Bitcoin can only become stable if this happens, says the Nobel Prize winner
Bitcoin can be a store of value, according to Nobel laureate Eugene Fama. But only if it is accepted as money or a medium of exchange. And that’s a long shot.
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The economist observes that everything has a value if there is an opportunity cost. For a medium of exchange, the opportunity cost is limited supply. Bitcoin’s limited supply of 21 million makes it a candidate to become a medium of exchange. But there are still certain obstacles remaining for the leading cryptocurrency.
Bitcoin as a medium of exchange
Money is a unit of account and must be stable. It must be a store of value and retain its value over time.
But Bitcoin has not been stable. Even before entering 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 to $8,000 in 2018. During the pandemic, the rises and falls were more dramatic. Bitcoin hit an all time high of $65,000 in November 2021 before crashing below $20,000 this year.
Although the coin has achieved higher returns than most other asset classes since 2008, the economist observes that it cannot be a long-term store of value 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 don’t do it yet, for good reasons.
Fama was awarded the Nobel Prize in 2013 for his work with hypotheses on efficient market theory, portfolio theory and asset pricing. The Nobel laureate says Bitcoin’s volatility means the coin can rise or fall dramatically from one day to the next. That makes it a poor medium for trading.
Economic activity is the exchange of goods and services and which depends on a medium that can maintain its value with minimal fluctuations. An economy based on a volatile medium will not survive.
Other store with value options
Bitcoin also has no intrinsic value despite its limited supply. On the other hand, gold, which is also limited in supply, has intrinsic value but has been too volatile to be a store of value. Foreign reserves were stores of value, but after the Fed bought bonds in unprecedented amounts, even that is seen as unlimited access now.
Inflation, which has been at a 40-year high, appears to be slowing as August showed a consumer price index increase of 8.3%, lower than July’s 8.5%. But core inflation rose 0.6% from July and indicates 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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