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The Bitcoin–Blockchain Mania

The latest asset price bubble is another symptom of capitalism’s inconsiderate pursuit of private wealth.

Significantly, with the launch of futures trading in the cryptocurrency bitcoin on the Chicago Board OptionsExchange on 10 December 2017 and the following week on the much larger Chicago Mercantile Exchange, large institutional investors, hitherto restricted by their rules from trading onunregulated exchanges, now have another promising financial instrument in their portfolios. With bitcoin prices soaring, the large institutional investors could not have held out any longer from the beckoning opportunity of raking in huge capital gains. Significant price volatility notwithstanding, at one point bitcoin touched the $20,000 mark in the third week of December from $1,000 in January 2017, generating apprehensions as to when the speculative bubble might burst. The hedge funds specialising in bitcoin and other cryptocurrencies seem to be having a field day, even as central bankers and financial authorities keep denouncing the bitcoin speculative mania as extremely risky.

Yet, the fact remains that it is the very monetary policy of “quantitative easing” followed by central banks, such as the Federal Reserve, the European Central Bank and the Bank of Japan, since the great financial crisis that has provided the unprecedented liquidity. This has been routed into speculative investment in the asset markets (stock, bond, other financial assets, real estate, etc), leading once again to a massive inflation in asset values. Such asset price inflation, accompanied by speculation in those very assets, has contributed to the growth of borrowing to finance the asset buying. This in turn has further fanned the inflation in asset values and spurred on the speculative mania. After all, the creditworthiness of the speculators is determined by the market value of the assets that they hold, which act as collateral for the lending banks.

With quantitative easing leading to easy liquidity, and with stagnation in the “real” parts of the developed capitalist economies, the competitive race to grab the hindmost of the impending capital gains naturally resumed. Thus, on the supply side of the financial markets, the “financial innovation” of cryptocurrency was quick to appear, with bitcoin being the first such digital currency in 2009. It uses cryptography to secure its transactions, control the creation and issue of additional units, and verify its transfers. Predictably, the shares of business ventures claiming to be exploiting bitcoin’s underlying decentralised ledger techno­logy, blockchain, have also been zooming on the stock market. And, even the shares of business ventures set up to create additional units of bitcoin and other cryptocurrencies—with a process that is called cryptocurrency “mining”—have soared.

One is reminded of the dot-com bubble of 1999 when the prices of the shares of companies claiming to be internet ventures went through the roof. Irrational exuberance seems to have taken hold once more. We might be exaggerating a bit, but if you want your company’s share price to zoom, just change its name, like the Long Island Iced Tea Corp did to Long Blockchain Corp! After all, are not the spokespersons of bitcoin and blockchain claiming that this financial product and process innovation heralds the second stage of the internet revolution? Unlike the dollar or the euro, or the rupee, the tall claim is that with bitcoin you will no longer have to place your trust in a central authority (a central bank) and a financial intermediary in the commercial banking system, or in the very system of states that back their respective central banks. Enter the era of global financing via the internet in a global economy that will no longer be constricted by the rules and regulations imposed by any central bank orfinancial authority!

The creation of such hype apart, the question of the impending bursting of the bitcoin–blockchain bubble needs to be dwelt upon. In 2007, just before the failure of the two Bear Stearns hedge funds and consequent freezing of the high-risk collateralised debt obligations market in June of that year, Ben Bernanke, the then Federal Reserve chairperson, claimed that a bursting of the market for the securities that were based on mortgage loans would not have any significant adverse effect on the financial system as a whole. Did he not know of the intricate interconnections between speculation in these securities and the larger financial system that would trigger the great financial crisis?

What then are the intricate connections between the bitcoin–blockchain mania and the other asset markets, bank lending, and credit default swaps? Frankly, we do not have a clue. We do however know that when a significant asset price bubble bursts and a number of the underlying collaterals vanish into thin air, all hell can possibly break loose across financial institutions and markets, and across countries in this world of globalised finance.

The larger point, however, is that with no end to long-term economic stagnation (slow economic growth, high unemployment/underemployment and excess capacity) in the developed capitalist countries, speculative finance, not productive investment, is the main engine of economic growth. In other words, a series offinancial bubbles are needed to keep the economic system going. The wealth effect—a tendency for consumption to grow, even in the absence of the growth of incomes, due to rising asset prices—brought on by such financialisation stimulates the real economy. But, when the financial bubble bursts, the real economy goes for a toss. Like earlier financial manias, the bitcoin–blockchain obsession too is indicative of capitalism’s pursuit of wealth by any and all available means, irrespective of whether these expedients have anything to do with satisfying the real needs of the people at large.

Updated On : 19th Jan, 2018


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