It’s promoted as some kind of “freedom”, but in case it’s not totally obvious, cryptocurrency is essentially a big scam. But unlike many scams, by design it pumps huge amounts of planet-warming CO2 into the atmosphere. Is it any wonder that the crypto bros are flocking to the Trump team?
Cryptocurrency is based on a few things. One is the blockchain, a distributed ledger that supposedly keeps track of all transactions. Another is mining, the process of creating cryptocoins. And then there are its applications. Who uses it, and why?
A blockchain is created by having a file that includes every transaction made with that chain, which generally represents a type of currency such as Bitcoin. Each participant has a wallet, which represents their coins. It has a password (preferably a long random number), which is why it’s called crypto: Each transaction that goes on the public chain includes a checksum which is secured by that password. So value can only be transferred from one wallet to another with the use of the sending wallet’s password. Lose it and you lose your money. If it’s weak and cracked (and this has happened), your money can be stolen.
The “value proposition” of crypto, then, is that money can be transferred anonymously, based only on the wallet ID (a very large pseudo-random number), without a bank. Stick it to the man! But who uses this? For various reasons, bank transactions are much faster and cheaper. So crypto is rarely used as currency for anything legal. It’s used for paying ransom and for buying contraband. Wonderful.
But it’s worse than that. “Web 3.0” was supposed to be built around this kind of distributed blockchain. But since every transaction makes the chain bigger, and each transaction involves computations that include the entire chain, it doesn’t scale well; transactions are expensive. So you probably can’t just get a wallet and put the whole Bitcoin chain on your laptop and spend away freely. Instead, users end up going to a crypto exchange. Something like those nice honest folks at FTX, Coinbase, or Binance. Not regulated like banks. The exchanges run their own little side chains, with a lower transaction cost. The main chain is sort of wholesale. But wait — doesn’t this start to resemble banks? It is a bit like a wild west variant of banks, unregulated, with lots of scamming and, worse, robbery. And no insurance. This is just a summary; Moxie Marlinspike has some really good writeups about this too which I recommend.
Now about that climate thing… Where does cryptocurrency get its value? A fundamental old law of money is that the value of a medium of exchange, before we adopted fiat currency, is the value of the work that goes into creating it. The price of gold, then, is based on the cost of mining more. Bitcoin is mined by wasting electricity doing unnecessary computations. The complexity of the computations continuously goes up, in order to maintain value. So with Bitcoin now over $50,000 per coin, a mining operation looks for the cheapest electricity so that they can maybe use $40,000 worth in order to find a new BTC. That’s a shit-ton of carbon being burned to create each coin! This is called “proof of work”. And each transaction requires a lot of that “work” too.
Electricity is fungible — all kilowatts onto the grid are essentially interchangeable. So even if there were a “green” mine using, say, solar power, that’s solar power that could instead be used to displace carbon-based power. But instead we do see mines opening up next to closed coal plants, even to restart them. A lot of this happens in China where there’s a lot of cheap coal. Or in oil and gas country like Texas. Any wonder, then, why the hard right, the oil barons and their sock puppet climate change deniers, is so big on crypto? Peter Thiel, Mark Andreesen, and other right-wing tech bros love their crypto too.
Apologists may note that the second-most-popular cryptocoin, Etherium, has moved from “proof of work” to a much less energy-intensive means of transfer, “proof of stake”. This basically takes the historic work (carbon emission) that was done to generate the pool of coin and then lets existing pool holders use their “stake” to validate others’ transactions. It’s much less harmful but it still derives from mining, and BTC is the big one with over 50% of the crypto business. Another variant, the stablecoin, tries to hold a steady value, like by linking it to dollars. That makes it more usable for sub-rosa transactions and less for speculation, but even these aren’t guaranteed; one early purported stablecoin, UST, was backed up by a non-stable crytocoin, Luna, and thus they failed together. A Libertarian dream of unregulated finance, eh?
Why do people who are not drug dealers or ransomware victims usually buy Bitcoin? Most is speculative, just gambling. The value of a single BTC is now over $50k, though it fluctuates wildly. It was pennies back a decade ago before it caught on and when the chain was short and you could mine it on your PC. So if you happened to buy in then, you might be rich now. But that’s not how money works. Actual currency is most useful when it is stable. When the value of the currency goes up, that’s deflation, which discourages actually spending it. It’s just a collectible, sort of a very very costly digital Beanie Baby.
The value of Bitcoin is backed up by the cost of the energy needed to mine it, but speculative demand can lead to a higher price. So most purchases are simply gambling on price fluctuations, hoping to get out at a higher price than you got in at. To that end there are Bitcoin ETFs (exchange traded funds), where you can gamble on the value of Bitcoin without actually touching it yourself. This is hardly how sound currency works! The stock market nowadays is largely a big casino, but at least common stocks have some connection to actual businesses. Bitcoin is more like The Airplane Game, just hoping enough suckers come along after you.
There are of course many other cryptocoins besides Bitcoin and Etherium. But none are really useful. Dogecoin was literally created as a joke, yet it caught on for speculation. For a while startups even thought they could fund themselves with “initial coin offerings” of their own blockchain currency, rather than issue stock. And let’s not even get started on NFTs.
Crypto has no good purpose and does much harm. For the sake of the planet, it should be abolished.
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