money is a measure, then someone has to define what it’s measuring. With feet and meters that’s not a problem because we all know how and where to use yardsticks. But measuring value is a whole different ballgame.

There are fleets of economists who work on that sort of thing. And they can actually get reasonably close to what a given economy is producing. Money, at its best, then measures that and makes it easy to exchange things at sensible prices.

 
Wealth

(Katelyn Wang)

The trouble comes in because money is also used as a store of value. You can put it in the bank and use your “rulers” of value later to buy things you need. People tend to confuse the storage function with the measuring function, even though storing value has to be (very) secondary to how money works. If not, you get the absurdity of people storing all the rulers, which are useless in themselves, and grinding the economy to a halt. In the case of real yardsticks, nobody would be able to make clothes or build houses or bridges or do anything else that requires measurement. In the case of money, too many people don’t have enough to keep the economy turning and depressions happen.

That is why countries abandoned the gold standard. There’s a finite amount of gold. What happens when you invent steam engines and telephones and computers? You get into the stupid situation of not having enough gold to measure all that. (Or the even stupider situation of making a unit of gold near-priceless and bestowing vast wealth on people who happen to hold gold. Needless to say, the holders of gold preferred this alternative.)

So countries have gone to a system where the money supply is supposed to reflect the size of the economy.

What does this mean for bitcoin? You see where this is headed. Bitcoin explicitly measures nothing. Its whole function is to store some-kind-of-value but it’s finite. So, like gold, it cannot reflect changes to the underlying economy.

It has no means of defining value. No fleets of economists. The whole principle is “stuff costs what any fool will pay for it.” That does not work for a real economy and just gives all the “rulers” to the people who already have them.

And, finally, it has no means of enforcing legal trade. If someone rips you off, there’s zero recourse. As a subset of the lack of enforcement, it also facilitates extremely sketchy trading, such as trafficking, pedophilia, and counterfeit medicines. Much as I might like to stop the GOOG and everybody else from spying on my every purchase of deodorant, I don’t think facilitating pedophiles is an acceptable price to pay. We could, you know, just have regulation that outlaws tracking.

So, in conclusion, this is where bitcoin stands. It’s a fun idea. The computer process involved could be useful in things like voting. It’s not money, because it does not measure value. It’s a digital analogy for gold: an arbitrary something people have decided to use instead of money. It could have been (and has been in the past) conch shells. It the future it might be tobacco plants genetically engineered to grow stained glass leaves. You can’t base an economy on stuff like that.

An economy has to be based on actual value and money has to be something that measures that.

So bitcoin, and all the other cryptocurrencies, are not useful for the real economy and, as currently constituted, are using up so much energy that they’re cancelling out all the gains made by the shift to renewables.

You know what? That crap needs the shit regulated out it.

 

Crossposted also on Widdershins