Cryptocurrency’s Other Sustainability Problem
A lot of my friends are introducing more plant-based dishes into their diets to reduce their carbon footprint, which I applaud. But interestingly, a number of the same guys (and they’re all guys lately) who are most vocal about their more sustainable dietary choices, are also betting big on cryptocurrency.
I feel like I have to call them out on their hypocrisy.
But this essay isn’t about the carbon footprint of crypto, which is well-documented and for which crypto fans have memorized a set of counter arguments. This essay is about cryptocurrency’s other sustainability problem.
Many people somehow believe that blockchain-based cryptocurrencies offer both a viable alternative to so-called “fiat currencies” ($, £, €, ¥, etc.) and also an alternative asset class to invest in to grow their wealth. It’s not actually practical for a single financial instrument to be both of those things. Why would you buy a loaf of bread with Bitcoins today, when you might be able to buy a house for the same number of Bitcoins next year?
But that doesn’t shake the faith of the believers because — as with many other belief systems — they don’t hold these beliefs due to there necessarily being any truth to them. In this case, people hold these beliefs simply because they also hold stakes in cryptocurrency and so they personally stand to benefit from continued adoption and increasing prices. If you aren’t one of the believers, I bet you know one who has tried to convince you to buy some of whatever they bought, for that very reason.
Our brains have evolved to rationalize all sorts of things that are in our own interest. But like many things that we’ve been tricked into thinking are in our own interest, cryptocurrency is designed — whether intentionally or not — to benefit a small number of people at the expense of everyone else.
And again, I’m going to put aside the very real problem of the disastrous environmental impact of mining coins and processing blockchain transactions.
Picture a tiny planet that’s home to just 1,000 humans. Much like on Earth, a very small number of those humans have claimed most of the planet’s resources and are using their control of those resources as leverage to get the rest of the humans to work for them. They use a rare Gem as their medium of exchange and a greedy man named Bill Yoneer has most of the Gems. He pays the hundred poorest people one Gem each per month (which is barely enough for them to live on) to dig up more Gems for him.
One day a capsule from outer space crash lands on the planet. It contains a document describing a theoretical new way of storing and exchanging value, called BlipCoin.
Of course, Mr. Yoneer scoffs at the idea. Why would he want to switch away from using a currency that he already controls most of? But those lower down the food chain are intrigued. Maybe this is a way for them to free themselves from Bill’s control. A few computer engineers implement BlipCoin according to the instructions provided and start testing it by buying and selling things on the black market.
Eventually the drug dealers accumulate enough BlipCoins that they want to spend them on houses and cars. But you can’t buy houses and cars with BlipCoin, yet, so they need to find a way to convert BlipCoins into Gems. Luckily for them, the computer engineers are on it, because they’ve been accumulating BlipCoins, too. They build an online exchange where people can convert between the two. This gives BlipCoin a measure of mainstream credibility, which not only encourages more people with computers to mine BlipCoins, but also — because of the artificial scarcity that is central to BlipCoin’s design — it increases the market price.
Some of the drug dealers and computer engineers who got a lot of BlipCoins for almost nothing in the beginning, sell them and become Gem rich. This encourages even more people to mine BlipCoins and encourages people with spare Gems to buy BlipCoins in the hope that the upward trend will continue.
Of course, Bill Yoneer isn’t blind to all this. He’s no longer actively pushing back against the idea of cryptocurrency. In fact, he’s now bought a bunch of BlipCoin and, because it’s unregulated, he can promote it to others and even sell it to himself repeatedly to artificially inflate the price. Over time, as more people get rich, it encourages still more to invest and the price of BlipCoin keeps going up.
But it’s absolutely critical to remember that there is no wealth creation happening here.
Every time someone sells BlipCoin, they’re taking someone else’s real Gems in exchange for something imaginary that will only increase in value if someone else is willing to pay more real Gems for it in the future.
Because the whole system is so arcane, most people don’t understand it beyond seeing that other people keeping getting rich and the price keeps going up… until suddenly one day it turns out that everybody who believes that the price of BlipCoin will keep going up has already spent as many Gems as they’re prepared to bet on it. With no buyers, the price drops off a cliff and a lot of people who bet big on BlipCoin, lose big.
But luckily for the computer engineers and for Bill Yoneer, people have short and selective memories. Soon a new cryptocurrency, BleepCoin, is launched. And, because everyone still remembers how rich the early adopters of BlipCoin became, BleepCoin attracts a lot of early investors and in turn quickly increases in price. Of course, as soon as people start getting rich off BleepCoin, it also pays off for those who held onto their BlipCoin, which enjoys a resurgence.
But there are only 1,000 people on the planet and at most a couple hundred of those people have Gems to spare. Of those, it’s an even smaller number who believe that these cryptocurrencies can undergo indefinite price growth with a finite population. And so again, once the last person who can afford to gamble Gems on crypto has made that bet, demand suddenly vanishes. The prices of crypto crater and the poor suckers who bought at the highest price lose everything.
By definition, any process that can’t continue indefinitely is unsustainable. There were once enough trees and fossil fuels and elephants to make it seem like we could go on exploiting them indefinitely. Similarly, there are so many people on our planet to make it seem like there will always be enough of them who believe the hype and are willing to exchange real money for imaginary crypto, to keep the prices going up indefinitely.
But there aren’t. Like any Ponzi scheme, crypto will again run out of new investors to buy into the scam. There will inevitably, eventually come a time when there aren’t enough people left with spare money who believe that Bitcoin and Ethereum and Dogecoin can experience indefinite growth with a finite population. And at that time the prices will crater, again.
Maybe you think you’re smart enough to know when to sell. But believe me, only the Bill Yoneers and their computer engineers are data mining the market fluctuations and public sentiment with enough precision to be able to sell at the peak. I won’t be surprised if it takes a number of boom and bust cycles for it to fully die. But die it will.
In the meantime a bunch of mostly already rich people will end up much richer. And because it’s a zero sum game, a lot more people will end up much poorer. Many of the last people to invest before each crash will have their lives completely destroyed.
And nothing of actual value will have been created.
AND on top of all that, the whole exercise will have contributed significantly to catastrophic climate change.
So you can eat all the plant-based burgers you want, bro. You’re still guilty of destroying other people’s lives and the planet in your unsustainable and hypocritical pursuit of greed.
PS: if you’re wondering why Bitcoin hasn’t crashed again on the scale it did a few years back, one significant reason is that cryptocurrency exchanges have tricked investors into making recurring micro investments they call “dollar cost averaging”. They sell this as a way of both protecting and benefiting people from fluctuations in cryptocurrency prices. But it’s actually just a way of artificially creating ongoing demand and delaying the inevitable collapse.
PPS: YES, I do agree that the current monetary system is broken and probably irreparable. But can’t you see that replacing one grossly unfair and unsustainable system with another grossly unfair and unsustainable system that just happens to give you a slightly better starting point, is not actually a solution to gross unfairness and unsustainability?
If you’re interested, I’m workshopping ideas for a more fair and sustainable economic system over at optimalism.net
