The Truth About Cryptocurrency

Balancing Out The Enthusiasm

I’ve been actively researching the intermingled topics of serial killers, government mind control projects, and Satanic cults, so I will soon add another post in the series that I started with my review of Cathy O’Brien’s Trance Formation of America. In the meantime, since cryptocurrency has been a topic of discussion in the 2024 US Presidential election, here are some unpleasant truths about what exactly it is.

I’ll cover Bitcoin and its “proof of work” competition first, followed by Ethereum and its transition from PoW to “proof of stake”. I’m not an expert in economics, so I recommend the free online textbooks at CORE Econ for a thorough, balanced education on the subject. This post focuses on the technical details, so here’s an excerpt from the Income and wealth section of The Economy 2.0: Microeconomics:

Wealth⁠ is the value of things that you own that contribute to your well-being in some way, called assets. Households invest in assets, including houses, works of art, and financial assets like shares⁠, to ‘save’ or ‘accumulate’ wealth. The assets can either provide an income, for example the rents, profits, interest, or dividends from physical and financial assets you own, or provide other valued services, for example the transport and accommodation made possible by your vehicle and home. If you own intellectual property (such as patents, trademarks, and copyrights) these are also part of your wealth. A work of art is an asset that may appreciate in value, and at the same time, provide pleasure on the wall of your sitting room. Debts require you to make payments to others, and therefore count as negative wealth.

The term wealth is also sometimes used in a broader sense to include your health, skills, and ability to earn an income (your human capital).

I didn’t find a short definition of “money” that didn’t primarily use examples, such as coins and banknotes, but here’s the start of Merriam-Webster’s definition:

something generally accepted as a medium of exchange, a measure of value, or a means of payment

Karl Marx talked a lot about money, and I know he’s considered “evil” by capitalists, but there’s some real value to his analysis, which likely explains why he’s been so demonized (besides the historical failures of various explicitly Marxist economies). From a longer essay, “Marx’s monetary theory and its practical value” by Guogang Wang in China Political Economy (worth reading in its entirety, including for its analysis of why Bitcoin can’t be considered money):

Marx believed that money performs five functions, namely, measure value, means of circulation, means of hoarding, means of payment and universal currency. These monetary functions are closely related to commodity circulation. The title of Chapter 3 of volume 1 of Das Kapital is “Money or circulation of commodity,” which regards “money” and “circulation of commodity” as equivalent categories. This not only means that money serves the circulation of commodity, which implies that money will lose the practical significance of existence if it cannot meet the needs of commodity transactions; but also means that the mere mention of “circulation of commodity” refers to the function of “money,” which implies that there is no “circulation of commodity” without the function of “money.”

Now to the technical analysis. If you’re not convinced by my quick explanation, and you want to read a detailed analysis with equations and graphs by a real economist, I highly recommend Nassim Taleb’s “Bitcoin, Currencies, and Fragility” (PDF link).

In a nutshell, Bitcoin is a distributed public database consisting of a log of transfers of ownership – with owners identified by private digital keys held in local digital “wallets” that correspond to public keys on the Bitcoin ledger, assuming they’re not using a private crypto exchange to hold the keys for them – of tokens representing Bitcoins (BTC), or fractions thereof. As I write this, one BTC is valued at nearly $62,000 USD. But what are the BTC actually made out of?

The glue that holds the Bitcoin network together is the concept of zero-trust, where the assumption is that many mutually untrusting parties will cooperate to store an immutable ledger of transactions in perpetuity if there’s both a selfish incentive to do so and a mathematical guarantee that other parties won’t cheat and corrupt the ledger. The selfish incentive is the “mining” of coins, which takes place by a continuous lottery system where miners expend vast quantities of electricity in a guessing game trying to find a value, or “nonce” (the “arbitrary number used once” meaning, not the “person who commits sex crimes with children” meaning), that, when mixed with the cryptographic hash of all the transactions up to that point, has an arbitrary number of 0 bits in front, with the specific number varying depending on the total number of computers playing this game, and how good they are at it. Thus, the challenge of the lottery is regularly adjusted to make it extremely difficult.

The reward for being first to find the nonce that fits the lottery criteria for the transactions up to that point, plus a set of new transactions submitted by users of the network, is a payout in new BTC, and all of the computers in the network verify that a winner has been found for the current round of the game, add the new transaction block to the chain (hence the term “blockchain”) plus the ownership of the newly-created BTC, and everyone goes to work with a new set of pending transactions trying to guess the next winning nonce before someone else does. In this way, a new block is added every 10 minutes, with a median transaction speed of 3.3 to 7 transactions per second. That’s an abysmally slow speed for something intended to be a global financial network, so there are various workarounds, particularly something called a “layer 2” network where a smaller number of mutually untrusting parties collaborate on a set of transactions and then submit them to the main blockchain. This issue is called the Bitcoin scalability problem.

My main criticism with this whole scheme is that vast quantities of electricity are being thrown away on a game that’s essentially a “tulip mania”. There’s nothing behind the assumption that BTC has an exchange value with conventional forms of money other than the fact that people collectively believe that it does. Unlike gold or silver, there’s no commodity use for BTC. You can only trade it with others. Unlike central bank currencies, you can’t pay your taxes with BTC, and governments and banks can’t create it to pay salaries or lend it at interest, paying interest to depositors. Bitcoin enthusiasts see this as a strength, because the underlying philosophy that led to its creation was the Austrian school of economics, which is rooted in a distrust of all collectives and institutions, and a religious faith in individual selfishness as the principle behind which all of society and economics should be organized.

It takes tremendous amounts of electricity to power the computers in the network to play the nonce-guessing game, due to the number of other players and the electricity collectively wasted on this endeavor, to move around figures at a speed that a handful of humans could accomplish with pen and paper, in a non-distributed system. People are currently discussing the vast quantities of electricity being spent on “A.I.” models which can churn out text, photos, video, sound, etc. in response to human prompts, after being trained with vast quantities of human-produced input, thus creating new works that appear to be the creation of humans, but which have no human consciousness behind them and are actually the mindless extrapolation of the training data with no thought process behind it. Even so, A.I. models have real value to people. They can create art in the style of other artists and write answers to questions based on what they’ve been told. One can argue that the electricity is not wasted.

There’s no such argument to be made for Bitcoin and other “proof-of-work” systems. They’re actually extremely slow means of trading receipts that merely prove that vast quantities of electricity were wasted in the past on a game of mutual mistrust where the purpose was to store the log of all the transactions trading the receipts created by the past waste of electricity. It’s completely circular and, in the end, 100% pointless.

As to Ethereum, it innovated on the original system in two ways. First, the creators added a method where, in addition to transactions, arbitrary programs can be run, very slowly, on the collective network, and the result of those programs’ execution is also stored on the public blockchain, forever. Those programs are limited to manipulating data fed into them and the Ethereum tokens themselves. In this way, people have created a variety of new coins, as well as so-called “non-fungible tokens” (NFTs), which are supposed to represent “ownership” of something digital or otherwise in the real world. There’s no legal backing behind any of this, although enthusiasts would like to one day be able to buy and sell property and other real assets using this system. It seems that this very slow, redundant computer is only useful for creating new tulip manias, Ponzi schemes, casinos, and related swindles.

The other innovation was the transition from “proof-of-work” to “proof-of-stake”, which I must admit was quite an achievement to pull off on a system based around mistrust and selfishness. Today, Ethereum doesn’t waste vast quantities of electricity, but instead the selfish motivation is handled by means of the nodes in the network staking their holdings of ETH tokens on their honor that they’re going to record future transaction blocks accurately and not swindle anyone. If stakeholders do try any shenanigans, the rest of the network will punish them by confiscating some of the stake. This, too, is a completely circular system, only now the rewards in terms of new tokens are given to the parties who already hold existing tokens, rather than to the parties who are willing to spend vast amounts of money on electricity to waste. In that regard, it’s not too different from the old-fashioned banks that crypto enthusiasts despise. Either way, the rich become richer, except with layers of tech obfuscation.

I hope by this point you can see why I’m disgusted by this development, and by the enthusiasts who worship these networks with religious fervor. To the Bitcoin faithful, they’re not participating in a new “South Sea Bubble” based on emotion and greed, but rather they’re building up “generational wealth” in the form of proof of their participation in a scheme to waste unconscionable amounts of electricity. Because so much electricity as well as capital in the form of the specialized computers needed to turn that electricity into winning nonces, has already been expended, and because the mining computer hardware looks very big and impressive (and uses so much power), true believers claim that by some magical transmutation, they’re participating in something that advances humanity and their selfish efforts will be rewarded forever and ever, amen. They have deep faith that the bubble will never burst, and they lash out with anger at anyone who dares to doubt the reality of their new money God.

Other participants are trading Bitcoin and other tokens on the “greater fool theory”, hoping to buy low and sell high, and ultimately to cash out before it all collapses. I find the whole endeavor to be distasteful, but I must admit that it has exposed many people to important questions about the nature of money, value, and wealth, which humanity must grapple with, and soon, due to the ever-increasing inequality in the current global economic system that is concentrating wealth and power into ever fewer hands while impoverishing an ever-greater number of humans. Hopefully humanity will collectively agree that wasting electricity in greed-based lotteries is a poor use of our time, and we’ll find ways to rebalance or overhaul the system so that everyone can have their basic needs met, while also being motivated to contribute to society in meaningful ways in exchange for appropriately valuable rewards.