The Bitcoin Bubble

The price of Bitcoin has soared to a record $11,000. It is up more than 800% this year. A look at a chart shows that its parabolic rise, is typical of every other such asset price bubble, in the past, at the point where it is about to burst. There is reportedly a record level of Google traffic about buying Bitcoin using credit cards, as a bunch of bigger fools enter the market at the top, ahead of the bust, to buy an overpriced asset using credit, again a feature of every previous bubble just before it burst. In the next few weeks, the Chicago Mercantile Exchange will start trading Bitcoin Futures, again not only allowing all of the bigger fools to enter to buy into the bubble using derivatives, but will also allow people who recognise the bubble for what it is, to enter to short it. A lot of people on one side of this trade will lose a lot of money, whilst a small number of people on the other side of the trade will be happy to take that money off them. As with all such financial panics, there is no reason why this should have any impact on the real economy.

One commentator on Bloomberg the other day noted that Bitcoin was definitely in a bubble, and that when such bubbles burst, the price falls typically by around 80%. Quite true, and I have myself said in the past, that I expect the price of property to fall by 80% from its peak, and I expect similar falls in stock markets, and bond markets, in real terms. In 2000, when the NASDAQ bubble burst, it dropped by 75%, for example. However, the Bitcoin bubble is different. When Tulip bulbs soared in a similar bubble during the Tulipmania, the bursting of the bubble saw a similar collapse in the price, but tulip bulbs did at least have some value. Land has no value, because it is not the product of labour, but it does have a price, because it has a  use value, as a necessary instrument of production, whether to be used for the growing of crops, the mining of minerals, or on which to stand factories etc. The price of land is the capitalised capitalised rent it produces, and so long as the land continues to have a use value, in this way, it will always have a price greater than zero. In the case of property, its price is not only composed of the price of the land it sits on, but also the actual value/price of production of the building itself, determined by its current cost of reproduction. Bonds and shares have no value, they are only fictitious capital, but like land they have a price, equal to the capitalised revenue (dividends, coupon) they produce. So, long as the underlying real capital, on which they have a claim continues to exist, so as to produce profits, or so long as the state that issues them continues to be able to raise taxes to pay the interest, they will always have a price greater than zero.

But, that is not true of Bitcoin. Not only does it not have any value, but there is nothing stopping its price going to zero. For something to have value, it must fulfil two conditions. Firstly, it must be a use value, secondly, it must be the product of socially necessary labour. But, the only use value of Bitcoin is actually to act as an asset, and it can only act as an asset so long as it is considered to have value, or at least to have a price. Bitcoin can be said to be the product of labour, in that it requires miners to dig it out, but its price does not derive from this labour, but from the fact that it is in artificially constrained supply. In other words, it is the consequence of monopoly. But, there is nothing stopping someone creating another crypto-currency, and they have, and that means that, although the supply of Bitcoins may be limited, the supply of crypto-currencies in general is not limited.

Bitcoin has some similarity with gold in that although both are constrained in supply – one by its natural rarity, the other by a deliberately engineered scarcity – once created they are not destroyed, and so remain in supply. The difference is that gold besides being a form of currency, is also a commodity, and a use value. Whilst gold is being used as money, that is its only use value, it gives up all of its use value as a material to be used in jewellery, to be used in high-end electronics and so on. However, it could only become a currency, could only become the money commodity in the first place, because it is also a commodity, is a use value, with a value determined by the labour-time required for its reproduction. Gold will always retain this value as a commodity, even where it is not used as an asset or as money. The price of gold may be driven above its exchange value /price of production, as a consequence of an asset price bubble, and by the fact that its supply is constrained, and similarly when such a bubble bursts, the price of gold can sink below its exchange value/price of production, but the value of gold can never sink to zero, precisely because it is a use value, is a commodity, and does require labour for its production. That is not true for Bitcoin. If Bitcoin is not used as currency – and in fact, it does not even possess the qualities required to be a currency – or used purely as a financial asset for speculation, then it has no other use value, and any labour expended on mining it, is simply unnecessary labour, which produces no value. There is no reason, therefore, why the price of Bitcoin cannot go to zero, unlike any of these other assets, which have all, and many currently also are the subject of speculation, and whose prices have been driven into similarly astronomical bubbles waiting to burst in catastrophic fashion.

Proponents of Bitcoin describe it as currency, but it is not. Currency is money in circulation, the word currency itself deriving from the French word, which also gives us current, as in a flow of water. But, to act as currency, therefore, it must first be money, and money is nothing more than the universal equivalent form of value. What is value? Value is labour, and the measure of value is labour-time . But, value can also be measured indirectly in terms of how much of some other commodity, one commodity exchanges for, in other words its exchange-value. Money is simply this exchange-value stood up on its hind legs, and assuming physical form, so that instead of measuring the value of any product/commodity directly by the amount of actual socially necessary labour-time it represents, or by measuring it indirectly by the quantity of other commodities it can command, it is simply measured in terms of this one single commodity, which everyone agrees to accept in exchange for any other commodity. Bitcoin is not currency, because it is not accepted as a universal equivalent form of value.

When someone says that the price of a litre of wine is £1, the origin of this price goes back to the quantity of the money commodity, in the case of Pounds to silver (the name Pound Sterling comes from a Pound of Sterling silver), whose equivalent it represents. If we ignore the question of commodities under capitalism exchanging at prices of production, rather than at their exchange values, what it means is that a litre of wine has the same value as a Pound of silver. What gives these two different things this equal value? It is that they both require the same amount of social labour time for their production. When A exchanges a litre of wine for a Pound of silver, and B likewise exchanges a Pound of silver for a litre of wine, what they have both, in fact, exchanged is an equal amount of social labour-time. What appears as a relation between things, wine and silver, due to commodity fetishism, is, in reality a relation between people, and the labour-time they undertake.

Precious metals such as gold and silver take on the role of money commodity, of being the universal equivalent form of value, precisely because they themselves have value, they are commodities that have use value, and possess value. Where money differs from other commodities, is that, as currency, it takes on this specific role. The wine maker who exchanges 1 litre of wine for 1 Pound of silver, does not do so, because they want silver as a use value, in the way that the jeweller might do, for example. They want the silver only for its use value as money, for the fact that it can be exchanged for any other commodity, for example, so that the wine producer might buy bottles, for their future production, or might buy food to enable their own personal consumption. Money, thereby enables its owner to have command over an equal amount of value/social labour-time in any other form, and as such that money can be stored, for such future use. Money, in whatever physical form it assumes, including the form of electronic digits in a bank account, is then merely a claim to a certain amount of labour-time.

Money takes the form initially of some physical commodity, be it cattle, gold or silver because those who engage in trade, need some commodity whose value they can determine, and whose value is also thereby assured to be able to continue to give them this claim over social labour-time. Money, thereby goes back in history to a period long before the establishment of governments and states. When states arise, they also appropriate to themselves the function of determining what is money, and exercising control over the money-supply. The manifestation of that is that the money commodity itself takes on the form of the coin, minted and put into circulation by the state. 

But, the reality is that it is not the value of the coin itself that is determinant, but the amount of value/the amount of social labour-time, it nominally represents. If silver is the money commodity, and 1 Kilogram of Silver is given the name £1, which is also equal to 100 hours of labour-time, if I produce a silver coin that contains only 100 grams of silver, but which I likewise give the name £1, so that I am saying that it has a claim on 100 hours of labour-time, this coin can fulfil exactly the same function as did the 1 Kilogram of silver, but does so at much less cost. If, on the other hand, I produce 10 of these coins and put them into circulation, so that I have put into circulation a claim to 1,000 hours of social labour-time, it is clear that these coins cannot all fulfil that function. What will happen is that whatever the face value of these coins says, of giving a claim to 100 hours of labour-time, each coin can only exert a claim on only a tenth of that amount, because only 100 hours of labour-time exists as its counterpart. The price of every commodity would then rise tenfold, so that a litre of wine instead of having a price of £1 would have a price of £10. In other words, there would be an inflation of prices.

The important point here then is that it is irrelevant how much value is actually contained in the coin or other money token. Silver coins whose silver content had been worn away to a fraction of their nominal silver content always continued to circulate at the full value of the coin. What is decisive is the nominal amount of social labour-time that the money token purports to have a claim on, and the quantity of such tokens put into circulation. When a Bank of England Pound Note, said that the Bank Governor, promised to pay the bearer a certain quantity of gold, all this actually meant was that the Bank promised to pay the bearer a quantity of value, i.e. a quantity of social labour-time, whose physical manifestation was a given quantity of gold.

This is why fiat currencies can work just as effectively as a currency based upon some money commodity such as gold. Rather than saying that the Bank of England promises to pay the bearer a quarter of an ounce of gold, all that is required is for it to say that the Bank promises to pay the bearer 10 hours of social labour-time, or what amounts to the same thing that the note can be exchanged for any commodity that bears the same amount of value. Indeed, as Marx says in The Critique of the Gotha Programme, when money itself has disappeared, let alone any connection of it to gold or silver, this basic relation will continue, with each person being given a certificate entitling them to a certain quantity of social labour-time, proportionate to the value they have themselves created by their labour, and they will then be able to exchange these certificates for products to an equal amount of value/labour-time.

“... and with this certificate, he draws from the social stock of means of consumption as much as the same amount of labour cost. The same amount of labour which he has given to society in one form, he receives back in another. 

Here, obviously, the same principle prevails as that which regulates the exchange of commodities, as far as this is exchange of equal values. Content and form are changed, because under the altered circumstances no one can give anything except his labour, and because, on the other hand, nothing can pass to the ownership of individuals, except individual means of consumption. But as far as the distribution of the latter among the individual producers is concerned, the same principle prevails as in the exchange of commodity equivalents: a given amount of labour in one form is exchanged for an equal amount of labour in another form.” 

In this situation too, were it the case that some unscrupulous person or group of people engaged in forgery, and produced a large quantity of these certificates, the same inflation would occur, because the nominal demand for goods and services, in terms of the amount of social labour-time demanded in exchange for these certificates, would exceed the quantity of value of goods and services available to meet that demand. Shortages would arise, and as always happens in such circumstances, that in turn enables other groups of unscrupulous individuals to establish a black market for those goods and services in short supply, for which queues have formed, and on this black market, the price of these goods and services rises way above their nominal price in the official stores.

In effect, this is what the Stalinists did in Russia in the 1920's, when they believed they could create value out of nowhere by simply printing excess currency. As Trotsky remarks in The Revolution Betrayed,

“The platform of the Opposition (1927) demanded “a guarantee of the unconditional stability of the money unit.” This demand became a leitmotif during the subsequent years. “Stop the process of inflation with an iron hand,” wrote the émigré organ of the Opposition in 1932, “and restore a stable unit of currency,” even at the price of “a bold cutting down of capital investments.” The defenders of the “tortoise tempo” and the superindustrializers had, it seemed, temporarily changed places. In answer to the boast that they would send the market “to the devil”, the Opposition recommended that the State Planning Commission hang up the motto: “Inflation is the syphilis of a planned economy.”” 

(Chapter 4)

All that is required for a fiat currency to function effectively is that the quantity of it put into circulation should be limited to the amount of social labour-time, it nominally represents adjusted for the velocity of circulation. In other words, if £1 is designated as representing 10 hours of social labour time, then if the velocity of circulation is 10, then ten £1 notes will circulate 1,000 of social labour-time. If instead 11 notes are put into circulation, this would represent 1,100 hours of social labour-time, and consequently prices would rise by 10%. In fact, a look at consumer prices over the last 20 years shows that the more or less worthless paper dollar has been a much more stable measure of value than has gold. In 1999, the price of gold stood at $250 an ounce, but within a few years it had risen to $1,000 and ounce and by 2011, stood at nearly $2,000 an ounce. This rise in the price of gold was due neither to a fall in the value of the dollar, or a rise in the value of gold, any more than when the price of gold fell from $2,000 an ounce after 2011 back to $1200 an ounce, that was due to a fall in the value of gold, or a rise in the value of the dollar. It was due to speculation in gold. Had gold been used as a measure of value during that period rather than paper dollars, prices would have been all over the place, on an almost daily basis. 

But, at the same time, it has been the oversupply of dollars and other currencies, which has also created the basis for such speculation, whether it is in gold, bonds, shares, property or Bitcoin. All of these bubbles will burst, and probably the bursting of one, will be the catalyst for the simultaneous bursting of them all.