A virtual currency called bitcoin has captured the public imagination—and the attention of get-rich-quick speculators.
At the beginning of 2017 one bitcoin was priced at just over £700. Now it’s worth just under £15,000—a near 2,000 percent increase.
Bankers and financial pundits have lined up to condemn bitcoin as a fraud, a “Ponzi scheme” and a sure way to lose a lot of money.
But its ideologically driven, long-time supporters see it as a way of undermining the control of central banks and governments.
They see the state as a manipulator of money and champion bitcoins as “democratising” because they supposedly decentralise money supply. For instance, its “book keeping” is carried out by computers solving cryptographic puzzles not central banks.
Yet it’s estimated that 40 percent of bitcoins are held by a mere 1,000 people.
Mainstream economists are confused, and worried, by how a string of letters and numbers have attracted large flows of speculative investments. And they are even more puzzled by the fact that bitcoins have become a form of money outside of central banks’ control—at least for now.
The revolutionary Karl Marx would not have been surprised.
Marx argued that bosses profits are based on workers’ labour. He said that the value of commodities was based on “socially necessary labour time”, the amount of time it took for an average worker to produce them.
Yet Marx explained that the price of financial assets—and sometimes other commodities—could deviate from this value.
But how are bubbles able to inflate in the first place? And what causes them to come crashing down?
Marx distinguished between “real capital” and “fictitious capital”. Real capital is the means of production—factories, offices, call centres—and human labour that works them to create new value. This is where profits are based.
Fictitious capital is represented by stocks, shares and bonds, which are only indirectly related to actual production. Their price can shoot up rapidly—up to a point.
That’s partly because under capitalism production isn’t planned. So there’s nothing to stop investors deciding that they want to get in on a new technology or commodity, such as IT or bitcoins. Equally, there’s nothing to stop them pulling all of their money out of an industry.
And, fundamentally, fictitious capital is based on real capital meaning the amount it can inflate is related to the amount of profits that are produced. If there are problems of profitability—as there were in the run up to the 2007 credit crunch—bubbles can come rapidly come crashing down.
The situation with bitcoin is further complicated because it is a form of money.
Bitcoin has been highly successful as speculative asset. But that means it’s not very successful as a form of money—if its price is rising why spend it?
The contradiction at the heart of bitcoin is that it’s value is expressed in the very paper money it was designed to overthrow.
Bubbles can last years—and bitcoin is a world phenomenon
And under capitalism relations between people who produce commodities are obscured. They don’t appear as a social relationship between a boss exploiting a worker, commodities being exchanged on the market. Marx called this “commodity fetishism”—and bitcoins takes this even further.
Bitcoins are a logical part of capitalism. They are no more irrational than drilling for oil under melting ice caps or building machines to deep-sea mine gold off the coast of Papua New Guinea.
Only a socialist society, where production is planned to meet human need, will get rid of such waste and speculation.