‘Mother of all crashes’ as Bitcoin slumps
Are cryptocurrencies evil? Many think digital currency is doomed after China clamped down on Bitcoin yesterday – but others still believe they can revolutionise the global economy.
In Liaoning Province, in northeast China, sits one of the biggest Bitcoin mines in the world. Situated in a vast abandoned factory, it can produce more than 700 Bitcoin a month – the equivalent of more than $22m.
But the money-making might be about to come to an end. Yesterday, China clamped down on cryptocurrency mining and instructed banks to stop trading the digital coins. Other countries are expected to start imposing similar regulations.
And now, investor Michael Burry, one of the few people to predict the financial crisis of 2008, has warned that cryptocurrencies are heading for the “mother of all crashes”, adding that when they collapse, they will bring the rest of the economy with them.
As a result, the price of Bitcoin slumped yesterday. It has now lost more than half its value since reaching a new high in April.
But a single Bitcoin is still worth almost $30,000, an astonishing feat for a currency that was invented just 12 years ago. The first-ever Bitcoin transaction took place in 2010 when Laszlo Hanyecz bought two pizzas for 10,000 Bitcoin. Today, that would be worth more than $300m.
The idea behind Bitcoin was to set up a decentralised currency that would be beyond the control of central banks. Because there was a limited supply, its inventors thought, people who owned Bitcoin would not see its value constantly undermined by inflation. And it would be completely open: anyone with a computer would be able to mine their own Bitcoin.
They hoped that it could eventually become a global reserve currency that would belong to ordinary people, not the banks.
But criminals quickly recognised that cryptocurrencies had an additional advantage: they are anonymous and untraceable. That means they are perfect for illegal transactions. In 2019, almost $2bn worth of Bitcoin was used in darknet markets.
As the value of Bitcoin soared, it also became much less democratic. It is now very expensive to mine Bitcoin: each one can cost as much as $15,000. Most mining is now done by huge plants like the one in Liaoning, rather than by ordinary people.
That is not the only core value that Bitcoin has abandoned. The currency was designed to avoid inflation. But the value of Bitcoin has in fact fluctuated wildly, partly thanks to speculation by wealthy investors. Some Bitcoin buyers have lost thousands of dollars as a result.
And as they grow in popularity, cryptocurrencies are causing more problems for the environment. Bitcoin alone uses more electricity each year than the whole of Argentina. In Iran, cryptocurrencies now draw so much power from the grid that they have started causing blackouts. As a result, people have had to fall back on cheaper, dirtier sources of fuel which release more air pollution and cause smog, driving a public health crisis.
Are cryptocurrencies evil?
The biter bit
Yes, say some. They are a haven for criminals who use them to carry out dirty deals without being traced. Because of the greed of cryptocurrency enthusiasts, global electricity use is soaring, and in some countries, they are even causing power shortages. There is no further need for cryptocurrencies when state-backed digital currencies are becoming so common.
Not at all, say others. Far more crime is still carried out with conventional currencies and through respected financial institutions, yet these are not labelled “evil”. Only 1% of all Bitcoin transactions involve illegal activity. This is not the end of crypto. Rather, it is just the beginning: because they are independent of national governments and central banks, cryptocurrencies could revolutionise the global economy.
- Can any item be inherently evil – or does it depend on how things are used?
- Is it a good idea in principle to have a currency that is outside the power of national states and central banks?
- In a small group, come up with a name for a new cryptocurrency, and then design a symbol for it.
- In a small group, research one cryptocurrency that is not Bitcoin, and create a short presentation about it.
Some People Say...
“Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.”Nassim Nicholas Taleb (1960 – ), Lebanese-American essayist
What do you think?
Q & A
- What do we know?
- Most people agree that Bitcoin has not lived up to its early promise. The idea was to create a currency that would be beyond the power of any state or financial institution, and could replace the dollar as a global reserve. But instead, it has ended up being very largely used by states like Iran to dodge sanctions on international financial transactions, and enriching the financial institutions that bet on its success or failure as if it were a stock option.
- What do we not know?
- There is some debate over whether or not Bitcoin will retain its dominant position among cryptocurrencies. There are almost 10,000 cryptocurrencies in total. Right now Bitcoin is the most secure option, and the most widely traded. But other cryptocurrencies are starting to offer a greater return: while the value of Bitcoin has grown by 7,700% since 2013, the value of joke cryptocurrency Dogecoin, named after a meme, shot up by 200,000% in the same period.
- Bitcoin mines
- Cryptocurrencies have to be mined, which means that they appear when a computer solves a given number of equations.
- A kind of digital currency. The owner of each Bitcoin is recorded on a kind of digital ledger called a blockchain, which is designed to be impossible to hack.
- Michael Burry
- An American investor most famous for his portrayal in The Big Short, a book (and later, a film) about the handful of people who saw the 2008 financial crash coming.
- Central banks
- A central bank manages its country’s currency and usually handles its monetary policy.
- A general rise in prices across an economy, which also means a decrease in the value of its currency.
- Reserve currency
- Most national central banks hold large amounts of other countries’ currency for use in international transactions. These are known as reserve currencies.
- Darknet markets
- The term given to illegal transactions on the internet.
- A kind of toxic fog caused by high levels of air pollution.