Bitcoin is an ongoing insult to market economies everywhere. It shouldn’t exist ― indeed, in important respects, bitcoin doesn’t really exist at all ― but a cabal of techno-hucksters have convinced gamblers and the gullible to quite literally buy into the idea that it does.
Bitcoins, which began the year trading below $1,000, have skyrocketed to well over $16,000 since the late summer in a frenzy of pure speculative madness. “We’ve seen mortgages being taken out to buy bitcoin,” Alabama Securities Commission director Joseph Borg told CNBC on Monday. “People do credit cards, equity lines” ― taking on household debt for a wild gamble at getting rich quick.
And it’s going to get crazier before the inevitable crash. Federal regulators at the Commodity Futures Trading Commission recently allowed the Chicago Board Options Exchange and the Chicago Mercantile Exchange to begin trading bitcoin futures. The CBOE’s market opened on Sunday, and in their first day of trading, bitcoin futures accounted for about half the total trading activity on the entire exchange.
This outrageous experiment in fraud and foolishness has, in the past few months, created several millionaires. It is also meaningless, dangerous and a very good reason to be worried about the Republican Party’s new tax cuts for the super-rich.
Bitcoin enthusiasts refer to it as a “cryptocurrency,” a word that has no real meaning other than “things like bitcoin.” In practice, bitcoin is something that people can buy and sell, but that has no inherent use or value itself. It’s supposed to mimic the function of money. Nobody believes there is $20 worth of paper and ink in a $20 bill, but we agree to let those green things with Andrew Jackson’s face on them serve as a store of value and a medium of exchange. Unlike actual money, however, bitcoin isn’t dependent on a government for its value ― it’s worth whatever people will buy and sell it for.
This has a certain appeal among people who long to purge government from every corner of the market and realize the libertarian millennium on Earth. But it also underscores the conceptual limits of this peculiar philosophy. Because money stripped of political legitimacy is no longer money ― it’s a commodity. You can’t have modern markets without money and there can’t be money without government. Gold coins without a government to back them up are just pieces of gold.
And bitcoin isn’t even a commodity. A commodity is a physical good that people can trade, moving it through space and time. Bitcoins are ethereal digital data points.
At the moment, people have bid up the value of those data points to preposterous levels. This is not because bitcoin performance has vastly improved over the course of the year. It is because speculators are guessing that other speculators will continue to be willing to pay higher and higher prices for no real reason.
Bitcoin, then, is money without political legitimacy, a commodity with no physical being, and an asset bubble without an asset. It is stupidity and confusion, marketed to speculators and fools.
“It’s just not a real thing,” said JPMorgan CEO Jamie Dimon in September. He also called bitcoin “a fraud.”
The decision by the Commodity Futures Trading Commission to permit bitcoin derivatives is an even greater insult to commerce than bitcoin itself. Futures allow people to speculate on the future price of a commodity. This has plenty of legitimate uses ― farmers might want to lock in a future price for their harvests, airlines might want to guarantee fuel costs, etc. But there is no reason why people should need to lock in a future price on bitcoins. The sole function of a bitcoin futures market is to expand the scale of speculation ― the same way that mortgage-backed securities and credit default swaps enabled trillions of dollars worth of speculation on subprime mortgages.
In a sign of just how unhinged this project really is, a trade association representing the world’s biggest banks wrote an open letter criticizing futures commission Chairman J. Christopher Giancarlo for greenlighting the bitcoin derivatives markets without a thorough review. Bank lobbyists do not typically advocate for tighter government oversight. But in this situation, they’re afraid their companies will get stuck holding the bag for fraudulent or absurd bets when the price of bitcoins inevitably collapses. And due to the way trades are executed and guaranteed over commodity exchanges, the banks almost certainly will.
Which brings us to the tax bill Republicans hope to soon pass. To the extent that its defenders have attempted to offer any justification for this multitrillion-dollar package of goodies for the wealthy, they’ve suggested it will spur investment in the economy, which will eventually trickle down into higher wages. Corporate executives, for their part, have made quite clear that if they receive the $1.5 trillion tax cut the GOP has set for them, they won’t invest it in new equipment or research, but simply pay out more to their shareholders.
But to some conservative economists, including George Mason University professor and Bloomberg columnist Tyler Cowen, even this isn’t cause for alarm. “What if those investors take the money and put it in a venture capital fund or invest it in some other manner? The whole point of capital markets is to recycle resources into the most profitable new opportunities,” Cowen wrote in November.
What’s then to stop rich tax-cut recipients from plowing the money into bitcoin?
Ultimately, bitcoin is just a hyper-distilled example of what is going wrong in the American economy. Corporations are currently sitting on $2 trillion in cash. The stock market is enjoying record highs. But none of these profits are doing much for ordinary families. The median household income has barely budged over the past decade. If we put more money into the financial system without directly improving the prospects for working people, there won’t be any productive place for that money to go. It will end up in purely speculative projects that could destabilize the financial system. Under conditions of extreme economic inequality, big tax cuts for the rich aren’t just unfair; they’re dangerous.
Maybe bitcoin is only a silly aberration. But I wouldn’t stake $1.5 trillion on it.