REINVENTING THE YAP STORY
IT’S NOT THAT CRYPTOCURRENCIES ARE CRAZY. THEY’RE JUST NOT THAT USEFUL.
One of the Bank of Canada’s most prized possessions is its Yap stone, on display at the entrance of its newly-renovated currency museum. It’s the most striking piece of the museum’s collection: a twometre, three-tonne disc that was once used as currency on the Micronesian island of Yap. Since they were probably the most unwieldy form of currency ever invented, transactions didn’t require Yap stones to be physically delivered; it was enough for it to be known that ownership of the stone had been transferred to the person accepting it in exchange for goods or services. The fact that one stone had been lost at sea didn’t affect its usefulness as a unit of currency: everyone knew the location of the stone and its value.
Monetary history is full of cases where the role of money has been played by unlikely actors, sometimes out of necessity: playing cards for the colonists in New France, cigarettes for Allied soldiers detained in German prisoner of war camps. Pretty much anything can be money if enough people believe that it is. So there’s nothing obviously crazy about the idea of people using a few lines of computer code as money.
In fact, it’s pretty clever. The obvious challenge with an electronic currency is counterfeiting: making exact copies of a computer file is ( usually) trivial. This ob- viously doesn’t mean that electronic payments have been impossible up until now; it’s just that these transactions required a third party to ensure that the transaction showed up as a debit for the payer and as a credit for the payee. The clever part of the blockchain technology behind electronic currencies such as Bitcoin is the encryption that makes it possible to transfer ownership directly, without third-party verification. And just like with cash payments, the transaction is anonymous.
As I said, it’s pretty clever. But then again, it’s nothing particularly special, either: to a very great extent, cryptocurrencies are simply reinventing the wheel. There is almost nothing that you can do with cryptocurrencies that you can’t already do faster and more cheaply with existing instruments. The costs of making a bitcoin transaction are steep: the fee is about $20, and it typically takes an hour — and sometimes up to 12 hours — for the trade to clear. In contrast, a transaction with a debit card is costless and takes a few seconds, and is virtually instantaneous if you’re using a paypass card.
There’s also the question of anonymity. For most people, it’s enough to simply pay cash for small transactions that you’d rather keep private, but cash can be cumbersome for large transactions. But then again, the sorts of large transactions for which one would rather not leave traces are typically those involving illegal activity. For criminals, cryptocurrencies offer an alternative means of making payments that doesn’t involve dealing with suitcases filled with $ 100 bills. This may not be a positive development on the public policy front, but at least it can be argued that cryptocurrencies are not completely useless.
The textbook definition says that money serves as a means of exchange, a unit of account, and as a store of value, and cryptocurrencies satisfy approximately none of these criteria. As a means of exchange, they are much more costly than the payments mechanisms we have now, and no one sets prices in cryptocurrencies. You can’t even use bitcoins to pay fees at bitcoin conferences.
At this point, cryptocurrency enthusiasts will point to the store of value criterion: estimates for the outstanding market value of cryptocurrencies run into the hundreds of billions of dollars. But no one should consider them to be a stable store of value, at least, not at current prices. The market for cryptocurrencies is as close to a pure bubble as you’re likely to see. Investors (that doesn’t seem to be the correct word here — “punters,” perhaps?) are not buying cryptocurrencies in order to obtain whatever flow of income or services they generate, because there are none.
During the dot- com bubble, people could at least imagine that money-losing tech companies might eventually become profitable enough to justify the high valuations that had been attached to them; there are no such comforting narratives that cryptocurrency punters can use to justify the price they paid. Their only hope is that they’ll be able to unload their holdings at an even higher price — and buying something purely in the hope that its price will rise is what an asset price bubble looks like.
To be even more blunt, the investment logic of cryptocurrencies is the same as that of a Ponzi scheme: the people who get in first make their profit from those who come in afterwards. It’s gotten to the point where parody is indistinguishable from real life. One prankster set up a new cryptocurrency called PonziCoin, complete with a detailed description of how Ponzi schemes work, and that a frank admission that PonziCoin was explicitly designed to be a scam. Things went awry when he saw that the project was being taken seriously by punters. The project had to be shut down eight hours after going live, but not before it had collected some $ 25,000 from people who though that getting in on the ground floor of a Ponzi scheme was a good use of their money.
The cryptocurrency bubble would be a mostly harmless spectacle if it weren’t for the fact that it is a hideously costly drain of productive resources. According to Digiconomist, the bitcoin network consumes 0.2 per cent of world electricity production, equivalent to Iraq’s electricity consumption, or enough to supply four million U.S. households. Clearing just one transaction consumes enough electricity to power 15 U.S. households for a day.
The reason why Yap stones were considered valuable was that they were the result of an enormous amount of effort: they had to be quarried in another island, transported and then shaped. What we have learned since is that this effort was largely wasted, at least as far as the functioning of a monetary system goes. This lesson appears to have been forgotten. Maybe cryptocurrencies haven’t reinvented the wheel so much as they’ve reinvented the Yap stone.