Heads or Tails? The Unpredictable Future of Bitcoin, Capitalism and Society
On the 8th of February 2021, Elon Musk, billionaire CEO of Tesla and SpaceX, tweeted that he bought some “Dogecoin” for his son. Not long after his tweet, the exoteric cryptocurrency that was originally just a ‘meme’ had reached eight times its original value. On the same day, Tesla bought $1.5 bn in Bitcoin and announced that it will be accepting it as currency. This caused Bitcoin prices to spike and reach the record value of almost $50.000.
There are two broadly opposing interpretations of the event. One is that cryptocurrencies are just a commodity void of any real value, based on simple market frenzy and celebrity endorsement. The other would be that Bitcoin represents extraordinary technological innovation that may decentralize the economy and offer everyone a valid investment opportunity. There are good arguments on both sides, but do the positives outweigh the negatives? Is Bitcoin good for society?
But first, what are cryptocurrencies? Cryptocurrencies, such as Bitcoin, Ethereum and Dogecoin, are types of digital currencies based on blockchain technology. Essentially, blockchain technologies enable the verification of transactions through safe and decentralized computations that have to be solved by multiple computers. In exchange for their service called ‘mining’, the computers also receive some cryptocurrency.
The bright side and the dark side of cryptocurrencies
Using this system offers users a combination of advantages. It is very secure and safe, so people concerned with privacy have an option to store and send money without the fear of government involvement. No banks are needed either, as people just store cryptocurrencies in digital wallets and spend them whenever they want without any transaction fees.
The disadvantages of cryptocurrencies are, in some sense, inherent to its features. The privacy elements do not only work for good people concerned with their privacy, but they also enable illegal activity. According to a study published in 2019 by The Review of Financial Studies, almost half of all bitcoin transactions are indicative of illegal activity. This is equivalent to more than $76 billion each year, almost as much as the illegal markets of the US and Europe — combined.
Cryptocurrencies are also harmful to the environment. According to the Bitcoin Energy Consumption Index developed by data scientist Alex de Vries, Bitcoin accounts annually for the consumption of 77.78 TWh, the equivalent of Chile’s power consumption. The cryptocurrency also accounts for a carbon footprint of the size of New Zealand and generates the same amount of electronic waste as that produced by Luxembourg. Scale is not the only problem — a single bitcoin transaction may have the energy footprint of 453,000 credit card payments on Visa.
What about the money?
While social costs of Bitcoin may be considerable, they may be upset by individual gain. After all, it is undeniable that investing in Bitcoin was a life-changing decision for many, including not so well-off individuals. If you would have invested only $20 in Bitcoin in February 2011, you would be a millionaire today. Unfortunately for people living in the present, Bitcoin may not grow that much anymore. Indeed, some suggest that Bitcoin is just a bubble, so a price crash is imminent. If Bitcoin’s value is high just because of irrational exuberance sustained by celebrity endorsement, and not by its actual value, then investing is a bad idea.
One can theoretically tell that a financial asset is forming a bubble if its market value outweighs its ‘fundamental’ value. This is hard to tell for Bitcoin, since one would have to compare the value of privacy and convenience with the value of moral hazards and environmental costs. One can also look at why people buy Bitcoin. Elon Musk’s announcement that Tesla will accept bitcoin caused a spike in value. People saw that more and more firms may accept the currency, so they anticipated a rise in its value.
In general, that’s how other financial assets work. You buy shares because you anticipate a future rise in value. A given event, such as a potentially beneficial merger, encourages more people to buy the share, so the asset price goes up. The problem appears if many people invest not because they see an actual potential increase in value, but just because they know that others will also invest.
New research has shown that social factors play a much larger role in investment decisions than previously thought. If Bitcoin investing is just a trend, then it may not be wise to invest in it. Trends come and go. If trend setters continue to criticize Bitcoin, it may very well crash. After all, if the price of Bitcoin grows with the help of Elon Musk, its price may also fall with Elon Musk (and a dip in price did happen when he tweeted “Tesla stock price is too high imo”).
Fighting the system?
Slovenian philosopher Slavoj Žižek remarked that “it is easier to imagine an end to the world than an end to capitalism”. In his book, Capitalist Realism, the late philosopher and cultural critic Mark Fisher builds on this precise idea. According to him, capitalism not only created an economic system, but it also created a surrounding culture that justified capitalism by claiming that no viable alternative exists.
Maybe we cannot imagine a good type of cryptocurrency because we cannot imagine an end to capitalism. After all, Bitcoin’s environmental problems exist only because capitalism encourages the extraction of only the cheapest energy sources which may or may not be harmful to the environment. Bitcoin is not intrinsically good or bad, it is simply context sensitive. Changing the system may be the way to make cryptocurrencies good. Cryptocurrencies may just do that by themselves.
Cryptocurrencies — products of the capitalist system renowned for its potential of ‘creative destruction’ — may inherit this property and completely alter the financial system itself. Facing pressures from cryptocurrencies, institutional investors are already planning on buying and using digital currencies. Even central banks well known for their cautious approaches, from the People’s Bank of China to the European Central Bank, are considering the introduction of digital currencies that may bypass commercial banks and overhaul the entire financial system.
At the same time, one does not have to reach such radical conclusions. Leftist movements successfully pressured capitalists to introduce the modern welfare state and improve labour rights, but they only succeeded when they also adapted to capitalism by replacing socialism with social democracy. Cryptocurrencies may similarly adapt themselves to capitalism. Creators of Ethereum and other cryptocurrencies are already looking for new technologies that would enable more energy efficient transactions, others are looking for ways to create less volatile cryptocurrencies and new research may offer ways to track and deter future illegal transactions.
While the future is uncertain, digital currencies and capitalism will most likely find an equilibrium and adapt to each other. Neither is perfect, both may currently harm society and the environment, but both may also be part of the solution to create a fairer and more sustainable future society.
All sources can be found on My Author’s Page.
