The only currency in the world this year that has performed worse than bitcoin (which accounts for 55 per cent of all of them by value) is the Venezuelan bolívar

The Independent Hamish McRae  Wednesday 12 September 2018 16:00

It’s official. This week the crash of cryptocurrencies in now greater than the crash in high technology shares after the dot-com bubble at the beginning of 2000. On Wednesday the MVIS CryptoCompare Digital Assets 10 Index had fallen by 80 per cent from its high in February this year. The Nasdaq index of high tech US shares fell by 78 per cent from its peak in March 2000 to its trough in 2002.

I’m grateful to Bloomberg for pointing out the parallel, and it makes a change from comparisons with the Dutch tulip mania in 1637, or the South Sea Bubble of 1720. It also carries a real warning. The collapse of the dot-com boom was followed by a US recession (the UK just avoided one), while the easy money policy that helped to pull the US out of that recession helped create conditions for the much bigger crash in 2008.

But you have to be careful when drawing comparisons, for what happened in the past can be a false friend. For a start, cryptocurrencies are tiny by comparison to high-tech companies in America. The value of the cryptocurrencies at their peak this year was $831bn. The value of the companies on Nasdaq at its peak in 2000 was $6,600bn. Allow for inflation and you can see that the wealth lost in the dot-com crash was ten times as big. Incidentally, Nasdaq market capitalisation now is $15,370bn, and the value of cryptocurrencies $186bn.

That leads to the next point, whether cryptocurrencies at some stage will recover and maybe surge ahead in value and importance. After all, a lot of people lost money in the dot-com crash, but the technologies associated with it changed the world. Here, my instinct is that they won’t recover to any significant extent because they don’t fulfill the classic functions of money.

In order to make a comparison with their performance and that of Nasdaq, I had to convert their value into dollars, rather than converting Nasdaq’s value into, say, bitcoin. So they were not able to perform the first role of a currency, being a unit of account – a unit that enables you to compare different prices against each other. Its own value changes too much.

They do to some extent act as a medium of exchange, the second classic thing a currency is used for. A Rolls-Royce dealership in Houston, Texas, has just announced that it will sell you a new one for Bitcoin – 55 of them reportedly, though if Bitcoin keeps falling, they might want a few more. I suspect, since its outgoings are in dollars, it would convert the bitcoin into dollars pronto. Actually the various cryptocurrencies are used for some trading, stuff such as software and the like, but it is quite limited.

As for the third function, a store of value, they are clearly very bad ones. On my quick tally the only currency in the world this year that has performed worse than bitcoin (which accounts for 55 per cent of all of them by value) is the Venezuelan bolívar.

But they are a significant asset class, and they are useful to some people who don’t want to have their transactions traced. It would be unfair to say that they are the currency of choice for criminals, just as it is unfair to say that people who chose to be paid in cash are drug dealers or tax evaders. But in a world where our every movement and just about every action is tracked, it is certainly a bit of a relief to be able to stay under the radar.
CEO Financial Conduct Authority: ‘If you want to invest in bitcoin be prepared to lose all your money’

This concept of them as an asset class fits in with the new surveyof financial executives by Forbes magazine, where 70 per cent believe they are here to stay. Gradually legislation will catch up, as it always takes time for the legal and regulatory systems to adapt to any new technology. Thus the US Securities and Exchange Commission thinks some tokens might be considered securities, which would bring them under government jurisdiction.

The Winklevoss twins, famous for their roles in the 2010 film about Facebook, The Social Network, have just got regulatory approval for a new cryptocurrency, the “Gemini dollar”, to be pegged to the US dollar. That would certainly get rid of the volatility issue, and pegging to the dollar is a device periodically used by Latin American countries to try to give stability to their own currencies. But I can’t quite see the advantage: why not just use dollars?

There is a further twist to the tale. The world is coming to the end of a long bull market, driven by shedloads of free money printed by the central banks. There may be a year or two left, but gradually some sort of normality will return. Under those circumstances, what role does a fringe asset have? The more that it is brought into the mainstream, the more it will be tracked, unlike cash. If someone suddenly has a lot of them, the tax authorities will want their slice, and rightly so. Indeed possession of a cryptocurrency might even act as a red flag, signalling to government agencies where to investigate. Maybe buying a Rolls-Royce with bitcoin is not such a great idea after all.

How Bitcoin Could Drive the Clean Energy Revolution

The system’s economic incentives favor clean, renewable, energy.

Bitcoin’s recent incredible price increases have come along with equally sensational headlines about its energy usage. There are plenty of reasonable voices out there; I particularly recommend Ars Technica and TechDirt, and also this researcher who suggests that (at least by last spring) miners used less than annual Christmas tree light consumption. However, there are also people suggesting that bitcoin mining will boil the oceans. We are going to release a more comprehensive, just-the-facts backgrounder on Bitcoin’s energy use soon, but today I wanted to briefly present an alternative to the boil the oceans thesis: If Bitcoin mining did become the dominant driver of energy consumption, then that could be a good thing for the environment! Just as the consumer electronics revolution drove the massive computing efficiencies known as Moore’s law; the Bitcoin revolution could drive a similar explosion of innovation in clean efficient energy.

It’s common knowledge that heavy industry drives electricity efficiency. Why? Because heavy industry can generally be based anywhere, and electrical costs tend to be a large percentage of their total costs. Electricity is 40-45% of costs to chemicals manufacturing (like chlorine production) and a whopping 30-50% of costs to steel and aluminum smelting. That means that heavy industry will base itself where costs are lower, and that will tend to be wherever electricity is affordable because its production is more efficient. Demand drives supply and thus rewards those who develop cheaper modes of electricity generation. Lately that has roundly been a green affair. The cheapest electricity on the planet is now wind and solar energy. Geothermal and hydroelectric are also top contenders and don’t have to deal with storage issues.

However, electricity costs may not always be top of mind for your typical heavy industry proprietor. They may put up with expensive, dirty energy if other costs drive their decision-making. Industries also like to be where their customers are, where it is cheap to ship material inputs like scrap metal, and where governments grant them subsidies in order to encourage industrial growth.

But electricity costs matter even more to a Bitcoin miner than typical heavy industry. Electricity costs can be 30-70% of their total costs of operation. Also, Bitcoin miners don’t need to worry about the geography of their customers or materials shipping routes. Bitcoins are digital, they have only two inputs (electricity and hardware) and network latency is trivial as compared with a truck full of steel. This particular miner moved an entire GPU farm across the U.S. because of cheap hydroelectric power in the Pacific Northwest and, in his words, “it’s worth it!” That’s also why we see miners in Iceland. Aside from beautiful vistas you can find abundant geothermal and hydraulic power in the land of volcanoes and waterfalls.

If Bitcoin mining really does begin to consume vast quantities of the global electricity supply it will, it follows, spur massive growth in efficient electricity production—i.e. in the green energy revolution. Moore’s Law was partially a story about incredible advances in materials science, but it was also a story about incredible demand for computing that drove those advances and made semiconductor research and development profitable. If you want to see a Moore’s-Law-like revolution in energy, then you should be rooting for, and not against, Bitcoin. The fact is that the Bitcoin protocol, right now, is providing a $200,000 bounty every 10 minutes (the bitcoin mining reward) to the person who can find the cheapest energy on the planet. Got cheap green power? Bitcoin could make building more of it well worth your time.

Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permissionless blockchain technologies.