In August, bitcoin has surpassed the price of 10,000 euros, in March it was below 5,000, how are those values justified? Precisely in the Economic Studies Bulletin for this past August an interesting article is published by my good friend and prestigious professor at the Autonomous University of Madrid, Prosper Lamothe, along with his homonymous son, also an economist, on the assessment of the bitcoin. Without going into the Lamothe work now, the topic is hotly topical, so we can ask ourselves: is bitcoin, and other cryptocurrencies, really a currency, like the dollar or the euro? Undoubtedly they have some similarities, since they can be used to buy in some markets, but they have important differences. I would point out three: behind bitcoin there is no sovereign government that forces us to accept bitcoin as a means of payment; Its value has enormous variability, so it is also not useful to store stable wealth and, precisely because of this variability, it is not very useful to measure the value of other assets in bitcoins either.
If bitcoin resembles a currency, but does not have all the characteristics of a currency, how could we classify it? Perhaps we could classify it as virtual merchandise that, with the agreement of the parties, can be used as a means of payment; and also as a highly speculative investment awaiting its revaluation.
The great English economist John Maynard Keynes, in his General Theory published in 1936, argues that, for many, assets on the stock market are worth what people want to pay for them. And that happened in the famous tulip mania in Holland in the first half of the 17th century: tulips reached exorbitant prices, but then plummeted. Could it be that the current price of bitcoin is as justified as that of tulip bulbs four hundred years ago? There have been many speculative bubbles, a posteriori they are usually easy to explain, it is difficult to detect them from the inside, and new things can be prone to creating bubbles, do we remember the dot-com bubble of twenty years ago? But the opposite has also happened; Human beings are often skeptical of great developments: remember how among the doctors of the nineteenth century many considered dangerous to health to travel by rail at more than 30 kilometers per hour. Could the rejection of bitcoin maintained by many financial experts be as well founded as that of those doctors less than two hundred years ago?
That in the future, and not distant, the use of something similar to the current cryptocurrencies will become widespread is quite probable; But it is difficult to know if the current ones, with bitcoin at the top, are overvalued like the tulip bulbs of the 17th century or are unfairly attacked like the locomotives of the 19th: are they bulbs or locomotives?
The rising price of bitcoin may try to be based on its rising cost of production: producing new bitcoins is becoming more and more expensive. But this argument does not quite seem solid to me. It reminds me when a Riojan winemaker, a graduate student of mine, went to buy a winery and the seller, to raise the price, argued that the noble zone had gold taps. Undoubtedly, this fact had increased the cost of building the winery, but it would hardly increase its sale price, beyond what could be earned by replacing it with a normal tap.
In addition, the enormous energy cost of producing bitcoins, suggests that such a business is hardly sustainable: shouldn’t we look for another model that is more compatible with the environment?
Returning to the price of bitcoin, the aforementioned article by the Lamothees tries to support it with the quantity theory of money or the network economy. Both ways help us better understand its value, but they fail to justify it. It is true that their small number (they cannot exceed twenty-one million), can invite them to be hoarded waiting for their revaluation, and that this would raise their price, or that if their use increases, their value will increase. Also their opacity can make them more appreciated. But I still don’t know if its value is reasonable.
As I said before, it is likely that some of the current cryptocurrencies, or several, will see their widespread use. Or maybe it’s a new one that hasn’t appeared yet: what will happen then to the current bitcoin holders? If you lose your money, please don’t ask us to bail you out, just as you haven’t shared your huge winnings to date.
Fernando Gomez-Bezares is Professor of Finance at Deusto Business School