Bitcoin has suddenly become all the rage at the time of writing at the beginning of 2018 and 5778. Although it is not something new, having been around since 2009, and far from the only cryptocurrency around Bitcoin has garnered a lot of attention in recent times. At the time of writing, there are nearly 1500 cryptocurrencies, with a total sum market value of USD 550 Billion. Over half of this value is Bitcoin. Given the current volatility of the currency, this could change significantly, however. The next highest cryptocurrency is Etherium with about quarter of the market capitalisation of Bitcoin. The vast majority of the rest of these cryptocurrencies have a market capitalisation of below USD 100m, and only a few dozen above USD 1 Billion. To try to explain why Bitcoin stands out from the others is like explaining the success of Harry Potter, Pokemon, Cards Against Humanity, the iPhone, or other great phenomena. This is going into Nassim Taleb’s Black Swan territory. By definition, we cannot explain what makes this particular currency stand out from the rest. The fact is that it has now garnered a lot of attention. We can look at why the market has such a structure, but not why bitcoin specifically is so successful. This would be meaningless. Everybody can agree that this is a somewhat unique phenomenon. Although individuals have created their own currencies in the past, such as the classic and real example (which was surprising to me as I thought that it was just a trope) of cigarettes in jail. They have also used non-local-government-issued currencies such as the US Dollar in countries such as Zimbabwe recently, or in the Soviet Union when it was still around. Bitcoin is very different. It is a global phenomenon. It has captured the imagination of the world. It started as a something espoused by libertarians and technologically savvy people alike, who said for years that cryptocurrencies were the future. Few believed them at the time. Now everybody is talking about them.
Before moving forward, we need some definitions, in order to know what exactly it is that we are dealing with.
Cryptocurrency is defined primarily by its security. It is secured through cryptography, and is attractive primarily due to how free from government interference it is. This last element probably adds to the allure of Bitcoin, who’s very origins are unknown. Nobody quite knows who or what created it. It is created through a process called mining.
Cryptography is a form of encryption. Only a certain code can unlock, or open a certain piece of data. This prevents one’s messages and other data from being accessed by somebody without a key. Cryptocurrency has exceptionally advanced encryption.
Mining is a form of puzzle solving. Once the puzzle is solved, a new coin is created, and one moves onto the next puzzle, or block. Each is more difficult than the last.
Blockchain is a form of digital accounting. It is unmodifiable and very secure. This is the foundation of what makes cryptocurrency technology so valuable.
Money, as defined by standard economists has three characteristics. It is a medium of exchange, store of value, and measure of value. We need to see how this applies to what we are dealing with. Perhaps a new definition of money is needed.
Gambling is to place money, or another object of value, as a wager in order to win money or other goods. This is typically found in card games or casinos, but has extended to almost any field. Certain forms of participation in the financial markets can be called gambling, others not.
Investing is also a certain form of wagering. The difference is that investing involves some form of ownership. It involves buying a potion of a certain venture to earn a share of the profits.
Underlying is what usually differentiates gambling and investing. This is ownership of whatever one is wagering on. Without ownership it is pure gambling. This is why something like insurance is not gambling. Some derivatives, on the other hand might be considered gambling.
A potential explanation for the current market structure is given by industrial economics. This is the study of the firm beyond monopoly and perfect competition, neither of which exist in the real world, and both of which are what most students of economics focus on. Why should one currency have around half of the total market capitalisation of all the others combined? The reason is practicality. We all go for what is familiar, first of all. Secondly, network economics and economies of scale. In short, the more people have of one thing, the more useful it is. Take USB for example. There are other ways of transferring data, but because USB is so widespread, people see little reason in using other forms of data transfer or power charging.
There are some important questions when it comes to Bitcoin, however, within the context to Jewish Halacha. I will attempt to deal with them with through certain major points going from more general, to more specific, and then becoming more general as we look forward in time.
What does Judaism say about risks and investments?
Judaism has a very strong stance on gambling. In fact it forbids it. The question is on how gambling is defined. For example, speculation in the financial market can be called gambling, but is permitted. The Mishnah in Sanhedrin compares the professional gambler to a robber. He is therefore not allowed to serve as a witness in a Jewish court of law, or beit din. This is due to the fact that he does not produce anything useful in gambling, and does not view money with the correct value. It is a profession that is looked down upon, because instead of pursuing an honest living and learning Torah, he engages in conduct which he should not according to the Rambam, Maimonides.Judah ha Hasid even says that we must refuse to help a gambler in need. Other side-effects are also taken into consideration such as the fact that this individual is banned from other elements of Jewish life such as reading the Torah, being a member of the Hevre Kadishah, and getting married in a synagogue. Drinking and wife beating and poor children’s education are also part of a gambler’s lifestyle.
On the other hand, in Rabbi Dessler’s Strive for Truth, in the section on faith in G-D, he says that somebody with enough faith in the creator will be offered the chance to make his livelihood through buying a single lottery ticket. This seems somewhat contradictory. This is why we need further definition. There are also several forms of lottery throughout Torah literature which seem to contradict the above judgement. For instance, lots were drawn in the dividing of the land in the book to Joshua. The argument would seem to lie in the type of gambling, and how much. If somebody has another, primary, form of livelihood, it is permitted. A more stringent opinion would argue that all those involved in a bet expect to win. As a result, the winner would in effect be stealing from the loser.
What about investing? Is it considered gambling? There is the stereotype of Jews working in financial markets, or property, and individuals like Steve Wynn and Sheldon Adelson own casinos. That does not make it okay. There are plenty of Jews who do not keep Torah laws. Firstly, the idea of a winner and loser does not really apply. If a person invests in a company, and it makes money, it is not at the direct detriment of another. By investing, somebody is not producing nothing. An investor usually gives tools, not just limited to capital, but also business expertise to the investee. This form of investing also falls under the category of something called Heter Iska. This is a way of allowing a form of interest, standard interest being forbidden. For the normal consumer, Heter Iska takes the form of lending to an individual, and the lender taking a share of the capital gains instead of interest. This can be a share of a business’s profits for example. If this sounds like investing, it is because it is for all intents and purposes.
Regarding owning casinos, casinos are usually entertainment hubs. A Las Vegas casino will not just have slot machines, but restaurants, magic and music shows, and numerous other forms of entertainment. The gambling itself is not seen as a way of making money, as most patrons know that the odds are stacked against them, They get joy from the activity itself, and winning is a byproduct, however much desired it might be. Bitcoin is not a casino. People do not buy and sell it because they enjoy doing it. Although they must do so, otherwise they would not. It is completely irrational for a person to do anything that they gain zero pleasure from, after all. This is the fourth principle of Mankiw’s 10 Principles of Economics. People respond to incentives. Incentives bring one some measure of pleasure, otherwise it would not be an incentive. Other reasons people buy Bitcoin are to make money, currency speculation, in other words. We will discuss the permissibility of currency speculation. Security is another reason. Bitcoin could act as a shield against inflation. The original intention of course, is as an alternate form of money. We will look into whether this fits the definition of money, and even if it does not, whether it can function as money.
How does Bitcoin relate to this? The argument would lie in two things. First is whether society benefits from it, and second is whether there is some underlying ownership behind it, rather than simply playing with money. This why currency speculation is questionable.
Does Bitcoin have an underlying and does this matter?
This could matter because it would mean the difference between gambling and investing. Pure gambling, as we have seen is at best frowned upon by Judaism, and at worst completely forbidden. Gambling has no underlying. It is a situation in which one has a winner and a loser, based on the outcome of a given scenario. One does not have an income on the scenario. Horse racing is a good example. Betting on a horse will not affect how fast it runs.
Investing is buying shares or bonds in a company to help it function. This can be seen as a form of Tzedaka, or charity. It can give a company the much needed capital to get started, or indeed continue functioning. An investor can also give his expertise or input to help it succeed. This is also not a zero-sum game. In this context, investing is so far away from gambling, that it actually becomes one of the most important mitzvot of the torah. One is obligated to give to charity. An investment can fall under this. Bitcoin could either be gambling or investing, which means that it is either something very questionable, or something extremely good.
Bitcoin would appear to be neither. From the libertarian perspective, this is not so much investing, as being no different from having a bank deposit. This is especially important to consider, given that money no longer is backed by gold or silver, depending on the country. It is based on faith. This is the main argument for Bitcoin, according to them. The belief is that money needs to have some kind of underlying. Otherwise it simply is not worth anything. They want to be able to go to the bank, and trade their money for gold or silver, as used to be the case many years ago. Bitcoin is just like this, but better. It is better because it is free from government regulation. At least it is for now. At least nobody controls the supply. So it is not investing because there is no underlying. It is not gambling either, because if it was, having a bank account would turn one into a gambler. This is obviously absurd.
We must now look into the definition of what money is.
Is Bitcoin money?
Adam Smith: “Money is like a road which helps in transporting the goods and services produced in a country to the market, but this road does not itself produce any thing”. Bitcoin is the same. It is used to purchase things. Unlike money, however, it cannot be stolen. This security is one appealing factor behind this. Is it okay for one to hold money? Of course it is.
Another definition of money has three factors. It is a medium of exchange, store of value, and unit of account. This is what the International Monetary Fund says. This is the official definition. Jewish law has another view on this. Chabad states that money must either be declared as currency by government, which it is not, or be accepted as currency in a given place, which is it. This is in line with the Shulchan Aruch, which takes its position from Baba Metzia 45a. This latter factor is very important to consider. This started with Bitcoin cafes all over the world, later cash machines. At the time of writing, London boasts 1 Bitcoin cash machines and 69 shops which accept it as currency. Places which accept this as money are schools, restaurants, all manner of shops from hardware to sports and newsagents, law firms, massage therapists, real estate, electronics, tattoos and piercings. This means that you can buy almost anything you need using Bitcoin. Clearly, then, it is money.
The main differentiating factor between this and another form of money, besides government control is its volatility. Given a market capitalisation of USD250B, such volatility is expected, especially compared to other currencies which are valued in the trillions. Being so large, they cannot be expected to be so volatile. That said, the British Pound Sterling lost 15% of its value in a single day in 2016. There are also numerous example of currencies losing value on a daily basis throughout Latin America in recent history. This volatility argument, therefore, does not hold water. No serious individual would argue that the British Pound Sterling is not money, or for that matter, the Brazilian Real, or Argentine Peso.
On the other hand, the Chatam Sofer in Tired Deah gives three requirements for money. They are as follows. Firstly, they need is needs to be generally accept. Bitcoin is. Second it needs to have the authority of the king, or government. This is in accordance with the principle of Dina demalchuta Dina. This is questionable at best. It is technically legal, but not endorsed by the state. The whole point of crypto currency, however according to some is the lack of government influence. The third requirement is for it to be redeemable.Conventional money has no underlying either. Although there is no underlying, at least unless the state collapses, which is very rare these days. At the very least, one can pay his taxes with currency. Bitcoin does not have this. The only guarantee is what others will pay for it. It would therefore not qualify as money given that it only fits one, or at best two of the three requirements according to the Chatam Sofer.
Is Trading Currency Gambling?
The question on whether buying and selling bitcoin is a problem would appear to lie in whether buying and selling currency is indeed a problem. For this, we need to look at primary sources. This takes us to the Talmud and the Shulchan Aruch. The question that we need to ask is whether trading currency is problematic. This is important to know due to the sheer volume of currency trading that takes place. For instance, trading amounted to USD5.1Trillion every single day on average throughout 2016.To give an idea of how large this is, the value of total output that year was USD120.2Tillion according to the CIA World Factbook.This means that in a month, global currency trades are worth more than the total world output. We need to understand what is going on here, and whether it is problematic. The first instinct would say that it is very problematic. Currency trading is buying one currency with another currency. On the surface, Jewish law would seem to say that this is just wrong. Massechet Baba Metzia would appear to give an initial answer.It says, pretty clearly that buying one currency for another, in this case, gold for silver or vice versa, is not allowed. The reason for this is because of a potential change in value in either one which would lead to profit purely from currency fluctuation. The thing is that there is absolutely no way to know whether the price will go up or down on any given day. If one buys because of pure speculation, this would lead to the issue of the gambler who is considered a degenerate, because he makes money without producing anything. It does say, however that good can be traded for money to be later used to purchase goods in Jerusalem, due to the practical consideration of storage. The questions are therefore around the issues pertaining to paying in a certain currency for delivery later, or lending currency to be repaid at a later date. This brings us back to foreign exchange. It is seen as mostly speculating, when in fact, it is not. It is mostly used by international companies who need to be able to know how much they will be making and spending by doing things such as purchasing forwards and derivatives. These trades act more as insurance than anything else. Any opposition to currency trading would therefore have to be viewed as the same opposition against insurance. Insurance is obviously okay, so so it currency trading, for the most part. It depends on one’s motives.
What are the costs of producing Bitcoin and are they worth it?
Environmental considerations are important in this day and age. It seems odd to consider the environment in this equation. Bitcoin is mined through a process which uses a lot of computing power. Each new coin requires more computing power. As a result, it can cost many thousands of dollars to mine a single bitcoin. Most energy around the world is still produced using non-renewables. Two issues are at play here. The first is the energy used, the second is the alternate uses that this energy could go for. This is what economists call opportunity cost. What else could this same energy be used for? Millions of homes could be powered using this energy for example. In today’s croudsourcing economy wherein using many computers to find a solution for a specific problem. A good example of this is GoldCorp Inc, a Canadian mining company, which used this in order to discover gold deposits in Ontario. Imagine if all the bitcoin mining energy was used for actual mining, or that computing power to solve other world problems? These are theoretical questions and not worth spending much time on.
Are Bitcoins Beanie Babies?
Many have drawn comparisons between the current mania for Bitcoin and that for Beanie Babies in the late 90s. This is probably for good reason.In fact, there is now a cryptocurrency which looks a lot like these plush toys, called Cryptokitties.
I would personally conclude that cryptocurrencies are worth even less than Beanie Babies. At least you can keep a Beanie Baby or give it as a gift to a child, who will cherish it. These currencies have zero underlying. The thing is that Beanie Babies were a pure bubble. People bought them in order to sell them at a higher price, nothing more. Bitcoin is bought to buy other things with. The question is about why there is so much speculation around it. The reason for so much speculation is the same for all other currencies. The vast majority of currency trading is not done to purchase things, but for speculation.
What about the experts?
Experts say that it’s a bubble. They were wrong about Trump and Brexit. Does it mean that they are wrong here? It would seem as though they might be. This is due to their vue of its function.
Paul Krugman has very strong opinions about Bitcoin, going as far as to call it evil. It is also the purest bubble imaginable. The difference between this, and the housing bubble, according to him, however is that you can see when a house is worthless when it lies vacant. Due to its nature, it can keep value almost indefinitely, especially given the mining costs. There seems to be this consensus that this cannot last, and that this is an elaborate game of hot potato. People are going to keep trading and making money, until it becomes worthless and hope that somebody else will be holding the asset rather than them. The thing is that it is not a standard investment. It is currency. All currency is based on people having faith in them, and nothing more. These arguments about it being based on hot air are founded on the assumption that this is an asset like any other. It is not. It is money. Therefore the same reasoning does not apply. Others are similarly less positive as Jamie Dimon of JPMorgan Chase called it a fraud, those who buy it stupid, and Warren Buffet called it a mirage and said that we should stay away. Their view seems to have one big issue. This is the view that people buying bitcoin are doing it for speculative purposes, rather than because it is as an alternative currency.
Mohamed El-Erian says that this is Bitcoin’s moment of truth. This is as Bloomberg finally sets up its cryptocurrency trading desk, and the recent introduction of Bitcoin futures. I have personally been talking about Bitcoin futures since 2013, however, when I lived in Brazil, so it has been a long time coming. If anything, this maturity comes very late. This probably explains the meteoric rise in prices. As people become more interested and buy more at a rate far higher than the slow rate of production. This instability might simply be due to it adjusting as new ways of trading come into existence.
What purpose can Blockchain serve?
If Bitcoin is worthless, what use can its technology serve? Blockchain is the foundation “block” of Bitcoin. It is a way of making transactions highly secure and anonymous. This is very useful technology with many applications. Even if we choose to forget about cryptocurrencies in many years, the technology behind it will certainly serve us, especially as we move more and more towards a digital society.