In the Divine Comedy, Dante reserved one of his most ghastly punishments for the crime of forgery. In Canto 30 of the Inferno, a counterfeiter Adamo is condemned to the eighth circle of hell, just one above Lucifer in the ninth. In this Canto, Dante and Virgil, his guide through the underworld, meet two falsifiers, one of whom is the unfortunate Adamo, a real-life counterfeiter who in Dante’s youth had tried to debase the Florentine florin. Adam lived in Brescia, a city in competition with Florence, where he was persuaded by prosperous Brescian merchants to debase the florin by replacing three carats of the pure gold coin with copper. The coin weighed almost the same but it was a fake. Dante pairs Adam with another liar, Simon the Greek, the man who tricked the Trojans into believing the Trojan horse was an innocent gift. This betrayal led to the destruction of an entire civilisation.
Why would Dante equate Adam, an everyday, opportunistic counterfeiter, with Simon, the man who betrayed Troy? It seems disproportionate, but only if we fail to appreciate the role of the florin in underpinning the might of Florence.
For Dante, money was sacred and the florin’s integrity was central to Florentine power. Mess with the money and you mess with the foundation of a civilisation. This has always been the case. Few everyday signals capture the ascent or descent of a great power as the value of its money. Trying to pass off all sorts of fraud, forgeries or tokens as real money has been a recurring event in financial history. Bitcoin in particular and crypto in general are the latest incarnation of an age-old story.
Characters as diverse as the coin-debasing emperor Nero, Dante’s counterfeiter Adamo and even Adolf Hitler have tried to control money by manipulating it. All these were efforts aimed at privatising public money and the latest example in this illustrious list is crypto. Dressed up as though it may be in the rhetoric of liberation for the average person, crypto is a form of private money, printed, created, disseminated and pumped up by private individuals on the make.
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Introduced in 2008, around the same time as the iPhone, Bitcoin is the original cryptocurrency. It was promoted by enthusiasts as the future of money, a replacement for the dollar and other official currencies. This hasn’t happened.
The promise of crypto was a new democratic, egalitarian and honest form of money, and its manifesto involved a kind of revolutionary appeal – smashing the establishment’s hold on finance, and opening up the world of money beyond Wall Street. At least, that was the spin.
Rather than being issued by allegedly corrupt governments, cryptocurrencies such as bitcoin are governed by incorruptible algorithms, underpinned by a new technology called blockchain, made possible by the ongoing global data revolution. Blockchain is a clearing house for all trades in cryptocurrencies and is designed to eliminate the banking system’s role in clearing transactions.
Bitcoin has an inbuilt self-destruct algorithm, and the number of bitcoins that can be mined is finite. In total, there are 19.6 million bitcoins available. Over 93 per cent have already been mined and the rest continue to be extracted by so-called bitcoin miners. More or less an elaborate scam, crypto capitalised on an era when public trust in democratic institutions and markets reached a new low.
Though bitcoin’s status as crypto is sometimes disputed by its advocates, it is generally considered to be part of the crypto family and, like any speculative punt, its price has yo-yoed in recent years.
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Today bitcoin’s price is down 40 per cent from its October high of around $70,000 (€39,580), and lots of people who bought it in the recent upswing are hurting, and angry. Quite apart from the problem of retail investors losing money on this new form of “makey uppey” private money, crypto has a major intellectual difficulty: what problem is it supposed to be solving? If it is to take its place in the great pantheon of innovations in money, it must be solving a problem; if not, what is the point of it?
The idea that there is some large, inefficient global payments system whose wastefulness can be solved by bitcoin or crypto and its ledger, digital blockchain, appears to be, if not baseless, not as much of a problem as claimed. There are already plenty of digital payment systems processing billions of online transactions priced in regular money, particularly dollars. Is it necessary to add the dimension of crypto into an exchange where old money is working?
Compared to the plain old credit card or the global banking settlement systems – problematic as some may be and susceptible to occasional hacks as they sporadically are – blockchain remains in its infancy.
The claim that “bitcoin is money” is patently not true. A key characteristic necessary for money to be useful is that its value must be stable. This means money must be managed. For everyday transactions, bitcoin is unusable in practical terms because its price jumps all over the place. This instability in price comes down to basic traditional economics: the price moves up and down precisely because the supply of bitcoin is fixed.
As bitcoin became popular and more people bought it, its price rose too quickly. This militates against it being used for transactions. Bitcoin promoters sometimes portray a spike in its price as evidence that it is money, when in fact the opposite is the case.
Why spend bitcoin when it’s going up in value against everything else? Due to its fixed supply, it can’t act as a stable medium of exchange and thus it ends up being hoarded for capital gain; rather than functioning as money, it becomes an asset of sorts.
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But is it an asset?
A little bit of thinking about speculation and investment raises another red flag. An asset should have a flow of income paying you for your investment. Unlike a bond or an equity, cryptocurrencies generate no cash flow or income. Cryptocurrency entails no legal claim on anything. When you buy a share, you are buying a bit of a real company. When you buy a bond, you are also buying a claim on the assets underlying the bond, be it a company or a state.
Unlike these other investments, crypto doesn’t contribute to any capital formation. When you buy the shares of a company, the understanding is that your money goes to the company and might be used to buy equipment or finance the expansion into a new market, from which you hope to profit. The prospect of this investment will be dependent on, among other things, underlying economic activity. Trading on sentiment alone, crypto is by contrast the ultimate speculative punt, a tradeable gambling contract.
Crypto is not money. It will never be. If or when it falls fully to earth, expect retribution for the various grifters who pushed and pumped it. The eighth circle of hell might be a bit extreme, but it won’t be pretty.
