Value and Bitcoin

The value of an object we buy or the services we consume is subjective. It is in the eye of the beholder, although it often reflects the general opinion of its worth. Ultimately, though, it’s our decision whether or not to buy something at the price asked. At a rarefied level, we see this every time there is an art sale at Christie’s and, at less stratospheric prices, during every episode of the Antiques Road Show. Very often, there are valuations which leave me astonished. But it also applies to things we buy for everyday consumption, when we choose between brands. So then, we are a value driven society. We are encouraged in this by the many price comparison websites which purport to give us information about the quality of the items and the relative prices asked by different vendors. The Welsh tenor “Gio Compario” has made a fortune out of representing just such a web-site for insurance. But when we want to know how much we can get from selling something, our own valuation of it is not exactly the last word. We need to know how others see it. And such estimates of value are not easy.

A particular example of the difficulty valuation presents us is the phenomenon, or as some would say, the Ponzi scheme, known as Bitcoin. In early January of this year, it hit the headlines because it had attained its greatest value since its creation. Although having no material presence, a single bitcoin was trading at just over £30,000 on 8 January. Two weeks later, it had fallen to £23,000. So then, a bit volatile. As we all now know, the ‘mining’ of bitcoins takes place on powerful computers, running the code provided by its anonymous creator. Indeed, in light of the value of the bitcoins mined, it now makes business sense to pay for the immense amounts of electricity needed to run the huge computer centres devoted to this mining.

The Iranian government, however, which had encouraged the creation of ‘Bitcoin farms’ on its territory, has now closed many of them, blaming their heavy electricity usage for the rolling blackouts the Iranians are suffering. For the Iranian government, this industry had been a very useful thing to encourage for two reasons – the farmers/miners paid 5 times the normal commercial tariff for their electricity and it provided the government with an alternative currency to trade in. They have no access to the normal banking system. Oh, and they still have rolling blackouts.

Bitcoin though has one or two inherent flaws. We have heard of many people with bitcoin on their computer hard drives who have lost their passwords. As an anarchic form of money, there is no-one at the centre to hold a record so that they can send you a password reset e-mail. There is a recent case in the UK where the owner of such a hard drive managed to throw it out by accident. He has offered the local authority 10% of the value of his bitcoins (they are worth £230 million) if they will dig through their tip to find it for him. An offer so far rejected. And then there is the fact that the bitcoin algorithm itself limits how many bitcoins can be produced in total (21 million). So then, over time, with the loss of passwords and hard drives, the number of bitcoins in circulation will necessarily diminish. Although it may seem that this will drive up the value of those left, ultimately, they will become a curiosity from a previous age, rather than a usable currency or even a tradable asset. Maybe they’ll appear on the Antiques Roadshow one day.

It seems very likely that the idea of avoiding the banking system was the original intention of its founder. Bitcoin was launched on 3 January 2003 and written into the code were the words “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. So then Bitcoin was offered as a means of payment which was not subject to the controls of the existing banking system or of governments. Although it has fulfilled its promise as an alternative means of payment in the shadowy corners of the world, the fact that it has a wildly fluctuating value is another reason why it’s difficult to see how it can ever become a part of the mainstream economy.

These days, we work, or at least some of us do, in order to be paid a salary. The money we receive has no intrinsic value but consists in effect of tokens which we can use to buy other things, or to save for when it is needed. But, ideally, those tokens need to have a stable value. We have seen the difficulty when inflation reduces their value, when the tokens needed to be in sufficient quantities that a wallet was replaced by a wheelbarrow. And in the same way, the unpredictable significant fluctuations in the value of Bitcoin would present major problems for everyday life.

Even though it does not have the stability required of a currency, various of the big financial players and a number of scammers have now seen how they can make money out of it without putting themselves at risk. They are starting to offer the man in the street the possibility of investing in Bitcoin. And having seen the increase in value of Bitcoins and, despite high charges for dealings on behalf of individual clients and warnings from central Banks that investors risk losing their entire investment, they have decided to gamble.

But there is another factor: the ‘currency’ is now having a significant effect on global warming. I read the other day that the people mining for Bitcoin are now using a quantity of electricity the equivalent of the entire power consumption of the Netherlands. Only 30 countries get through more energy.  With bitcoin usage still relatively low this means, according to researchers at Cambridge University, that each transaction uses the same amount of power as the average American household consumes in a month. By comparison, each Visa transaction uses about a million times less energy. So then, perhaps it’s finally time for the banking authorities actually to do something to protect badly-advised individual investors likely to lose their shirts and, at the same time, to protect the climate. After all, the climate too has value.

Paul Buckingham

24 January 2021

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