Sun. Apr 11th, 2021

The virtual currency is scarce, sovereign and a great place for the mega-rich to store their wealth.In “Shuggie Bain,” Douglas Stuart’s award-winning and harrowing depiction of alcoholism, sectarianism and deprivation in post-industrial Scotland, money is always scarce and often dirty. Deserted by her second husband and unable to hold down a job, Shuggie’s mother, Agnes, relies on her twice-a-week child benefit to feed her children — or her booze habit. As the latter nearly always wins, she and Shuggie are regularly reduced to desperate expedients to fend off starvation: Extracting coins from electricity and television meters, pawning their few valuable possessions, and ultimately selling their bodies 

Stuart vividly captures the miseries of a Glasgow of greasy coins and filthy banknotes. After one of many wretched copulations in the back of a taxi, one of Agnes’s lovers inadvertently showers her with coins from his pocket. Shuggie’s father briefly reappears at one point, handing his son two 20-pence pieces from his taxi’s change dispenser by way of a gift, grudgingly adding four 50-pence pieces when the boy looks nonplused.The “rag-and-bone man,” who goes from house to house buying old clothes and junk, pays “with a roll of grubby pound notes” bound by an old Band-Aid. The image is especially startling because banknotes have so rarely featured in the narrative. The only credit in this world is from rent-to-own catalogues, the Provident doorstep lender, and a few hard-pressed shopkeepers.

I grew up in middle-class, mostly sober Glasgow, but I still remember the tyranny of those damned coins: the nightmare of having too few for a bus fare or the wrong sort for a phone box. To my children, all this is as much a part of ancient lore as pirate chests of doubloons once were to me. Coins are fast fading from their lives, soon to be followed by banknotes. In some parts of the world — not only China but also Sweden — nearly all payments are now electronic. In the U.S., debit card transactions have exceeded cash transactions since 2017. Even in Latin America and parts of Africa, cash is yielding to cards and a growing number of people manage their money through their phones.

We are living through a monetary revolution so multifaceted that few of us comprehend its full extent. The technological transformation of the internet is driving this revolution. The pandemic of 2020 has accelerated it. To illustrate the extent of our confusion, consider the divergent performance of three forms of money this year: the U.S. dollar, gold and Bitcoin.The dollar is the world’s favorite money, not only dominant in central bank reserves but in international transactions. It is a fiat currency, its supply determined by the Federal Reserve and U.S. banks. We can compute its value relative to the goods consumers buy, according to which measure it has scarcely depreciated this year (inflation is running at 1.2%), or relative to other fiat currencies. On the latter basis, according to Bloomberg’s dollar spot index, it is down 4% since Jan. 1. Gold, by contrast, is up 15% in dollar terms. But the dollar price of a bitcoin has risen 139% year-to-date.

This year’s Bitcoin rally has caught many smart people by surprise. Last week’s high was just below the peak of the last rally ($19,892 according to the exchange Coinbase) in December 2017. When Bitcoin subsequently sold off, the New York University economist Nouriel Roubini didn’t hold back. Bitcoin, he told CNBC in February 2018, had been the “biggest bubble in human history.” Its price would now “crash to zero.” Eight months later, Roubini returned to the fray in congressional testimony, denouncing Bitcoin as the “mother of all scams.” In tweets, he referred to it as “Shitcoin.”

Fast forward to November 2020, and Roubini has been forced to change his tune. Bitcoin, he conceded in an interview with Yahoo Finance, was “maybe a partial store of value, because … it cannot be so easily debased because there is at least an algorithm that decides how much the supply of bitcoin raises over time.” If I were as fond of hyperbole as he is, I would call this the biggest conversion since St. Paul.

Roubini is not the only one who has been forced to reassess Bitcoin this year. Among the big-name investors who have turned bullish are Paul Tudor Jones, Stan Druckenmiller and Bill Miller. Even Ray Dalio admitted the other day that he “might be missing something” about Bitcoin.Financial journalists, too, are capitulating: On Tuesday, the Financial Times’s Izabella Kaminska, a long-time cryptocurrency skeptic, conceded that Bitcoin had a valid use-case as a hedge against a dystopian future “in which the world slips towards authoritarianism and civil liberties cannot be taken for granted.” She is on to something there, as we shall see.

So what is going on?

First, we should not be surprised that a pandemic has quickened the pace of monetary evolution. In the wake of the Black Death, as the historian Mark Bailey noted in his masterful 2019 Oxford Ford lectures, there was an increased monetization of the English economy. Prior to the ravages of bubonic plague, the feudal system had bound peasants to the land and required them to pay rent in kind, handing over a share of all produce to their lord. With chronic labor shortages came a shift toward fixed, yearly tenant rents paid in cash. In Italy, too, the economy after the 1340s became more monetized: It was no accident that the most powerful Italian family of the 15th and 16th centuries were the Medici, who made their fortune as Florentine moneychangers.

In a similar way, Covid-19 has been good for Bitcoin and for cryptocurrency generally. First, the pandemic accelerated our advance into a more digital word: What might have taken 10 years has been achieved in 10 months. People who had never before risked an online transaction were forced to try, for the simple reason that banks were closed. Second, and as a result, the pandemic significantly increased our exposure to financial surveillance as well as financial fraud. Both these trends have been good for Bitcoin.I never subscribed to the thesis that Bitcoin would go to zero after it plunged in price in late 2017 and 2018. In the updated 2018 edition of my book, “The Ascent of Money” — the first edition of which appeared more or less simultaneously with the foundational Bitcoin paper by the pseudonymous Satoshi Nakamoto — I argued that Bitcoin had established itself as “a new store of value and investment asset — a type of ‘digital gold’ that provides investors with guaranteed scarcity and high mobility, as well as low correlation with other asset classes.”

What is happening is that Bitcoin is gradually being adopted not so much as means of payment but as a store of value. Not only high-net-worth individuals but also tech companies are investing. In July, Michael Saylor, the billionaire founder of MicroStrategy, directed his company to hold part of its cash reserves in alternative assets. By September, MicroStrategy’s corporate treasury had purchased bitcoins worth $425 million. Square, the San Francisco-based payments company, bought bitcoins worth $50 million last month. PayPal just announced that American users can buy, hold and sell bitcoins in their PayPal wallets.

This process of adoption has much further to run. In the words of Wences Casares, the Argentine-born tech investor who is one of Bitcoin’s most ardent advocates, “After 10 years of working well without interruption, with close to 100 million holders, adding more than 1 million new holders per month and moving more than $1 billion per day worldwide,” it has a 50% chance of hitting a price of $1 million per bitcoin in five to seven years’ time.

Whoever he is or was, Satoshi summed up how Bitcoin works: It is “a purely peer-to-peer version of electronic cash” that allows “online payments to be sent directly from one party to another without going through a financial institution.” In essence, Bitcoin is a public ledger shared by a network of computers. To pay with bitcoins, you send a signed message transferring ownership to a receiver’s public key. Transactions are grouped together and added to the ledger in blocks, and every node in the network has an entire copy of this blockchain at all times. A node can add a block to the chain (and receive a bitcoin reward) only by solving a cryptographic puzzle chosen by the Bitcoin protocol, which consumes processing power.

Nodes that have solved the cryptographic puzzle“miners,” in Bitspeak are rewarded not only with transaction fees (5 bitcoins per day, on average), but also with additional bitcoins — 900 new bitcoins per day. This reward will get cut in half every four years until the total number of bitcoins reaches 21 million, after which no new bitcoins will be created.There are three obvious defects to Bitcoin. As a means of payment, it is slow. The Bitcoin blockchain can process only around 3,000 transactions every 10 minutes. Transaction costs are not trivial: Coinbase will charge a 1.49% commission if you want to buy one bitcoin.

There is also a significant negative externality: Bitcoin’s “proof-of-work” consensus algorithm requires specialized computer chips that consume a great deal of energy — 60 terawatt-hours of electricity a year, just under half the annual electricity consumption of Argentina. Aside from the environmental costs, one unforeseen consequence has been the increasing concentration of Bitcoin mining in a relatively few hands — many of them Chinese — wherever there is cheap energy.

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