Why the Bitcoin frenzy heralds a massive financial meltdown

From WSWS/Automatic Earth: Bitcoin has been hailed as the currency of the future; and dismissed as a bubble at best, or a tool for organised crime at worst. But one thing is clear; its soaring demand is a direct result of a broken global financial system trusted by nobody and on the verge of breakdown.

Bitcoin Frenzy: The Fever Chart Of A Deepening Crisis

Nick Beams, World Socialist Web Site

According to the official scenario, the world economy is enjoying its best period of growth since the global financial crisis of 2008-2009, which ushered in the worst recession since the Great Depression of the 1930s.

According to a report issued by the Organisation for Economic Cooperation and Development last month: “The global economy is now growing at its fastest pace since 2010, with the upturn becoming increasingly synchronised across countries. This long-awaited lift to global growth, supported by policy stimulus, is being accompanied by solid employment gains, a moderate upturn in investment and a pick-up in trade growth.”

Once upon a time such a “rebound” would have seen increased productive investment, accompanied by real economic growth and rising wages and living standards. Those days, however, have long gone.

Symptomatic of the real state of affairs is the fact that the biggest economic and financial news this week has been the beginning of futures trading in the cryptocurrency bitcoin. It was initiated on Sunday night by Cboe Global Markets, a Chicago-based futures exchange operator. Next week, the much larger CME Group will begin trading in futures for bitcoin.

While trading was described as relatively slow, it had to be halted twice as prices surged, triggering circuit breakers. January 2018 contracts traded at $17,420, compared to a price of $16,250 for buying bitcoin directly on cryptocurrency exchanges. In the last week, the price of bitcoin has risen by 50 percent. At the start of this year it was fetching around $900, making its rise over the past 11 months the largest financial bubble in modern economic history.

The origins of bitcoin lie in the development of a new mechanism in 2009 known as blockchain by an unknown Japanese man named Satoshi Nakamoto, or a group of computer programmers using that name. The new technology claims to enable direct monetary transactions via the Internet using bitcoin or other cryptocurrencies bypassing national-based currencies and financial regulatory authorities.

The technology itself, which is based on a public ledger system in which information is simultaneously stored on the computer systems of the participants rather than centralised, may have wider applications that could facilitate faster transactions, speeding up information flows and tracking the flow of goods and services digitally.

But the rise and rise of bitcoin from something little more than a curiosity in its first years of existence to its explosion into financial prominence over the past year has nothing to do with any potential benefits that may derive from the underlying technology. Rather, it is the most egregious expression of the rampant speculation that has come to dominate the global economy.

Reporting on the establishment of bitcoin futures trading, the Financial Times said it marked a “seminal moment for a cryptocurrency engineered as an alternative to the global monetary system.” The main effect, however, of the introduction of futures trading is not the implications it may or may not have for the global monetary order, but that it enables the major hedge funds and other financial speculators to cash in on its rising price and make huge profits from their transactions.

Initially, bitcoin had been regarded with some scepticism in leading financial circles. The CEO of JP Morgan Chase, Jamie Dimon, for example, said earlier this year that he would fire anyone who was dealing in it.

But as the head of Citigroup, Chuck Prince, famously commented in 2007 in the midst of the speculative sub-prime bubble, when the music is playing you have got to get up and dance. And the opening of futures trading provides the opportunities for the inflow of large amounts of money into this latest form of speculation.

The bitcoin mania forms part of a much broader development in the global financial system since the financial crisis of 2008-2009. The response of the Fed and other central banks to the collapse of the speculative sub-prime bubble, and the meltdown of the global financial system, was first to bail out the banks and investment houses and then pump in trillions of dollars and set interest rates at historically-record lows to finance the next one.

The outcome has been to send up asset prices, stock prices and, in some areas, housing, to new highs, completely outstripping the very limited growth in the underlying real economy.

As the Financial Times commentator John Authers noted: “Stocks look blatantly overvalued. Bonds look even more so. Art has never fetched such big prices. The bitcoin is only an absurd appendage to what is already a ‘bubble in everything.’ ”

One of the main factors in sustaining the bubble has been the promise of major corporate and income tax cuts for the ultra-wealthy in the United States, with the Trump administration’s legislation now in the last stages of passing through Congress.

Since the election of Trump, US stock prices have risen by 25 percent, bringing the rise in the market to more than 350 percent since its trough in March 2009. The tax cuts will do nothing to promote investment in the real economy and economic growth but are aimed at providing still more funds for speculation, while at the same time leading to further cuts in social spending to finance the operation.

Apple is a case in point. It has been calculated that as a result of the lowering of tax rates on the $250 billion in cash it holds overseas it stands to gain some $47 billion—more than the annual profit of any single US corporation. None of this money will go towards investment but will be used for “financial engineering” such as share buybacks, to boost the value of its stocks even further as it heads towards a $1 trillion market valuation.

Writing in the Financial Times and Washington Post, former US Treasury Secretary Lawrence Summers said the US economy was on a “sugar high”.

He noted that economic growth this year had been driven by a stock market rally that has seen an increase of more than $6 trillion in household wealth “captured by a small share of the population.”

Despite record-low capital costs and abundant corporate cash, both of which are an inducement to investment, productivity growth has been very slow and “even innovative companies such as Apple and Google cannot find enough high-return investments and so choose to engage in large-scale share repurchases.”

The implication of Summers’s “sugar high” diagnosis is that the US and, by extension, the world economy are heading for a crash.

Summers did not explicitly draw that conclusion, issuing instead an empty call for “a new economic foundation that we so desperately need,” but the bitcoin frenzy is the clearest indication that all the conditions for a massive financial meltdown are being created.

ALSO READ

Bitcoin Explained
Dr. D, The Automatic Earth
A five-part series of articles explaining how Bitcoin is a direct result of a financial system nobody trusts

Bitcoin Doesn’t Exist – 1
Bitcoin DOESN’T exist. It’s not a real thing. Or rather, the only “real” thing is the ledger itself which is already public to everyone everywhere. You can’t demand the secret keys to Bitcoin privacy because it’s already completely, entirely public. What would a government demand? Suppose they ordered a miner to alter the record: the other miners would instantly reject it and it would fail. Suppose they confiscated the ledger: they now own what everyone already has. Suppose they unplugged it: they would have to unplug the entire internet, and everything else on it, or every Bitcoin node, one-by-one, worldwide. If any nodes were ever turned on, all Bitcoin would exist again.

Bitcoin Doesn’t Exist – 2
It’s probably not an accident Bitcoin arrived immediately after the Global Financial Crisis. The technology to make it possible existed even on IRC chat boards, but human attention wasn’t focused on solving a new problem using computer software until the GFC captured the public imagination, and hackers started to say, “This stinks. This system is garbage. How do we fix this?” And with no loyalty to the past, but strictly on a present basis, built the best mousetrap. How do we know it’s a better mousetrap? Easy. If it isn’t noticeably better than the existing system, no one will bother and it will remain an interesting novelty stored in some basements, like Confederate Dollars and Chuck-e-Cheez tokens. To have any chance of succeeding, it has to work better, good enough to overcome the last most critical aspect money has: Inertia.

Bitcoin Doesn’t Exist – 3
Remember when we started, banks paid 4% and charged at 8%. Now they openly take savings with negative interest rates, and charge at 30% or higher on a credit card balance averaging $16,000. And still claim they need bailouts comprising trillions a year because they don’t make money. The sector that once facilitated trade by absorbing 5% of GDP is now 5x larger. There’s a word for a body whose one organ has grown 5x larger: Cancer. Unstopped, it kills the host. What does this have to do with Bitcoin? Simple. They’re charging too much. They’re making too much both personally and as a group. They’re overpriced. And anything that’s overpriced is ripe for competition. And the higher the markup, the more incentive, the more pressure, the more profit there is to join the upstart. Bitcoin can economize banking because what does banking do? It saves money safely, which Bitcoin can do. It transfers money on demand, which Bitcoin can do. It pays you interest, which mining or appreciation can do.

Bitcoin Doesn’t Exist – 4
To clean up the market would discover 10%, 20%, 40% fake shares, fake business values, fake pension values, therefore fake GDP values, and fake GDP to Debt ratios, and therefore would perhaps lead to an accurate Debt to GDP of 140%, which would crash the U.S. dollar and possibly the nation. Would a complete U.S. financial collapse lead to a nuclear war? And it all goes back to fraud we didn’t stop 20 years ago. How do you solve the problem? The only way out without collapse is to build an honest system parallel to the existing system and slowly transfer assets from the rotten, sinking ship to the new one. The captains of the old ship may not like it, but look at the incentives. No one can tolerate the old ship except the pirate captain; even the crew, the stock traders, don’t want or control it any more.

Bitcoin Doesn’t Exist – 5
Is Bitcoin a Ponzi? It’s not a Ponzi by definition because there is no central thief, nor are new investors paying off old investors. So is it a fraud, misrepresenting a few hours of electricity as worth $10,000? Well, that depends on what you think its value is. Is it providing value, a service? If so, what is that service worth to you? We already said it has the operational elements of money, with the addition of being extremely transmissible and transportable. If that has value to you, fine, if not, perhaps gold or bonds are more appropriate. But that’s the problem of what gives Bitcoin value.

RELATED
It’s Official: Bitcoin Surpasses “Tulip Mania”, Is Now The Biggest Bubble In World History
Zero Hedge
The former Bridgewater analysts Howard Wang and Robert Wu have released an updated version of their asset bubble chart. In the new commentary, Wang writes that the Bitcoin prices have again more than doubled since the last update, and “its price has now gone up over 17 times this year, 64 times over the last three years and superseded that of the Dutch Tulip’s climb over the same time frame.” That’s right: as of this moment it is official that bitcoin is now the biggest bubble in history, having surpassed the Tulip Mania of 1634-1637.

The age of crypto-economics
G. Sampath, The Hindu
The fundamental value proposition of the blockchain is that it eliminates the need for trust — a commodity without which exchanges of value (transactions) cannot happen. This means that individuals and businesses can do away with a whole bunch of intermediaries whom they pay for managing trust. It so happens that right now any technology that drives decentralisation also carries some political promise by virtue of challenging the centralising tendency of power. But that is a byproduct, and not to be confused with its intent, which remains the same as with any other IT innovation of recent times: efficiency and profit.