by John Quiggin on December 17, 2017

With the huge upsurge in the price of Bitcoin recently, I’ve been getting a lot of demand for articles putting forward my point of view: Shorter JQ: It’s an environmentally destructive Ponzi scheme that isn’t usable as a currency even for believers.

My observations on the electricity demand associated with Bitcoin made it into the ABC (Australian equivalent of BBC) News Quiz last week, which is a kind of fame, I guess.

Meanwhile, I had another piece in the Guardian, this time looking at the fact that, despite being called a “cryptocurrency”, Bitcoin is used even less as a currency now than it was several years ago. The core problem is that the system is so overloaded by miners creating new coins that processing transactions is slow, costly or both I mentioned the fact that game company Steam had stopped accepting coins and that the list of merchants accepting Bitcoin is small enough to fit on one page. Checking further I concluded that this list is out of date, but not in a good way. Lots of those included, such as Expedia, no longer accept Bitcoin, if indeed they ever did. Here’s one person’s experience. Bitcoin is now a “crypto asset” which is even more obviously a Ponzi fantasy than the original currency story.

One response I got was that transaction speed would soon be greatly improved by something called Lightning. Checking on this it appears that this is software in an alpha (very early) stage of development, which would allow any two parties to set up a transactions account separate from the main Bitcoin blockchain, and only occasionally update the main account. An analogy, for readers of a certain age, is the era before Bankcard, when, if you wanted to do something other than paying cash, you maintained a separate credit and debit account with every store you dealt with. This does not seem like the dawn of a new era to me.



BruceJ 12.17.17 at 4:21 am

This does not seem like the dawn of a new era to me.

Oh, but it IS this is an alpha system being pushed into production use without sufficient testing, Wait until some enterprising bank robber ‘innovator’ finds a way to turn the Mirai botnet onto this system and methodically steals everyones gold bullion bitcoin like some modern-day Goldfinger….

Or as I saw it described earlier this week “Bitcoin is Beanie Babies for Libertarian Nerds”

Unrelatedly I saw a report that people are taking out second mortgages to buy Bitcoin. Doesn’t it smell a lot like 2007 around here?


Chet Murthy 12.17.17 at 5:49 am

John, actually Lightning is even *worse* than you describe. In your description, those separate accounts are still maintained by some central authority, so that no data can be lost. That is not the case with Lightning. A possible analogy would be running a “tab” at a bar or local merchant. Every week or so, they send thru a credit card transaction for my tab. But in-between, if something happens to their offices (a fire?) that information is lost, and there’s no other place it’s stored (sure, I store it, but (per the organizing principle of cryptocurrencies) there’s no reason for me to behave honestly).

In short, it’s hooey. Complete hooey.


Will Uspal 12.17.17 at 12:04 pm

Technical question: Are the processing times and transaction fees expected to improve as the supply of unmined coins is exhausted?


Nick 12.17.17 at 2:38 pm

Will, they’re unrelated (sorry John, I have to disagree with you on that minor point). Processing times and transaction fees are based on transaction volume. The fees are arbitrary, you can nominate whatever amount you’re willing to pay. But when transaction volume is high (eg. any time in the last few weeks), transactions with low or no fees attached will be refused outright and aren’t even allowed in the mempool. It’s essentially a bidding contest. The more people who choose to trade bitcoin, the worse it gets.


Glen Tomkins 12.17.17 at 4:21 pm

But, don’t you see, frank crypto-assets, things like nth order derivatives and securitized everything, are indeed the wave of the present and future. You haven’t refuted the idea that bitcoin is a sound crypto-investment just by pointing out that it’s really a crypto-asset, not a cryptocurrency. The Rs are really fascists? Big deal. They’re proud of it these days.

Bitcoin is only a bad crypto-investment insofar as you, the potential crypto-investor, are likely to wiped out in a bubble burst. If bitcoin does go bust, the mere fact that you waste your time reading this site, when you could be devoting more time to relentless striving and ruthless acquisition, means that you are not one of the chosen few who is going to get enough advanced warning to sell early enough. So your only hope is that bitcoin is never allowed to go bust, that it acquires NYSE or G-S status as too big to fail, so that it gets a bail out if it starts to deflate. If G-S or similar gets into bitcoin in such a big way that it would go under if bitcoin did, then it will be safe for you and I to get into bitcoin. But that’s the thing about crypto-investments, you and I aren’t going to have any idea about G-S’s vulnerability to a bitcoin explosion until it’s way too late to get in on the ground floor.

That said, if you want to live off your wealth, crypto-investments of one sort or another are about your only remaining alternatives. In a highly productive but contracting economy, in which demand is being driven down ruthlessly as wages are suppressed to lower the costs of production, there is just way too much wealth chasing too few opportunities for real investment. You can’t invest even indirectly in anything real, and get a vanilla savings account to return a few percent per annum as you could decades ago. Even your once-friendly neighborhood bank no longer lives by lending out aggregated savings to enterprises seeking to expand. They make their money charging you fees. If your money isn’t making them money by your moving it around and generating activity fees, they’ll put on an inactivity fee to claw back whatever paltry interest they pay you, plus some.


Jim Harrison 12.17.17 at 5:07 pm

As I’ve remarked elsewhere, at least the tulips were pretty.


Warren Terra 12.17.17 at 11:11 pm

@#6 And, in a pinch, edible.


Glen Tomkins 12.17.17 at 11:41 pm

@#7, Not after they were thrown overboard to jack up the prices back up.


Kenneth Almquist 12.17.17 at 11:49 pm

“That said, if you want to live off your wealth, crypto-investments of one sort or another are about your only remaining alternatives. In a highly productive but contracting economy, in which demand is being driven down ruthlessly as wages are suppressed to lower the costs of production, there is just way too much wealth chasing too few opportunities for real investment.”

No. Crypto currencies are commodities, and pretty useless ones at that. They aren’t an alternative to investing in corporate stocks.


Glen Tomkins 12.18.17 at 3:56 am

Unless you buy enough stock to control a big enough voting bloc that the folks who run the corporation have to listen to your views on how it is run, then what you own in stock has as its only value its market value. Stock doesn’t give you the right to demand x percent of the corporation’s worth, so you do not in any meaningful way own x percent of the corporation. What you own is something that is worth exactly what you can get unloading it on the next sucker down the often long line of successive random owners. How is this different from what ownership of a bitcoin gets you?

No doubt the market value of most stocks is quite a bit more stable and predictable than bitcoin’s. If I did have money to throw at crypto-assets, I would definitely go for the less unstable crypto-assets I could get on the NYSE, some index fund. The NYSE is a relatively stable pyramid, whose managers got the US gummint decades ago to fix them up with a stable long-term influx of cash from gummint-supported 401Ks and TSPs, and a whole alphabet soup of gifts to the investment industry. Not only have they provided themselves with a steady stream of incoming cash to keep the bubble expanding (that’s why I would go with an index fund and not try to pick stocks based on the value of the corporations, as my expectation that the asset will appreciate is founded entirely on the bubbly goodness of 401K money flowing in undeserved forever, not on the dog corporate assets that aren’t really for sale anyway), they have created a hostage in all those voters who have money in 401Ks and such. The gummint can’t let the NYSE tank, ever, however deservedly, or those voters would exact vengeance.

All bitcoin has to do to achieve this status as a stable, govt-protected, crypto-asset, is to get enough people owning it who would be ruined if it imploded. And it’s not just sheer numbers of people ruined. The NYSE has a lot of people who don’t count except as voters, but it has enough of them to count as voters. G-S could go under and not nearly as many people would suffer directly, but these potential victims are people who count a lot more than as mere voters. They’re fellow members of the ruling class. They can’t be inconvenienced, much less ruined. I suspect that bitcoin isn’t there yet, thus my preference for the NYSE if I had money to throw around. But it’s just a suspicion. Who knows who owns how much bitcoin, or how many nth order derivatives of what terms and what counterparties? That’s the whole point of the shadow banking system and crypto-assets, to keep nosy Parkers like me, and any stray regulators who haven’t been captured yet, in the dark. For all we know, bitcoin is already too big and too well-connected to fail. It could be every bit as sound an investment as an index fund.


Chet Murthy 12.18.17 at 4:59 am

It’s a nice sales pitch that #10 is making. But it’s merely that: a sales pitch. Don’t be taken in.

BTC differs in critical ways from NYSE stocks. To wit: BTC’s entire raison d’etre is that it *cannot* be manipulated in any way by judicial diktat. So: imagine the USG putting the kind of support that #10 describes, behind … Russian government bonds, with Russian law controlling them. So Russian court decisions governing. Yeah, I can see that happenin’ too.

It is *intrinsic* to BTC, and basically all that makes BTC interesting to most people who actually -use- it, that it is uncontrollable by governments. If you remove that, it’s no better than any other fiat currency. You don’t really think that the money supply corresponds to that many bills, moving around the world in trucks/planes/ships, do you? It’s every bit as “virtual” as BTC. The only real difference, is how the accounting is done, and whether the servers on which the accounting is done, are controlled by centralized organizations.

So no, it ain’t gonna end up on some list of TBTF assets, backed by the USG.


John Quiggin 12.18.17 at 6:48 am

I think GT @ #10 may have omitted the irony alerts.

But to play it straight, ownership of stock entitles you to dividends and to participation in share buybacks, on broadly equal terms with the controlling shareholders. Of course, they get lots more (the control premium), so the system gets more and more unequal. Still there’s a difference between a rigged game, with enough surplus to keep everyone playing, and a pure Ponzi, like Bitcoin.


Collin Street 12.18.17 at 10:32 am

So no, it ain’t gonna end up on some list of TBTF assets, backed by the USG.

Of course, the USP of bitcoin is that it isn’t backed by any government. So if the path to its stable value runs through “acquires government backing”…


Glen Tomkins 12.18.17 at 3:36 pm

I haven’t bothered with irony alerts since the actual news started to out-Herod stuff you read in the Onion. Why should I be more gentle on the reader than what we laughably still call reality?

It is certainly true that generations of stock jobbery and bank failures taught us, slowly, to impose some regulation on a defined set of asset classes. But to protect that closed system from jobbery and vulnerability to panics, what also has to be regulated is its relationship to money outside the closed system. Assets outside the system have to be either kept down in value so as not to threaten to outweigh the publicly regulated system, or the closed system has to be walled off from contagion by collapse of asset values in the unregulated exterior.

However good the system still is at maintaining order within the borders of the empire, so that you can buy a stock on the NYSE or put money in a community bank without fear of losing it in all the old familiar ways, the empire seems to be failing both at controlling the size of the barbarian hordes outside its borders, and at keeping them outside the gates. This is how the Lesser Depression was triggered, the shadow banking system was allowed to produce and sell asset classes the regulators couldn’t or wouldn’t police, these assets grew in valuation (Value? Hah!) until they overmatched the less unreal economy within the publicly regulated space, and over-leverage was allowed to cross the borders from these crypto-assets into the no-longer protected space.

Now, if our system still functioned to protect ordinary citizens within the empire, you might see this as just the latest episode in our evolving adaptation to the world in which we live. The malefactors of great wealth learned some new tricks, so we just put in some new regulation to address their innovations, and the empire is safe once again. Except that really does not seem to be what has happened. It’s worse and more fundamental than regulatory capture, that barbarians like Aetius and Stilicho and Mnuchin now command the imperial armies. It’s intellectual capture, and barbarian thinking has captured the whole society. It is hopelessly quaint of me to talk of malefactors of great wealth, when of course they are now job creators. They’re not the enemies at the gate, they now are the empire, and embody the highest ideals the empire strives to attain. They are helping us remove all the fustian PC thinking that stands in the way of job creation. Tear down those walls! Let freedom in!

Now, of course I can’t point to which crypto-asset in the shadow banking system is going to implode, and which assets in the supposedly regulated world of the NYSE and the community bank are so tied to those assets by the mystic bonds of leverage, that they will tumble in response and bring the whole system down. Opacity is the whole point of crypto-assets and shadow banking. We won’t know until after the crash. The only people in a position to have any inkling now are the job creators themselves, and they ain’t tellin’ us where the current good stuff, the high octane stuff with the juicy RoI, is to be found. That’s where the next killer bubble is coming from. The sexier the RoI now, the more it will call with fatal attraction to wealth everywhere.

So, sure, assets within the NYSE are subjected to a certain level of public scrutiny and regulation that protects even the small investor from the old familiar forms of jobbery within that system. So, sure, if you feel the need to purchase assets whose market value overpowers any underlying value they might theoretically have, perhaps you have more control than you do in the crypto world. But those regulated assets are still a remove or two from the real economy, so you still depend on people who actually control values within the system to decide things like how much of the profit of the corporations you theoretically own part of will be distributed as dividends. If the public system were the dominant marketplace, or if that marketplace were walled off from unregulated wealth and leveraged wealth, even as a small investor you would be able to form reasonable inferences about what plays the big investors who actually make the decisions make sense for them, and act accordingly yourself to get a free ride. But the reality in 2017 is that that regulated system exists in a wider world in which we have little to no idea of the size and real relationships publicly regulated assets have to crypto-assets. Even within the system, corporations are driven more by profits they can get short-term through stupid CFO tricks, than by improved production and marketing of their products. That’s opaque enough, and that’s just within the public system. Then you add in the complete opacity of corporate decisions driven by phenomena in the shadow banking and crypto-asset world, and you really don’t have, even within the supposedly regulated system, the transparency that you need if you are to claim even approximate knowledge of the value of the assets on offer.

Your effective guarantee that you won’t be taken to the cleaners by forces beyond your ken, much less control, lies almost entirely with how likely the govt is to let an asset fail, and not with the govt maintaining a system of transparent valuations free of hidden jobbery. That’s really the only sure reason to prefer stocks to bitcoin right now, that so many voters and people who count would lose so much if the NYSE had another year like 1929, that the govt will not let it have another year like 1929. While it is possible that bitcoin has already reached protected status based on people who count being ruined if it imploded, sure, not likely based on public knowledge. But we now live in a world in which, if you’re not conspiracy theorizing, you’re not thinking. Alaric is in the White House, his Visigothic chieftains feast on the rotting corpses of sense, reason and irony.


Glen Tomkins 12.18.17 at 3:53 pm

I forgot to add the bit about the Visigoths washing down their feast with the wine of your tears. I feel a need to be complete and accurate.


Benquo 12.18.17 at 5:27 pm

… then Tezos wins.


cervantes 12.18.17 at 6:21 pm

I would say that the answer to the question of what small equity owners really own all depends. Companies that pay cash dividends are obviously valuable to own; and if a corporation gets bought out, then the shareholders will realize the value of their holdings. They can’t pay dividends to the holders of large stakes without also paying the widows and orphans, so you really do own something.

That said, it is far from clear what the point is of owning Amazon stock.


Benquo 12.18.17 at 7:25 pm

16 to 13


Glen Tomkins 12.18.17 at 8:18 pm

Well, even within the system, you have to balance dividend payments against the market value of the asset, with the latter much larger then the former. You can find out which stocks are paying the highest dividends this last quarter, but you have to wonder why a corporation is letting profits flow out of the enterprise as dividends to shareholders, rather than using those profits within the enterprise to stay ahead within its sector of the industry, with an R&D program, or expansion of its existing operations, etc. Has their business plan reached its sell-by date? Those dividend checks are nice, but they exist in a trade-off with the even nicer prospect of asset appreciation, and asset appreciation is an even surer bet than the accumulation of dividends, because the US govt has programs to ensure that more and more retirement money comes into the NYSE to chase those assets. If you see a company buck the trend and offer high dividends, maybe the company is only offering high dividends to let the stockholders get some cash out of a failing company, which is headed for a bankruptcy which the big shareholders will be sheltered from because they will sell before it’s too late, but which will result in you getting zero back on the dollar you paid for the stock after the bankruptcy and the company’s remaining assets are sold off to the rag pickers to pay off creditors.

Where crypto-markets come in to make ownership in stock even more fraught with unforeseeable danger, is that you don’t know which of the big players in a legitimate market like the NYSE are also heavily into crypto-assets. If they are heavily enough, and heavily leveraged enough, into a crypto-asset that implodes, they may have to sell big blocks of your legit stock in a hurry, and your asset value plummets to nothing. Add to the uncertainties within the public market that disfavor you, the working of crypto-markets that you can’t even in theory know as much about as the big players.

Of course bitcoin, by itself, does not seem big enough to have sucked in enough money that its implosion would spread contagion to assets on public markets sufficient to cause them to fail. And while there is the possibility that big players have been fool enough to let themselves get into highly leveraged bitcoin positions whose collapse could domino into their holdings in other crypto-assets, and in the end the contact with public markets is extensive enough to bring them down, that doesn’t seem terribly likely. But if 2008 taught us nothing else, it demonstrated that many big players are fool enough to let themselves get leveraged into some amazingly foolish and dangerous positions in crypto markets. Had govts not stepped in, your modest investment in the stock of some sleepy company high-drag low-speed enough to offer dividends (and it’s not some trap) would have been wiped out.

I don’t think it’s going to be bitcoin in particular next time this happens, but it will happen again, triggered by some or other shadow banking, crypto-market asset. We as a society have made a decision to let people hang on to so much wealth that there is no legitimate investment outlet for it, nothing that isn’t a balloon fiesta. Then we decided that we don’t need to keep tabs on the resulting hyperactivity, because that might dampen enthusiasm for risk too much. Let freedom ring!

What could go wrong?


Chet Murthy 12.19.17 at 11:28 pm

What could go wrong?

There’s a certain nihilism in the argument by this commenter, that I feel I must push back against. Notwithstanding that some of the “market cap” of various stocks is vapor, b/c if everybody tried to sell at the same time, the price would crash, there *still* is a difference between bitcoin (and other cryptocurrencies founded on proof-of-work and “censorship-avoidance”) and regulated financial instruments. David Gerard
in https://davidgerard.co.uk/blockchain/2017/12/17/why-you-cant-cash-out-pt-1-why-bitcoins-price-is-largely-fictional/ cites the crash of the Australian iGot exchange (http://www.abc.net.au/news/2016-04-11/australian-bitcoin-exchange-igot-on-verge-of-collapse/7315894)

“I [investor Owen Champion] just assumed that since they’re in Australia there would be some sort of safety net or regulation or something like that — bare minimum — where he could be accountable for his actions.”

If you’re a speculator, this might not dissuade you. But for even the financially sophisticated “investor”, the lack of *any* (and I mean *any*) legal safeguards *whatsoever* is a difference in kind between cryptocurrencies and regulated financial instruments. And this remains true even when we consider the long history of malfeasance surrounding those regulated instruments.


Eli Rabett 12.20.17 at 2:11 am

Bitcoin is like the millenials who get $20 at a time from the cash machines in the 7-11.


rogergathmann 12.21.17 at 9:25 am

Bitcoin is a unique investment vehicle to me, since it seems to have the property of attracting just those investors who, for every ideological reason, I would like to see stripped of their wealth, or at least severely diminished. It is like a liberal dream. So I say up with bitcoin, and may the ride down be as funny as the ride up!

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