Hey, folks, here’s a transcript for the video I released on my channel yesterday: Why Crypto Doesn’t Work. This is here primarily as an accessibility feature, but some of it won’t make as much sense without the visuals! Head over to YouTube to see the actual video.
So, after my last video, which was about video games I thought I would move to the next logical topic… which is cryptocurrency!
Please be nice to me.
I am a financial analyst and I thought I would share with you why it is, if one of my friends said “Hey, I’m thinking of g etting into cryptocurrency,” I would maybe… have a conversation with them.
Now, to that end, I’m not here to make anybody feel bad, I’m not here to talk down to anybody, I’m not here to call anybody stupid. So if you’re worried about that, or if you’re lookin’ for it, that’s not what’s gonna happen here.
So, first maybe let’s get into some basics.
I think the easiest inroad to talking about what a cryptocurrency is, is to describe who made it and what they made it for. Cryptocurrencies are fundamentally a political invention, and the politics I think they most closely hew to are the politics of American libertarianism. And libertarians worry about the following problems: First, that American currency is fiat currency. That is, it’s backed by the full faith and credit of the United States, not by a commodity. And second, that “the full faith and credit of the United States” means the violence of the United States. The violence
of the United States’ political system. Its laws, its police. That sort of thing.
So, how do we solve that problem?
Well, most people can’t go, like, buy a gold mine. So they can’t go just get commodities in order to go back a currency with it. So, they simulated mining. You’ve probably heard the term “Bitcoin mining” before.
So, the way you simulate mining is you have a computer solve a problem and when it solves that problem, it gets one coin. The next computer has to solve a slightly harder problem and so on and so forth. So each coin gets progressively harder to mine. This is supposed to prevent inflation and also to make sure that, you know, as computers progress, they don’t just start churning out coins faster and faster. Sort of quasi-attaching it to a simulated commodity is supposed to make the currency more stable as well.
The record of who owns that unit of cryptocurrency is stored in a file called a block. In fact, all records associated with that currency is stored in blocks and uploaded to a database called a “blockchain.”
Now, if you’re smart and you’ve never heard of this before, you’re going to say, “Well, how do you prevent
that from being hacked?” Like even if it’s a network with a lot of security, there’s a lot of money associated with crypto, and there would be all the incentive in the world to try and hack it. Well, the way they prevent that is they distribute the records associated with cryptocurrency across many computers. If you’re familiar with BitTorrent, it’s similar
to that. The benefit to distributing it like that is if one computer goes down, or if ten thousand go down, the records are still there and if somebody tries to tamper with it, it’s evident because the records don’t match all the other records.
I’m not going to deny as a critic, this is a marvelous piece of technology. However, maybe you’ve already spotted a few problems. Let’s go over the obvious ones first. Solving all those problems to mine coin requires high end hardware and a lot of energy and both of those things are incredibly polluting. Now there are a couple of responses to what I just said.
First, well, all currencies are very polluting. Which is true! If you’re looking for me to criticize capitalism,
oh buddy. We got some criticisms here. I think all currencies have things that we can criticize them about. But I think it would be incredibly misleading to flatten all criticism of all currencies and try and say
cryptocurrency is the same thing as fiat currency.
Next, theoretically, cryptocurrencies could be mined using green technology. And that’s true, they could be. However Currently, they are not. The vast majority of cryptocurrencies are mined using fossi fuels, and that’s not just because of personal choice, it’s because that’s the energy infrastructure we have in the places that are mining Bitcoin. And no amount of saying “theoretically, we could use green energy” is going to change that. We have to live in reality here. Not only is green energy not widely available, some of the theoretical technology to make green energy widely available isn’t there yet. And that’s a problem across the board with a lot of green capitalism, is it relies on a lot on technology that frankly just doesn’t exist yet. Like, we need more aggressive solutions if we actually believe what we’re saying on climate change.
Last, there are a lot of people who are like “I don’t believe in climate change.” And again, I’m not here to make anybody feel bad. But my response to that is The preponderance of evidence says that it exists, and there is a scientific consensus that says it exists. I have to live in the world as it is. And I don’t concede the point that someone being
unconvinced is the same thing as being rationally skeptical.
But you’ve heard all this before, and if you wanted to hear about the scientific consensus on climate change again, you would’ve gone to a climate scientist’s
channel. If you’re listening to a financial analyst, you wanna hear about finance, you wanna hear about economics, you wanna hear about currency. I gotcha. Let’s get into the good stuff.
A LITTLE HISTORY
So I’ve covered a little bit about what backs crypto as a currency. First, according to libertarians, the mining of a simulated commodity, which is sort of by proxy the use of a real commodity, aka energy.
But, there is more subtly a second thing that backs cryptocurrency: faith. That’s what the blockchain is for. But there’s another sense of the word “faith” I wanna explore here. You have faith in a currency when you accept a currency to pay for goods and services and to settle debts. Like, there are a lot of things that hold value which, nevertheless, cannot be used as currencies.
For instance: I can go down to the pet store and find a gerbil for about three dollars. I can’t, however, go across the street and pay for my groceries with fifty gerbils. That will not work. Gerbils are not a currency.
So I think across the board, regardless of the political affiliation of who you’re talking to, the accepted definition of currency is something that holds value but which is also accepted to settle debts or to buy goods and services. And by that definition, cryptocurrencies meet it. So, cryptocurrencies are currencies, no dispute there. My question is more about, are the design principles upon which cryptocurrencies were built valid? And if they aren’t, what are the implications of that?
One of the first things we’re taught about currency when we’re little (and even older) is about barter. Let’s say I’m a tailor and you’re a sheep pers—
You’re a shepherd!
And I need wool and you need clothes. Well, we barter. We trade what I have for what you have and everyone is happy. Now, there’s a problem there. Sometimes I need wool, but you don’t need clothes. So, we invent currency. That way I can pay you in gold or seashells or whatever we have lying around, and you can take that money and buy whatever you need. That’s the story we are told.
And it is bull.
David Graeber in his book Debt: The First 5,000 Years does an incredibly thorough debunking of the barter myth. The problem with barter is that people’s needs almost never match up Therefore, barter never really happened all that often.
What would actually happen is that if I needed wool and you didn’t need anything I had, was that I would owe you. Then, after a certain amount of time passed, I would have something you DID need, and you
would come collect.
Let’s make it one step more complicated. I need wool, but you don’t currently need anything from me. We write down, or we make a little token representing, what it is I will, eventually, owe you. You take that little shirt token for a shirt you don’t need and you walk down the road and you hand it to a baker ’cause you do need to eat. That baker can decide, “Oh, I need a shirt!” So he comes down to me and gets his shirt.
That token was a currency because somebody had faith that it would buy a good or service AND a debt was settled.
Now, what happens if I’m kind of a skeezy person and the whole thing collapses because somebody brings me a shirt token and I say, “I don’t know what that is.” Well, I could do that, but then nobody’s going to, like… feed me. But it’s still kind of a problem, like people still do fall on hard times even if they’re not bad people. So, eventually currencies started being based on the debts of a king. And honestly, if you’re a Medieval peasant, what better person to rely on than the full faith and credit of a monarch who is supposed to be, you know, appointed by God ‘n stuff?
By the Middle Ages, they had already been using precious metals to back currencies for a few thousand years. So how did we go from accepting basically any IOU on any commodity as a currency, to primarily basing our currencies around precious metals?
The answer to that is complicated. Until the turn of the nineteenth century or so, shopkeepers paid in IOUs and accepted IOUs as payment. But of course there were also silver and gold coins that were used as tender, and there is a story of how that came about.
Let’s say once again I am a seamstress and you are a soldier. You just came back from war. As a soldier, you weren’t paid in coin. You were paid in spoils, which was whatever you could carry. And as heavy as gold and silver is, it is also very compact and it’s very valuable. So that would be primarily what you brought back.
So you nip off a piece of a goblet (or whatever) and you hand a piece of gold to me, and you say, “I need my uniform repaired.”
And I say, “What am I supposed to do with this?” “I don’t know anybody who needs any gold! Get outta here with this!”
So, generals and other rulers march down to my shop with a few more soldiers and say, “I need my army supplied. And I don’t care what you do with it, you accept my soldiers’ gold.”
And I say, “…Crap.” laughs
But at that point, as a shopkeeper, I am then stuck with using precious metals as a store for value whether I like it or not. And obviously I don’t like it very much because, as I said before, they didn’t primarily use coin as currency for a long time; several thousand years. So, the libertarian idea of what a precious metal does in a currency is a little bit off.
It’s not there to retain value, it’s not there to prevent inflation. It’s there because of the convenience of some ruler several thousand years ago. The use of precious metal to back a currency is also not at all a free market phenomenon. It was imposed by rulers and by governments. And backing a currency with a commodity (mined,
simulated mined, or not) does not add stability and we know that because…we have proof!
So all of that energy spent mining cryptocurrency is basically useless. If one day you can buy a mansion with a cryptocurrency coin and then the next day you can only buy a trailer, that’s a problem! At least for it as a currency.
Now, that’s not to say that cryptocurrencies will go away. What I think will happen is that they end up getting treated like a highly volatile commodity that people will invest in and try and get rich off of. And… that’s not great!
What I’m afraid is going to happen is cryptocurrency will call out of use as a currency and is instead treated like a highly volatile commodity which a lot of people invest in, and pull out of, and invest in, and which ends up having a lot of the same incentive structures, in the brain, as gambling. And as a financial analyst, I don’t gamble and I don’t tell other people to gamble. There are all kinds of ways in which it is addictive and destructive And… I worry for people.
So, what do we do about this? The answer is “I don’t know.” The way cryptocurrencies were designed were, if their designers re-thought their positions and assumptions, it’s self-sustaining, and there’s almost no
way to dismantle them. We’re kind of stuck with a class of currency which is very volatile, which is very dirty, which has a lot of the same incentive structures as an investment as gambling.
And… I don’t know what we do.
As for the people who are already into this, and who are true believers, and who are sort of of a libertarian bent, I want to say, I’m not here to make you feel bad, I’m not here to make you angry. I don’t think that the people involved in
cryptocurrency are bad or stupid at all, and I think the problems that cryptocurrency attempts to solve are problems which need to be solved. Currencies themselves are attached to state violence, they are attached to a system which is itself highly polluting.
What I would say to the people who are involved in this because they want a political solution to the problems we’re facing today is: Instead of looking to your right, maybe consider looking to your left instead?
[The Internationale plays]: Arise ye prisoners
Arise ye wretched of the earth
For justice thunders condemnation
A better world’s in birth!