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Bitcoin doesn’t make sense, but let’s do it anyway

Thursday June 17 2021
Bitcoin pic
By Charles Makakala

When Hammurabi, the King of Babylon, formulated what is now one of the most famous legal codes of the ancients in 1750s BC – which articulated laws governing debt, interest, and the use of money – it was proof that business had become complex enough for people to use money. They therefore started to use bronze or gold objects as currency.

After a thousand or so years, the carrying of metal objects for business became too unwieldy, so the Chinese invented the minting of coins. This was soon followed by yet another Chinese invention – paper money, many years before Marco Polo brought the idea to Europe in the 13th century.

Starting in 1659, when the British started to use cheques, the modern world has witnessed multiple inventions in that domain, and different inventions have all carried along the same concept of money – people work and earn money that is equivalent to the value of their labour, and that is exchanged for the value of an object or a service that is being acquired. At least that’s how things ought to be, discounting that unpleasant bit where workers get ripped off by employers and traders alike.

Placed in that context, people think that since the world has moved from commodity money to digital money, then it automatically follows that we should move towards crypto-money. They assume that this is part of the unstoppable march into the future, and what’s more futuristic than cryptocurrency?

Oh, one wishes that things were that simple, but there is something fundamentally wrong with the idea of cryptocurrency, and the world is entering murky waters here.

Money in simple terms represents the economic value created through production or trade. It exists to facilitate the exchange of value for value, regardless of technology or medium of exchange. But bitcoin, or cryptocurrency in general, departs from this convention. To appreciate that, we need to understand what cryptocurrency is and how it works.

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Cryptocurrency is founded on a digital technology called blockchain. Through blockchain, decentralised accounts of transactions are recorded in millions of computers that communicate directly with each other through the internet. Blocks of these transactions are chained together and stored in millions of nodes, making it impossible to temper with – a quality that makes blockchain very desirable and a potentially enormously transformative technology.

Cryptocurrency is just one application of blockchain where it is used to transfer, verify, and record funds. These ‘funds’ exist only as digital signatures in computers, and are then ultimately branded Bitcoin, Litecoin, Ethereum, Monero, etc. One can come into possession of those funds through trading or through a process called mining.

Mining is the process where new bitcoins are produced. This is achieved through a twofold process. Firstly, by verifying blocks of transactions. Whenever there is a new transaction, users are expected to verify them in a decentralised way, and that is essential for keeping the system trustworthy. Secondly, by being the first to guess – yes, that is the word – the right answer to a numeric problem. The numbers involved are huge, and therefore miners from around the world compete using powerful computers which require significant energy to run to make guesses out of trillions of possibilities within minutes. Those who are successful get rewarded with new bitcoins.

Today, one bitcoin is worth almost Sh93 million, and given that there are 18.7 million bitcoins around, that’s Sh1.7 quadrillion of wealth created out of nothing. This is the appeal that bitcoin has, equivalent to the Californian gold rush of the 1840s.

However, bitcoin is essentially a creation of something out of nothing. This is to say that the 1,000 people who hold about 40 percent of all bitcoins have become millionaires by contributing absolutely nothing to the world. The fact that bitcoin has no intrinsic value is not a secret. That’s why the value of bitcoin fluctuates like a stormy sea. Peasants who eke a living through farming have done more for human development than these ‘millionaires’. Bitcoin is simply bad economics which produces professional guessers rather than workers.

That said, the world is full of bad ideas which have turned out to be immensely popular. Think of evolution, socialism, or even Liverpool FC! Like all crazes, they all create an appeal which make humans attached to them like a dog to a new bone. Therefore, as much as one may wish to say that ‘this is stupid, let’s sit it out until more sensible options appear’, this is probably not one such case. Powerful people have started to put their money into bitcoin – and this may end up changing our world in ways we can’t control.

So, even though there is little incentive for new entrants now, let those who can explore bitcoin do so, and the government should not stand in their way. However, the best case for bitcoin in Tanzania is through a government-run agency. It takes about 1MWh to produce between Sh450,000 to Sh900,000 of bitcoin, and that is not cheap if you are paying for power. But, if you own plants which generate excess energy, a position that Tanzania will find itself in soon, then bitcoin can be a worthwhile option to explore.

It’s an ‘if you can’t beat them, join them’ kind of thing.