Recently, there has been great interest in cryptocurrencies and, by extension, also non-fungible tokens (NFTs) in Malaysia. I have done some analysis on the former, exploring cryptocurrencies functioning as currency as opposed to conventional currency, their origin of value, how they perform against inflation and the challenges they bring to conventional utilisation of money, particularly from the view of a nation as a whole. The full analysis can be read here, whilst in this piece I hope to summarise as much as I can of the original piece. It is hoped the reader may use this piece as an initial point from which to explore the longer analysis.
To begin, let us explore what conventional currencies and cryptocurrencies are. Conventionally, money has no intrinsic value, rather it represents a promise by issuing authorities that they will be able to provide a material replacement for the money of equivalent value. Historically, this was gold, the most recent of which was the Bretton Woods system where the US Dollar was convertible to gold. This was replaced by the type of currency we are familiar with, the fiat currency. Fiat currencies work similarly, in that their value is tied to the ability of the issuing authorities, usually central banks, to be able and willing to guarantee their value, usually either through liquidation of reserves, greater exploitation of natural resources or some other way in which the economy for that country holds.
Cryptocurrencies are a little different. Their existence is derived from decentralised ledgers that are encrypted using cryptography such that they are immensely secure for online transactions. These ledgers contain a certain list of transactions, each one having its own unique code. These ledgers are encrypted by finding certain codes or numbers which will return a defined outcome once plugged in to a function containing all of the codes of the transactions within that ledger. These ledgers are also chronological, with later transactions within future ledgers connected to previous ledgers in a continuous chain.
This is termed a “blockchain” which is a chronological series of blocks (ledgers). These blocks can be created by anyone and is indeed a decentralised process that anyone can participate in. The dependency of the unique code for a block on all previous blocks in the chain means these codes are extremely difficult to find and, thus, the content of blocks cannot be easily duped. Hence, the blockchain technology is immensely secure.
For a fiat currency, the value it represents comes directly from the enactments by a country’s government enabling the existence of the currency and the utilisation of the currency within the local economy through debt created in the currency in the forms of loans and from taxes that can only be paid in that country’s currency. This is the direct reason why a currency can have value. The confidence within a fiat currency is the confidence of holders of that fiat currency on the ability of the equivalent central bank, and by extension the country itself, to pay its debtors. This confidence is material in nature, in that the economic handling of the country is tied to material conditions, including solid resources that can be liquidated to boost the economy during times of recession to abstract human resources that be used to grow the economy.
With nothing material backing cryptocurrencies, their trading in exchange markets is hugely influential to the value of the currency itself. Moreover, the mood about the currency, especially driven by hugely wealthy capitalists influence their value too. If big billionaires express interest in a cryptocurrency, buying a significant stake in it, the value of the cryptocurrency can blow up. Investor confidence is a domino, of course. As big investors express confidence, smaller investors get on the bandwagon as well. This drives the value even higher. The aggregate ownership of a cryptocurrency and mutual trading then becomes an artificial gauge of demand (thus, value) which is how these currencies manage to keep their value.
In other words, the value of a cryptocurrency comes from pure speculation. Hence, they are subject to large boom-bust cycles. The fluctuating value of these currencies, of course, is a double-edged sword. On the one hand, huge boom periods allow for greater profiteering, allowing for much better returns than any other form of investment. On the other hand, frequent bust periods can cause huge losses, especially for those without enough cash-flow to wait until the next boom period. Of course, those with enough capital find bust periods desirable too. Profits from trading cryptocurrency can only be made if there are high points to sell held cryptocurrencies and low points to buy crypto. This is why even large dips in value are desirable, as these become the time to buy large shares of cryptocurrencies. Even if the value doesn’t climb to previous levels, any increase in value would be profitable.
There are dangers in this form of profit-generation. Firstly, whilst the value of the cryptocurrency may be artificial, since people are using real money to buy it that they earned, the profit generated is not valueless so long as cashing-out crypto into a fiat currency is allowed. Disregarding wealthy capitalists with their surplus wealth in crypto and, thus, not having to worry about losing their material needs, we can have people pushed into investing most of their life-savings in cryptocurrencies and then losing them during a bust period when they are forced to sell their stock due to not having enough cash-flow.
Moreover, this boom-bust cycles are manipulated by large investors who hold significant amounts of cryptocurrencies. When the value is sufficiently high, they will sell most of their portfolio which causes a flood of free crypto in the market that drives its value down. This causes a domino effect where other investors cash-out as well, driving the value even further down. At a sufficiently low value, these large investors will re-buy their original share or more of cryptocurrency at a much lower price, thus making a profit as their original selling price was so much higher. As we can see, the value of crypto does not even depend on natural confidence, rather is artificially manipulated by large investors.
This means the crypto market is analogous to other capital markets, where those with initial accumulated capital are largely the only ones who benefit in making large sums of profit, whilst smaller investors are necessarily cut off. Imagining units of stock or cryptocurrency being finite, the only way to sustainably generate profits from it would be to engage in trade to accumulate it, that is depriving it away from small investors in a mechanism that needs to be continuous. The aforementioned large-scale selling in boom periods and wholesale buying in bust period is such a mechanism. In between these periods, crypto values are kept artificially high yet not too high to not be attainable through a combination of hoarding and limited trade.
With this in mind, we can see that cryptocurrency is not the paragon of alternative finance for the masses, rather is heavily biased towards benefiting the ultra-rich, the same as other capital markets but further expanded into a realm of imagined value. Capital markets, either company stocks, commodity stocks or foreign exchange, all have the same feature of impoverishing the underclass to enrich the wealthy but they at least have some tenuous connection to real value, respectively value of products sold, value of commodities or value backed by central banks. Cryptocurrency is an empty shell of promise that in no way signifies whatever form of real value.
Chief of Socialist Youth,
Parti Sosialis Malaysia