Bitcoin Could Bankrupt Tesla

Elon Musk has announced that he is to buy $1.5 billion of Bitcoin, and that Tesla is to accept Bitcoin in payment for its cars.  How Musk decides to gamble with his own money is one thing, but making a decision that Tesla will accept worthless bitcoins in exchange for its cars is another, because that risks bankrupting the company, and causing the loss of the jobs of all its workers, plus then the jobs of many more workers in supply companies and so on.  This is just another example of why shareholders should not have control over the socialised capital they do not own, and why such control should rest with its collective owners, the associated producers within the company.

In a recent article, Peter Bofinger set out why Bitcoin, as with other cryptocurrencies is essentially a pyramid scheme.  He sets out many of the arguments I have put forward against Bitcoin over the last few years.  He misses out, of course, that Bitcoin, unlike gold, has no value.  He doesn't do that, because he's a bourgeois economist, for whom the concept value and market price are identical.  In other words, he suffers from commodity fetishism.  There are, in fact, many things that have a market price, but which have no value, but the difference is that some of them have a use value, which is the basis of that market price, whereas Bitcoin, and other cryptocurrencies have no separate use value, other than that of being an object of speculation.

Air has no value, but people may be prepared to pay to visit an area of clean air, or even to pay for bottled clean air, if they live in an area of high air pollution.  Land has no value, but it has a market price determined by the capitalised rent.  Tenants, are only prepared to pay this price, because the land itself, whilst having no value, does have use, a use value that a farmer needs to produce crops, a miner needs to extract minerals, or a builder needs on which to build houses, shops, factories and offices.  Capital has no value, but it too has a market price, the rate of interest, because capital too, whilst having no value, does have use value, that of being able to produce the average annual industrial rate of profit.  Its these use values that are being bought, and for which the market price is paid.

What enables the owners of these assets to charge a market price for these use values, despite them having no value, is the fact that those that own them have a monopoly.  A capitalist farmer who wants to farm, must either buy or rent land.  More land cannot be produced in the same way that more cars can be produced, if the demand for cars rises.  The existing land can only be bought or rented from its current owners, and they will then charge a market price for that.  If land enables a capitalist farmer to make above average profits, then capital will seek to move into agricultural production, increasing the demand for land, creating the potential for Absolute Rent.  If a particular piece of land enables a capitalist to make additional profits compared to other land, then the demand for this particular land will increase, creating the basis for Differential Rent.

Similarly with capital.  In order to undertake capitalist production, a capitalist must first have possession of capital itself.   If they do not own capital they must obtain possession of it by borrowing it from someone else.  That may take the form of borrowing a machine, for example, or borrowing money to use as money-capital to be able to buy the machine, materials, buildings, labour-power and so on.  What they buy in borrowing the machine or the money is the use value of capital to be able to produce the average industrial rate of profit.  What price they pay for that use value, the rate of interest, will depend upon the supply of such capital as against the demand for it.  When the average industrial rate of profit rises, the demand for capital will rise, as capitalists seek to obtain capital in order to be able to make these higher profits, and vice versa.  But, when profits are high, these realised money profits for an increased supply of potential money-capital, also, which then acts to reduce the rate of interest.  In other words, industrial capitalists can use their own realised profits to finance their capital accumulation, and so have less need to go into capital markets to borrow it.  In addition, they can throw any unused money profits into the capital markets themselves, so as to obtain interest on it, and that increases the supply of money-capital, so causing interest rates to fall.  Where the rate settles depends on the interaction of these elements of supply and demand.

For every other commodity, they have both a market price, and a value, because they are both a use value, and a product of labour.  It is that, as Marx sets out in Theories of Surplus Value, that makes each such commodity money.  In other words, I can buy any commodity with some other commodity, provided the seller is prepared to accept it.  That is the basis of barter.  The ratio of exchange, the exchange value, is determined by the value of one commodity as against the other.  The money commodity is simply one commodity out of all others that society picks out to act as a general commodity, universally accepted in exchange for all others.  The necessary requirements of such a commodity, of being portable, non-perishable, homogeneous, of high value, and so on, leads to societies choosing precious metals, and usually gold to perform this function.  But, the requirement is that the money commodity must itself be a commodity in its own right, i.e. it must not only have value, but also use value.  Gold for example, can be used for jewellery, for decoration, for use in electrical components and so on.  If it is not being used as money, it can still be used in these other functions, and so still has value.

That is not true of Bitcoin or other cryptocurrencies.  In this respect they are the same as paper banknotes, i.e. they are worthless in and of themselves.  They have no use value other than for the specific function of acting as means of circulation and payment in the case of banknotes, and of speculation in the case of cryptocurrencies.  Take away those functions, and they are useless and worthless.  With paper banknotes, they have value because they circulate as tokens for money, and they are able to perform that function, because they are backed by the state.  They are a claim to a given amount of social labour-time.  But, as Bofinger says, cryptocurrencies only exist because those that speculate in them decide to engage in such speculation.  You could just as well speculate in Tulipbuls as Bitcoin, and in a previous speculative mania, people did, before, like all manias, the bubble burst.

Its true, that in the past, people have also speculated in the money-commodity gold.  All that proves is that, when the supply of a given commodity is restricted in supply its market price can rise way above its exchange value, at least for a time.  Its one reason that societies replaced the actual money-commodity gold with money tokens, which represented it, be they gold coins, coins made of other metals, or paper banknotes, and, today, simply electronic entries in bank ledgers.  The reality is that set aside the commodity fetishism and what people actual exchange is equal amounts of labour, or labour-time, and money is simply one means of representing this quantity of labour-time.  Why would you want an economy whose exchange relations were being constantly disrupted in the wild swings in the speculatively determined market price of your currency?  Of course, you wouldn't.

In previous centuries, for example, when the Conquistadors brought back large amounts of gold from South America, this influx of gold depressed its price significantly, and as prices were measured in gold that resulted in a surge in inflation.  The same was true when gold rushes occurred in the US, Australia, and South Africa.  But, also consider matters from the other perspective.  Between 1970 to 1980, the price of gold went from $30 to $800.  If prices had been measured in gold, there would have been a significant deflation.  But, those kinds of wild swings happen by the day or the week for Bitcoin.  Imagine trying to run your business when the price of a Tesla would have to vary from say 20 Bitcoin, when its price was just $5,000 to being just 2 Bitcoin when its price has risen to $50,000!

Worse still, imagine that you have sold 10,000 Teslas in exchange for just 20,000 Bitcoin, and then the price of Bitcoin drops to zero, as the bubble inevitably bursts.  That means that the company would have handed over $1 billion of value in cars, and would now be sitting on a pile of Bitcoins worth absolutely zilch, zero, nada, nothing.  

We need a rational way of running companies based upon the industrial democracy of the workers and managers within them whose futures are tied up in the future of that company, not on the flights of fancy of shareholders who have simply loaned money to the company in return for shares, and the interest on the money they have loaned.

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.