The world tends to listen to economists, when they speak, especially when the Nobel award committee has recognized them for having achieved something grand in the discipline. We also like to joke about them, as well, i.e., if you laid all economists end to end, they still would not reach a conclusion. If you were Nouriel Roubini or Joseph Stiglitz, both Nobel award winners, you would, however, have had no problem concluding that Bitcoin and its altcoin brethren were scams, had no intrinsic value, and would be “regulated into oblivion” by governments.
Not every economist is in agreement with these rather elderly gentlemen, who may have lost sight of a revolution happening right before their very eyes. Each man has gained a reputation for “Bitcoin bashing”, while Roubini has been given the nickname of Dr. Doom by crypto advocates. Alexander Puutio, an economist and contributor to Forbes, has spent the past decade focusing, as he puts it, “on high-level decision-making at the intersection of global finance, economics, and digitization”. He is not of a mind to discount the crypto revolution out of hand, but, for the benefit of Forbes, went through a scholarly assessment of Bitcoin, arguing that its current valuation will surely appreciate.
He admits that Bitcoin has been on a wild ride in 2019, establishing a return in excess of 150% over a span of less than nine months. Investors would be hard-pressed to find any other equity instrument with as great a run during a year filled with trade war chaos, negative interest rates, and fears that a global economic collapse was near at hand. The market has recognized traits about Bitcoin that others, which includes a few economists with rather large egos, have missed or already dismissed, with a strident flip of the wrist.
Traditional economists expect Bitcoin to behave like “money” – to be a “store of value, a means of exchange, and as a measure of nominal value”. Puutio then argues that:
When Roubini and company lambast bitcoin (and blockchains) being nothing more than a glorified spreadsheet, the critical reader will understand that they are ultimately arguing that bitcoin does not perform any of these functions adroitly enough to be considered money.
Bitcoin may have started out as an attempt to emulate money, at least the digital form of it, but market forces suddenly took it in another direction, one that met the needs of the market at that time and led to its amazing performance track record to date. Yes, volatility is high, and values did plummet over 2018, but the world’s favorite digital asset is making a comeback, as awareness spreads as to its finer qualities. Puutio then posits that, with respect to Bitcoin:
The drivers of [its] intrinsic value boil down to three words: function, faith and alternative assets.
Puutio then quips that traditional economists cannot truthfully explain how the principles of “function, faith and alternative assets” work in Bitcoin’s favor. These principles obviously have, since Bitcoin’s price is hovering around $10,000 today, to which these traditional fellows lament that:
The market must be in the grips of irrational animal spirits that have made bitcoin into our generation’s version of the Dutch tulip mania.
But some economists have gotten it right and have discerned that Bitcoin has the potential to act like money, but it is a “hybrid”, something that cannot be said about other fiat currencies. It can perform as an intermediary, like any other “safe haven” asset, and as many others have argued, Bitcoin’s value is “arbitrarily determined by the collective psychology of the mass of investors.” In other words, Bitcoin values are driven by faith and a hope for the future, as with fiat currencies, where masses have faith in them.
In the end, economic theory is based on the science of choice. For many, Bitcoin represents an “alternative” choice, one with benefits and appeal. The emotions surrounding this “appeal” is one of the three drivers of intrinsic value. As these emotions cycle through more and more of the population in the years to come, it becomes an easy proposition to say that $10,000 is on the conservative side of what a potential valuation of Bitcoin could be years down the road.
Alexander Puutio sums it up his assessment of Bitcoin’s value this way:
In short, bitcoin has the potential to perform all of the functions of traditional money and then some. Most speculators are betting on this potential being fulfilled one day, at which point the criticism leveled by Roubini, Stiglitz and others will seem quaintly luddite instead of Nostradamian.