Why Would Anyone Buy Bitcoin?

A few years ago, in my predictions for 2018, I suggested that Bitcoin would go to zero, having gone up to $20,000.  Well, it didn't quite hit zero, but did fall by 75%, back down to $5,000.  Having languished for a while, its recently soared to even new, and more ridiculous heights, of $42,000, before then crashing by 30%.  Even at that, its still over $30,000, a ridiculous price for something which has no value, nor use value.  The question is, then, why would anyone buy Bitcoin, or any other crypt-currency?

The answer is for the same reason they have bought, government bonds, shares, and other financial assets, or that they have bought property, or wine, or art, or vinyl records, or a score of other speculative assets.  That is, they have bought them in order to speculate, to gamble on the fact that, as a result of money printing by central banks, the prices of all these speculative assets has risen.  The prices rise not because any of them have risen in value - most of these things have no value - or that their use value has increased, but purely because this speculative demand has risen, causing the prices to rise, which fulfils the prophecy that the price will rise, creating a capital gain, which drives yet further speculation, as others seek to obtain the same gains, and not lose out.  In other words, the creation of bubbles, on the basis of the bigger fool principle, i.e. there is always some bigger fool than you waiting to buy them from you at an even more ridiculous price.

With yields on revenue producing assets having fallen to near or even below zero, people buy these assets, not to obtain revenues from them, but to obtain these capital gains.  Indeed, the search for the capital gain, drives the price higher, and so drives the yields ever lower.  Speculators, obtain revenue not from the actual revenue produced by the asset, but by converting a portion of the capital - the capital gain - into revenue, what is called taking profits.  Its a death spiral in which fictitious capital eats real capital, as the revenues from real capital, profits, rents, interest are used not to accumulate more real capital, and so produce more surplus value, but is used to buy these speculative assets that create no new value or surplus value.

With lockdowns having provoked governments into even more money printing to finance their borrowing, the inevitable consequence is going to be inflation, which means that those with available money-capital, will see real negative yields on financial assets fall even more, unless interest rates rise.  Those with money tokens will see the exchange value of those tokens decline - inflation - so that they will seek to get rid of the money tokens, and buy assets whose prices will rise as a result of the inflation, and also as a result of speculative demand for those assets, as they act as a hedge against the inflation.

As I wrote recently, the inflation will, indeed, cause the cost of production, and thereby, price of production of gold to increase.  With increased speculative demand for gold, the market price of gold will rise further.  But, the fact of all this additional borrowing, by governments, households, and businesses means that interest rates will indeed rise.  All of the money tokens pumped into financing unproductive consumption, will lead to inflation, which will mean that the prices of all the things that governments, households and businesses need to buy, goes up, requiring them to borrow even more money, which pushes interest rates higher still.  The fact that company profits, and household and corporate savings have also been hammered as a result of lockdowns, means that the supply of money-capital is also reduced, which causes interest rates to rise further.

Because the price of revenue producing assets such as land, shares, bonds and their derivatives is determined by the capitalisation of the revenues they produce, when interest rates rise, those asset prices fall, and when interest rates are very low, and so even small absolute rises in interest rates represent large proportional rises, then these interest rate increases cause large falls in asset prices, that results in all those bubbles being burst.  That is why, as I have predicted, all of this money printing, together with all of the borrowing to finance unproductive consumption arising from lockdowns will almost certainly cause the worst financial crisis in history, during the next year, as all of these speculative assets crash.

So, the question might be asked, why buy any of these assets, at the present time?  I might answer, why indeed.  But, as I have also said, because of inflation, and the effect on costs, the price of production of gold is likely to rise, so that, in terms of a store of value, it retains the ability to fulfil that function.  That won't be true of houses, or example, because the largest part of the price of houses, is the price of the land, around 70%.  Land has no value, no cost of production, so it cannot increase, as a result of inflation.  The only part of the price of a house that has a cost of production is its construction.  House prices are about four times what they should be on the basis of any rational long-term calculation, and so will fall heavily, especially as the consequences of unemployment, rising interest rates and so on, means that many, including all of the buy-to-let speculators, will be unable to make their payments, causing them to throw their houses on to the market in a fire-sale.

But, Bitcoin and crypto-currencies are like land, here.  They have no value.  Yes, they have a cost of production, because to produce Bitcoin, it has to be mined.  But, this cost of production, the labour expended on it is not value creating.  For labour to be value creating, it must be socially necessary labour, i.e. it must produce a use value, a commodity.  Gold has value, because it is, in its own right a use value, a commodity.  Gold is demanded as a use value to be used in jewellery, in electronic circuits and so on.  It is this fact that enables its value, determined by the labour-time required for its production to be compared to the value of other commodities, so as to determine the exchange value of gold as against these other commodities - their gold price.  And, when gold is used as the money commodity, it is this which then determines their money price.

But, Bitcoin, and other crypto-currencies have no use value other than to act as a vehicle of speculation.  Even, their function as currency is suspect, because what kind of currency is it that varies in a day by 30%?  Usually that kind of volatility is reserved for fiat currencies in banana republics.  But, they do not fulfil the requirements of currency in general.  Gold, silver and other commodities could arise as money commodities, and be turned into currency precisely because they were in their own right commodities, that had value.  But, Bitcoin is not.  It has no use other than as a speculative asset.  The other form of currency is fiat currency, based upon money tokens backed by the authority of the state.  But, Bitcoin lacks that too.  Its price depends entirely upon speculation, upon what buyers and sellers are prepared to agree upon, and with any asset which actually has no value, that means that, ultimately that price itself can be zero, when all of the speculative activity collapses.

Bitcoin collapsed by 75% in 2018, at a time when other speculative assets such as shares crashed by 20%, as interest rates began to rise.  We are about to see interest rates rise by an even greater amount, as a result of all of the borrowing, and reduction is supply of money-capital, and so expect to see Bitcoin again heading to zero.