There’s been much talk about Bitcoin, the world’s first decentralised digital currency, recently due to its massive increase in value. But Common Weal researcher Craig Berry believes bitcoin is inherently incompatible with socialism…
People are very excited about bitcoin, a decentralised open-source network of digital currency, unique in that it holds no centralised institution in which to issue it. The community of users become the custodian of the transaction ledger, with the ‘algorithm’ demanding that users of Bitcoin police the open-access ledger.
It has become a project aiming to achieve a “free market” digital currency that’s separated from the banking and political institutions’ sphere of influence. Modelled from the gold standard, the scarcity of the Bitcoin is what has created its value.
But before analysing why this is so damaging, it’s important to explain how it all works (even if it seema little complicated). Just as gold has a fixed supply under the Earth’s surface, so too does Bitcoin have a limited supply that is artificial, so not to extend beyond 21 million units. Like gold, there are two ways in which Bitcoin can be obtained: first, it can be bought by using money. Second, it must be “mined” by the users to unearth more.
To ensure perfect community ownership of the transactions’ record, computing power is the mining tool in which Bitcoin users require to unearth more Bitcoins. As the numbers of transactions begin to grow, the computing power required for an individual to participate in the Bitcoin community (which unearths more access to Bitcoins) begins to increase also.
With the rise in computing power there is also a greater need for electrical consumption, meaning there is an environmental impact to greater use of this technology, and with its increased use, the impact on the environment is greater. As an energy-intensive technology, the pollution costs make Bitcoin a less than acceptable alternative. However, the issues are deeper than just the environment.
Deflation is a looming threat to the Bitcoin community. With a maximum supply of 21 million Bitcoins available, more than half of these have already been unearthed, and there have been limited goods and services which are denominated in Bitcoin. Due to the constricted rate in which the algorithm supplies Bitcoins, once it has significantly penetrated the marketplace, this constricted supply will be outpaced by the increasing rate in the quantity of new goods and services.
Put simply, the available quantity of bitcoins per each unit of goods and services will fall, which will cause deflation. As a consumer, when we reach deflationary periods, the value of the currency increases, which encourages people with Bitcoins to not spend them as the longer they wait, the cheaper goods will become. As a service/goods provider, the lag time between the purchase of a product and the delivery of that product, assuming a steady fall in averages prices, would mean a consistently reduced price-cost margin, which is a disincentive for firms to begin dealing in Bitcoins.
With a currency that has the potential to be so volatile, it’s exacerbated by the unhealthy ratio between speculators and users. Although it’s usual for there to be speculation in all currencies, speculators are a larger market than users within the Bitcoin community. Speculation creates instability and has the potential to drive out transaction demand.
Bitcoin mirrors the issues we see today. Under “free” market capitalism, there’s a widening chasm between the aristocracy and the working poor. The rich have appropriated the wealth created by working class citizens. The inequalities we face today in the physical world are transposed into the digital world. As stated previously, the only way to gain access to Bitcoin is to purchase it or to mine it with a computer network setup to do so.
The cost of setting up such a network, even the cost to purchase a Bitcoin itself is beyond the reach of most citizens today. This creates an exclusivity for those that have been privileged enough to appropriate a physical surplus and then forces the latecomers to buy into bitcoin at an increasing price.
What’s perhaps most reasonable about Bitcoin is also why it has gained increasing support. The 2008 financial crash has created a scenario where scepticism engulfs the government and the central bank. People want to create a scenario where bankers and politicians are unable to manipulate the publicly accumulated wealth to their own personal benefit.
What Bitcoin is supposed to be is a new currency controlled by the people. Socialists can agree that our current government is failing to work for us, but socialism requires social control of institutions, and this means regaining control of the financial institutions through political means. The faith that Bitcoin can create the parameters to allow a free and fair currency and remain apolitical is a false narrative.
Since the early 1900s, capitalism has allowed large corporations to survive by providing large credit spurts to tend to their financial needs. To afford this, boosts in the money supply were necessary to create additional capital and to allow new consumption patterns which maintained the economy’s new productive capacity. Even during the Gold Standard, capitalism had ways of creating new money.
The financial sector during the 1920s was able to boost the money supply, regardless of the monetary authorities arguing for stable correspondence between money and gold. Capitalism had to do this to survive, as the corporations would never have been as successful as they were without receiving additional capital to invest.
But with capitalism itself being flawed, this allowed financial bubbles to inflate which lead to the 1929 Great Depression. As with Bitcoin, finance will be required to introduce bitcoin denominated securities which creates asset bubbles, or the deflationary abyss which will cause users of bitcoin hardship until they can abandon Bitcoin altogether. Bitcoin cannot be depoliticised, and must face state intervention.
We use the state to encourage the behaviours that we believe acceptable and without proper democracy, state power is used to encourage the behaviours supported of the people in power at the time. Since the implementation of international neoliberalism, we have seen states set the system to encourage individualism and over-consumption.
We even allowed neoliberal governments to create the conditions which allowed the banking crises to happen. State intervention is what we use to ensure that our institutions, including financial institutions, work for us. Without social control, they’re used to benefit a small minority of people at the top. This isn’t a failure in our currency but a failure in the democratic infrastructure we have allowed to erode.
If currency cannot be apolitical, we must ensure the state structure is rebuilt to become a social institution, and this can only be done by electing a socialist government. We must democratise the institutions which control our currency. If we want our currency to be truly equal and fair, then we must embrace politics and create a state structure which encourages fairness and equality. After all, socialism cannot be successful built on a foundation that is ill-designed and doomed to fail.