It should be obvious to pretty much everyone at this point that anything crypto is an old-fashioned grift, a scam, a Ponzi scheme. Those who got in on the ground floor of crypto-currencies and NFTs and the like—and then left when the going was good—have made out like bandits. The rest of us are left holding the bill.
Consider NFTs, or non-fungible tokens. These are collectibles—some might call them art—created by the same block-chain technology as cryptocurrencies like bitcoin. Jack Dorsey, the founder of Twitter, turned an image of his first tweet into an NFT in December 2020 and auctioned it off for $2.9 million a few months later. Dorsey donated the proceeds to charity, but most others have taken the money and run. When the purchaser of his NFT tried to resell it in April 2022 for $50 million, the highest bid was a paltry $280.
That might just seem like a single appalling financial miscalculation. But consider the fate of Bored Ape Yacht Club NFTs, which are nothing more than cartoon representations of an ape face with various expressions and accoutrements. You might pay $20 max for such a drawing on paper. But the price of these NFTs started to rise when celebrities began to buy them and then promote them to their fans. The collection topped $1 billion in value.
Then it turned out that these celebrities, by virtue of buying these tokens, became investors in the enterprise and profited madly off the hyperinflated prices. When the market crashed in October’s “cryptowinter,” a lot of people were pissed, and a class-action suit against celebrities like Madonna and Justin Bieber hit the courts this month.
NFTs are basically the Amway of the art world, with Madonna playing the role of your brother-in-law trying to sell you a ton of dietary supplements and pressuring you to do the same with your network of contacts. Such bubbles of irrational exuberance pop up (and then pop) throughout history, from the tulip mania of seventeenth-century Holland to the subprime mortgage crisis of the 2000s.
A tulip at least is beautiful. But a stylized ape with a sailor cap munching on a slice of pizza? Are people crazy…or just crazy greedy?
Come to think of it, what is Donald Trump but the NFT of politics? He wasn’t created by blockchain technology, but he transformed himself into a flashy commodity with no intrinsic value beyond what his fans invested in him. Despite numerous lawsuits and convictions for fraud, he continues selling himself in the hopes of boosting his market price. However, given the losses suffered by so many of his endorsed candidates in the recent mid-term elections, perhaps we are finally entering a “Trump winter” where his political resale value drops to zero.
It’s not just Trump. Like the cryptoanarchists who have championed bitcoin and other products of blockchain technology, right-wing populists all style themselves as iconoclasts bent on shaking up the system. In the end, however, both sets of opportunists are just trying to game the system for the political and financial benefit of themselves and their cronies. It’s ludicrous to believe that a billionaire like Trump—or his Twitter buddy Elon Musk—is actually sticking up for the average Joe (unless the Joe in question happens to be a member of a far-right militia). Crypto is just another example of elitism masquerading as populism.
From the other side of the political spectrum, consider Sam Bankman-Fried, the wunderkind hedge fund manager who jumped into cryptocurrencies with both feet, turning his FTX Exchange into a $32 billion giant that went belly up because of sketchy financial practices. Bankman-Fried positioned himself as an “effective altruist” dedicated to raising money in order to give it away to worthy causes, including the Democratic Party. As with Bored Ape Yacht Club, he enlisted celebrities like Tom Brady and Larry David to sell that particular version of a get-rich-quick scheme, and now they also face a class-action suit and Bankman-Fried has just been arrested at his Bahamas get-away.
Rich celebrities, greedy hedge-funders, the ubiquitous Trump: all of this block-chain nonsense would be just another example of a “First World problem”—except for two things.
Bukele the Bitcoin Bro
Nayib Bukele became the president of El Salvador in June 2019 at the age of 38. For a country torn apart by civil war and gang violence, Bukele seemed to be something fresh and new. Coming up politically on the left, he started his own party in 2018 called, auspiciously, New Ideas.
On the gang front, Bukele’s new idea was actually an old one: negotiate a secret truce with the country’s major criminal outfits, MS-13 and Barrio-18. When the truce broke down, Bukele relied on another shopworn tactic: massive arrests. With 53,000 suspected gang members newly added to the prison system, El Salvador now has the highest incarceration rate in the world.
Another of Bukele’s old ideas was to concentrate power in his own hands, by declaring a state of exception that allowed for more detentions and by replacing top judicial branch officials with his own loyalists.
But in one respect, at least, Bukele debuted a truly new idea. The problem is, it was a lousy idea.
In September 2021, El Salvador became the first country in the world to declare bitcoin to be legal tender. Bukele, a big fan of cryptocurrencies, went ahead with his plan even though the World Bank had refused to provide any help with the rollout, citing transparency and environmental concerns.
The country’s new bitcoin scheme got off to a rocky start. Even though every Salvadoran received a bitcoin account with the equivalent of $30 in it, most people just cashed out. Some never got the money to begin with after hackers committed identity theft to strip the bitcoins from the accounts.
And then the value of crypto started to tank. That wasn’t so much a problem for the average Salvadoran, but the government took a big hit since it had invested national resources into crypto. As a result of the steady drop in bitcoin’s value—and El Salvador kept increasing its bitcoin holdings as the prices fell—the government lost as much as $70 million. That’s the country’s agriculture budget, for example. On the verge of default on its foreign loans, El Salvador recently agreed to a deal with China, which includes a purchase of the country’s debt.
It wasn’t such a terrible idea to wean El Salvador off the U.S. dollar, which had served as its currency since 2001. But jumping into bitcoin was a huge gamble for a small country. As Michael Ahn Paarlberg explains in Slate:
A currency, as economists understand it, must fulfill three functions: It must be a relatively stable store of value, a commonly understood unit of account, and a widely accepted medium of exchange. Bitcoin fulfills none of these. It is, like other cryptocurrencies, a speculative asset masquerading as a currency—or to be more generous, an asset whose speculated value is based in part on the promise of one day becoming a commonly used currency.
Bukele’s approach to the country’s finances is dodgy in other respects. His administration is linked to Venezuelan money-laundering, the embezzlement of COVID funds, and various corrupt practices associated with the state of emergency. Bukele remains dismayingly popular in El Salvador—with an 86 percent approval rating, he’s the most popular leader in Latin America—but his populism is the worst kind of elitism: corrupt elitism.
Crypto and Climate Change
You might be thinking, ‘Well, isn’t this just another case of bad people exploiting a good idea for their own greedy ends?”
That brings us to the second reason why crypto is a problem for the whole world: its impact on climate. The currency is produced not by printing presses or a mint but by computers that are constantly “mining”—or creating—new bitcoins through the verifying and processing of transactions. These mining operations require a surprising amount of energy.
Indeed, cryptocurrency mining absorbs the same amount of electricity as the Netherlands and has a carbon footprint equivalent to Serbia and Montenegro. Oscar Gonzalez at CNet explains:
Crypto mining businesses can have hundreds or even thousands of rigs in one location. A mining center in Kazakhstan is equipped to run 50,000 mining rigs, and another mining farm in China has a monthly electricity bill of more than $1 million as it mines 750 bitcoins a month.
Not only do rigs take up power, they also generate heat. The more rigs you have, the hotter it gets. If you don’t want your rigs to melt, you need some cooling. Many mining rigs have multiple built-in computer fans. But if you have multiple rigs, the room quickly gets hot, requiring external cooling.
For a comparison, let’s look at Paypal, which isn’t a currency but can serve as a way to make payments. Paypal also relies on computers and data centers for verifying and processing transactions, but its energy consumption in 2020 was 264,100 MWh. That year, bitcoin required around 60 TWh—it’s about double that today—which is equivalent to 60 million MWh or about 240 times that of Paypal. And Paypal is decreasing its carbon footprint by delinking from fossil fuels. In 2020, Paypal processed more payments than bitcoin (that changed in 2021).
Yes, there is a movement to “green” cryptocurrencies by using renewable energy to power mining operations or relying on “proof of stake consensus mechanisms.” But crypto is by its very nature decentralized, so it’s hard to get everyone in the field to do anything in unison. Indeed, as some players were seeking to reduce their energy consumption and carbon footprint, others were moving to Kazakhstan or Kentucky to take advantage of cheaper energy based on coal. China wisely just banned bitcoin mining outright.
In addition to being directly linked to leaders like Bukele, cryptocurrencies come out of the same political milieu as right-wing populism: a pointed response to global financial elites and the economic inequality spawned by mainstream parties and institutions. As none other than Steve Bannon said in 2018, cryptocurrencies represent a “disruptive populism [which] takes control back from central authorities.”
Crypto takes back that control, perhaps, but then it delivers it to individuals who are even more lawless, institutions that are even more corrupt, and mechanisms that are even more dangerous to the planet. It doesn’t disrupt what most needs disrupting, namely powerful corporations and unaccountable political leaders. It’s a scam that crypto “sticks it to the Man” just as it’s untrue that right-wing populism sticks up for the “little guy.” Let’s hope that the 2020s mark the end of both of these extraordinary popular delusions.
FPIF, December 14, 2022