What the bitcoin price drop reveals about ‘crypto’

One of the definitive downsides of cryptocurrencies raised its head this week when the nosediving price of bitcoin – brought on by the Luna/Terra crash and subsequent cascading effects – rendered bitcoin mining less profitable. One bitcoin today costs $19,410, so it’s hard to imagine this state of affairs has come to pass – but this is why understanding the ‘permissionless’ nature of cryptocurrency blockchains is important.

Verifying bitcoin transactions requires computing power. Computing power (think of processing units on your CPU) costs money. So those bitcoin users who provide this power need to be compensated for this expense or the bitcoins ecosystem will make no financial sense. This is why the bitcoin blockchain generates a token when users provide computing power to verify transactions. This process is called mining: the computing power verifies each transaction by solving a complex math problem whose end result adds the transaction to the blockchain, in return for which the blockchain spits out a token (or a fraction of it, averaged over time).

The idea is that these users should be able to use this token to pay for the computing power they’re providing. Obviously this means these tokens should have real value, like dollar value. And this is why bitcoin’s price dropping below a certain figure is bad news for those providing the computing power – i.e. the miners.

Bitcoin mining today is currently the preserve of a few mining conglomerates, instead of being distributed across thousands of individual miners, because these conglomerates sought to cash in on bitcoin’s dollar value. So if they quit the game or reduce their commitment to mining, the rate of production of new bitcoins will slow, but that’s a highly secondary outcome; the primary outcome will be less power being available to verify transactions, which will considerably slow the ability to use bitcoins to do cryptocurrency things.

Bitcoin’s dropping value also illustrates why so many cryptocurrency investment schemes – including those based on bitcoin – are practically Ponzi schemes. In the real world (beyond blockchains), the cost of computing power will but increase over time. This is because of inflation, because of the rising cost of the carbon footprint and because the blockchain produces tokens less often over time. So to keep the profits from mining from declining, the price of bitcoin has to increase, which implies the need for speculative valuation, which then paves the way for pump-and-dump and Ponzi schemes.

permissioned blockchain, as I have written before, does not provide rewards for contributing computing power because it doesn’t need to constantly incentivise its users to continue using the blockchain and verify transactions. Specifically, a permissioned blockchain uses a central authority that verifies all transactions, whereas a permissionless blockchain seeks to delegate this responsibility to the users themselves. Think of millions of people exchanging money with each other through a bank – the bank is the authority and the system is a permissioned blockchain; in the case of cryptocurrencies, which are defined by permissionless blockchains, the people exchanging the money also verify each other’s transactions.

This is what leads to the complexity of cryptocurrencies and, inevitably, together with real-world cynicism, an abundance of opportunities to fail. Or, as Robert Reich put it, “all Ponzi schemes topple eventually”.

Note: The single-quotation marks around ‘crypto’ in the headline is because I think the term ‘crypto’ belongs to ‘cryptography’, not ‘cryptocurrency’.

Analysis Culture

The persistence of NFTs

NFTs freak me out. One of the ways in which my grandmother lost touch with her daughter – my mother – was my mother’s generation’s access to and use of computers, smartphones and the internet. And one of the ways in which my mother and father are out of touch with my generation is digitisation: the amount of information, and ways to manipulate it and extract wealth from it, that has become virtual. And I’m becoming surer that NFTs will be one of the big ways in which I’ll lose touch with the generation following mine.

From my point of view, NFTs have two facets, one each for the physical and the digital worlds they span. NFTs are essentially digital, but their name itself – non-fungible tokens – indicates that they are the product of a time in which the physical, typified by the fungible, and the digital coexist but in which the fungibles are still more important, even as the non-fungible is starting to evolve its first ‘offline communities’. Such communities are perhaps the best indications there could be that something is worth noticing, even if it’s misguided or just culturally hollow.

The film (and the book, which I haven’t read) Ready Player One should quickly clarify how powerful and how liberating the non-fungible universe, the metaverse, can be, even though it’s very much an outcome fantasy, and NFTs are allowing people to crenellate around such possibilities. Yet I remain deeply sceptical of NFTs because they exist in a superposition of high energy-consumption, the socio-economic privileges of their proponents, the absence of socialist values in their development trajectories and, immutably, a soup of jargon that constantly keeps their principles out of reach of those who would like to debate them. (The last point is non-trivial: intended inexplicability is a common symptom of scams).

I’m aware that, with these vectors of scepticism, I’m also part of a global community that’s pushing back against the nebulous rhetoric that has enveloped NFT culture – a community animated by the obvious and considerable distance between the present as lived by countless people in the “Global South” and the future as those in New York and California are imagining it.

At the same time, I’ve also been sort of wary of what the essential motivation for the NFT culture and the metaversal tendencies more broadly might be. This picture isn’t immediately clear because both cryptocurrencies and the metaverse are the brainchildren of that white + libertarian + Silicon Valley + tech-bro space that has prided itself on its profiteering, technocratism, cynicism of politics and a unique brand of super-rationalism. So it’s hard to conclude that anything this group thinks is a good idea is more than a good idea to make more money.

On the flip side, the existence of communities around an asset as baffling as NFTs at least indicates the presence of a deeper angst, particularly among people of certain ages. What might this be?

I recently read an article by Ginevra Davis, published on January 21, that attempted a diagnosis:

Our generation is notable for our lack of a youth-led counterculture, or any coherent rebellion, at least not on the scale of the late 1960s. But this lack of open rebellion does not mean that we are more satisfied than previous generations, or that we have nothing to rebel against. We are by many measures poorer, sicker (mentally and physically), and have fewer close relationships than our parents or grandparents. But instead of running away to some proverbial California, we have mostly chosen to express our frustration in private, on the internet, where you can laugh at memes about major depression or wanting to kermit sewer slide from the safety of your bedroom.

In the NFT community, we are witnessing the logical conclusion of a generation that is so alienated, so profoundly unfulfilled, that they are considering abandoning the physical world altogether. At least the metaverse is something new—maybe somewhere they can be rich, or important.

Either this is really true or it’s what the NFT-evangelists are telling themselves. Either way, it’s led to the creation of a parallel dimension that apparently promises to quell the tension that inhabiting the physical world in the 21st century entails. But it’s probably what the evangelists are telling themselves because, for an observer at infinity, it’s very difficult to distinguish the mores of the wider cryptocurrency + metaverse community, especially the self-indulgence and consumerism, from those of the tech scene that this community is apparently tiring of (Metakovan’s eyebrow-raising purchase of that piece of art for $69 million comes to mind). In fact, it’s tempting to consider whether NFTs are the result of a people doubling down on a culture and worldview in search of a purpose that this culture and worldview have thus far failed to produce, that their angst is less the desperation to break out and more the desperation per se. Davis herself is more charitable in her conclusion:

In “Slouching Towards Bethlehem,” [Joan] Didion captured a moment in time; a small group of teenagers who tried to find meaning in psychedelics. But it was also one of the first major literary works documenting the broader phenomenon of American decadence, or cultural malaise in the face of unprecedented economic prosperity. In the fifty-odd years since “Slouching” was published, a diagnosis of “decadence” has become shorthand for a constellation of cultural neuroses plaguing Western countries, including technological stagnation, cultural repetition, sterility, and nihilism. Unlike in the 1960s, it no longer includes coping with unprecedented prosperity.

As I wandered through New York, I wondered what Didion would think of the festivities at NFT.NYC. Are the desires of NFT proponents to rebuild the world online the endgame of a fully stagnant society—a final detour into the absurd before we give up on progress for good? Or is the starry-eyed optimism of digital true believers a last stand against decadence?

I came away from NFT.NYC with a certain respect for the NFT community. They are not taking decadence lying down, and have found a way to revel in the absurdity.

I don’t know agree with her, of course. My principal point of disagreement is Davis’s use of the word “we” to refer apparently to all of us as one cohesive mass. But there are many wes here: on the ground, there are super-rich Americans, wannabe-rich Americans, white Americans, non-white Americans, immigrants; off the ground, there are people around the world that technically belong to the same generation but are operating in much less privileged socio-economic contexts, as well as others in the same context who are in turn further disprivileged by class, caste, race, gender, geography, leadership, etc.

On this multi-layered pyramid denoting many strata of a single generation of people, there are many, many things that people on the lower rungs have left to do – from exiting poverty to eliminating caste-based discrimination, from improving income equality to reducing carbon emissions – before the future looks bare enough to populate with NFTs. The only way a unified “we” makes sense is that we will all suffer the vision this vanishingly small group of wealthy and influential people has for a better future.