Newswise – Bitcoin was on a hot streak recently, hitting an all-time high above $ 50,600. And that move also sparked a debate about the warming of the cryptocurrency. Is Bitcoin a viable currency for trading? Or is it just an overheated asset, about to cool down? Maryland Smith experts Brent Goldfarb and David Kass intervened recently.
Goldfarb is also Associate Professor of Management and Entrepreneurship, Academic Director of the Dingman Center for Entrepreneurship and co-author of “Bubbles and Crashes: The Boom and Bust of Technological Innovation” (2019, Stanford University Press). Kass is a clinical professor of finance and previously held senior economist positions in the Federal Trade Commission, the General Accounting Office, the Department of Defense, and the Bureau of Economic Analysis.
First, on a question of value, Kass says, “Bitcoin has no intrinsic value but is valued by the market based on supply and demand. It is a form of digital gold, but gold has some value as jewelry and has industrial uses. “
Kass, along with Goldfarb, provided more information in the following Q&A:
Q: Where is the price cap for Bitcoin Bitcoin and who benefits from a high price?
Kass: People who bought lower prices early and sell higher prices will benefit. The dumbest theory applies here – people who are stupid to buy Bitcoin for a high price expect to sell it for a higher price to a bigger fool. It can be used to hide illegal activity.
Goldfarb: There is no theoretical limit to the price of Bitcoin. It will continue to increase as long as there are people who think it will continue to increase. At the same time, without an anchor point, it can also crash very quickly. I can say for sure that the Bitcoin floor price is zero.
Q: Now that the Federal Reserve is paying attention to Bitcoin, is it already worried that it could call into question the international status of the dollar?
Kass: The US Treasury and Federal Reserve will likely issue a digital dollar in the future, which would make Bitcoin and other cryptocurrencies less useful, resulting in significantly lower prices for them. Other countries are likely to issue their own digital currencies.
Q: What will be the impact in the future? Some argue that Bitcoin is similar to gold, but with its price so volatile, who would dare use it as a store of value?
Kass: Bitcoin cannot be used as a currency or medium of exchange because its value is volatile and unstable. It is not a store of value.
Goldfarb: Bitcoin, like gold, is valuable because it is an agreed medium, not because it is generally useful as a currency. Currencies become more useful when they have a stable and predictable value. Bitcoin fails this test because if there is a belief that its value will increase, people will hold onto it as an investment. (Why buy a cup of coffee with Bitcoin today if you can buy two tomorrow?) If they think the value will drop, they will look to sell it and move to more stable assets.
Some additional sources of risk for Bitcoin are that it is used for illicit activities, and Bitcoin mining unnecessarily uses considerable energy resources. These issues can lead to regulatory pressure from global governments. For example, the Fed doesn’t think Bitcoin is a competitive threat, and it’s in the best interests of the United States that this remains true. But given its volatility, I think the Fed is right.
Q: What are the similarities and differences between Bitcoin and the 17th century Dutch Tulip Bubble?
Goldfarb: The surge in Bitcoin’s price inevitably drew comparisons to early 1637, when prices for some tulip bulbs in Amsterdam were briefly in the range of 17 years’ wages, before plummeting 99.99%. In other words, speculators inflated light bulb prices up to 20 times, before the market collapsed and reached normal levels in February of the same year. It all happened in cafes. They negotiated, raised the price, but only for future tulips. Many of these agreements never took place.
Bitcoin is similar, only a very small portion of Bitcoin is traded on any given day. This makes Bitcoin particularly volatile, given that large price changes can occur if a slightly larger group of Bitcoin holders become frightened.
Just as Bitcoin is hailed by some as the next big tech stock, the tulip bubble was a tech bubble. The growers were committed to crossing the seeds, but they were never sure what color would occur until the tulips sprouted. This uncertainty has contributed to an aura of mystery around some tulips which, in turn, have pushed their prices up. The only part of the analogy that holds true for Bitcoin is the story of a technology in which the use of Bitcoin will be like a currency replacement. However, central banks work very hard to stabilize the value of currencies, and they generally do quite well in this area.
The potential for increasing value that makes Bitcoin attractive as an investment makes it unattractive as a currency. As long as this is true, the Bitcoin-as-currency-tech prophecy will be confined to true believers.