Bitcoin Can Become Stable Only If This Happens, Says Nobel Laureate
Bitcoin can be a store of value, according to Nobel Laureate Eugene Fama. But only if it becomes accepted as money or a medium of exchange. And that is a long shot.
The economist observes that anything acquires a value if there is an opportunity cost. For a medium of exchange, that opportunity cost is limited supply. Bitcoin’s limited supply of 21 million makes it a candidate for becoming a medium of exchange. But there are still certain hurdles that remain for the leading cryptocurrency.
Bitcoin As A Medium Of Exchange
Money is a unit of account and has to be stable. It has to be a store of value and retain its value over time.
But Bitcoin has not been stable. Even before it entered its highly volatile trend in 2017, the coin rose 2% in value on average from 2013 to 2017. In 2017, the coin rose from less than $1,000 to more than $19,000 before falling down to $8,000 in 2018. During the pandemic, the rises and falls were more dramatic. Bitcoin reached an all time high of $65,000 in November 2021 before crashing below $20,000 this year.
Though the coin has achieved higher returns than most other asset classes since 2008, the economist observes that it cannot be a store of value over the long term unless there is something that gives it that value.
Bitcoin will stabilize only when people start believing in its use as a medium of exchange. But people are not doing that just yet, for strong reasons.
Fama was awarded the Nobel Prize in 2013 for his work on efficient market theory hypothesis, portfolio theory and asset pricing. The Nobel laureate says that Bitcoin’s volatility means that the coin may rise or fall dramatically from one day to the next. That makes it a poor medium for trade.
Economic activity is the exchange of goods and services and that depends on a medium that can hold its value with minimum fluctuation. An economy based on a volatile medium will not survive.
Other Store Of Value Options
Bitcoin also does not have intrinsic value despite its limited supply. On the other hand gold, which is also limited in supply, has an intrinsic value but has been too volatile to be a store of value. Currency reserves became the store of value, but after the Fed purchased bonds in unprecedented amounts, even that is seen as unlimited supply now.
Inflation, which has been at 40-year highs, seems to be cooling as August showed a consumer price index rise of 8.3%, lower than July’s 8.5%. But core inflation rose 0.6% from July and indicates that higher prices will be around for a while. The only tool to fight inflation is interest rates, not Bitcoin or gold, the economist concludes.
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