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Bitcoin: Four Contrarian Perspectives

A Nobel Laureate economist, the next Chairman of the Fed, an investment banker and a legendary investor weigh in on the Bitcoin phenomenon.

By now you, have probably heard of Bitcoin, the so-called cryptocurrency that has shot up in market value from less than a dollar in 2009 to more than $200 billion today. For the unfamiliar, Bitcoin is an Internet-based currency made possible by a new technology called the blockchain, defined by Harvard Business Review as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.”

The distributed nature of the ledger allows for decentralized transactions to occur without the control or oversight of a third party, most typically a bank. The possibilities of the blockchain technology are broadly considered to be far-reaching, with the potential to disrupt everything from the way we transfer money to how we vote.

But the transformative effects of the blockchain are far from certain for its most famous poster boy, Bitcoin. Given that Bitcoin is only one of over thousand cryptocurrencies relying on blockchain technology, why has it skyrocketed in value over the past year? Is each Bitcoin really worth $14,000?

Below, we have collected opinions from a diverse set of backgrounds and fields of expertise.

Robert Shiller, Nobel Laureate and Professor of Economics at Yale University:

I think that the value of bitcoin is exceptionally ambiguous.

There is the medium of exchange function that it’s offering, and there’s also a store of value function; that is, you can hide away your wealth in there. And it’s mobile; you can go anywhere, and get at it. How valuable is that, though? I don’t personally see any value to that. That’s the problem; they have a really clever technique to generate something, and it could be valued. But that’s why it’s especially likely to become a bubble, because when you see people valuing it, you start to wonder, ‘Maybe they’re right.’

The fascination people have with bitcoin is partly because of the mystery of money itself. Why do these pieces of paper have value, and couldn’t something else have value? Plus, we all believe in a first-mover advantage. Bitcoin was first.¹

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Jerome Powell, Federal Reserve Chairman Nominee:

In the long, long run, cryptocurrencies could matter. They don’t really matter today. They’re just not big enough; there’s not close to enough volume for them to matter to us (the Federal Reserve).

There’s no question that valuations have really gone up quite a lot in the last year or so. I don’t have a view on the appropriate level of the valuation, of course. From our standpoint, cryptocurrencies are something we monitor very carefully. We actually look at blockchain as something that might have signifiant applications in the wholesale payments segment of the economy. That’s something we pay close attention to.²

Christopher Whalen, Investment Banker and Chairman of Whalen Global Advisors:

Bitcoin is an old fashioned fraud clothed in the new age wonder of technology. Promoting bitcoin is not so much about a new asset class as its is a class of felony, yet civil authorities have so far been unwilling to shut it down. Bitcoin is perhaps the most impressive speculative bubble in modern history and one that will tolerate no contradiction since it gains credibility as the price soars ever higher.³

Warren Buffet, Investor and Chairman of Berkshire Hathaway:

In terms of cryptocurrencies, generally, I can say almost with certainty that they will come to a bad ending. Now, when it happens or how, or anything else, I don’t know.

We don’t own any, we’re not short any, we’ll never have a position in them. I get into enough trouble with the things I think I know something about. Why in the world should I take a long or short position in something I don’t know about?

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Aside from self-proclaimed “Bitcoin experts” (who are often investors in the cryptocurrency themselves), the contrarian views on the rise of the cryptocurrency ranges from caution to outright contempt. The rise in the popularity of Bitcoin is indeed a puzzling phenomenon; but even Mr. Powell, soon to be the most powerful central banker in the world, said he is paying close attention. Perhaps the most intelligent view is that of Mr. Buffett, that is, stay away from investable products you don’t actually understand.


Sources:

1) https://www.cnbc.com/2017/12/19/robert-shiller-bitcoin-valuation-is-exceptionally-ambiguous.html

2) https://www.cnbc.com/2017/11/28/bitcoin-is-still-not-big-enough-to-destabilize-an-economy-powell-says.html

3) http://www.theamericanconservative.com/articles/bitcoin-the-most-impressive-speculative-bubble-in-modern-history/

4) https://www.cnbc.com/2018/01/10/buffett-says-cyrptocurrencies-will-almost-certainly-end-badly.html

 

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