As crypto prices rise and fall, experts and casual observers alike are trying to predict the future of the digital economy. In addition to the media’s perpetual fascination with the prospect of a Bitcoin bubble, message boards and Reddit threads are packed with similar conversations about the efficacy and sustainability of digital currencies.
Now, academics are beginning to weigh in as well.
This week, Noah Smith, an assistant professor of finance at Stony Brook University and an op-ed contributor at Bloomberg, crafted a compelling forecast for Bitcoin’s future. Mr. Smith presents three possible outcomes for Bitcoin’s adoption and proliferation.
- Bitcoin Triumph
- Bitcoin as Gold
- Bitcoin Bust
To be sure, each scenario has its share of supporters, but, after analyzing the exchange rate of Bitcoin and the dollar’s inflation rate, Mr. Smith concluded that Bitcoin as Gold is the most likely scenario for the digital currency. He opined, “I have long believed in the middle scenario.”
Bitcoin As Digital Gold
His argument is simple.
First, like gold, Bitcoin is a finite resource. Only 21 million Bitcoin will ever be produced, so it’s a deflationary asset that benefits from relative scarcity. Moreover, Bitcoin is an asset with a high expected return, and these assets tend to be more volatile.
For example, gold experiences cycles and booms and busts – the last of which took place in 2013. As The Wall Street Journal reported at the time,
“Gold prices have declined by more than $203 an ounce, a record skid since the futures began trading in the U.S. in 1974.”
Likewise, Bitcoin is well-known for its wild, and certainly more frequent, price swings. These fluctuations, ominously dubbed “flash crashes,” occur on both a micro and a macro scale. In December, Bitcoin’s price suddenly dropped 25% before a price correction occurred just a hours later. Meanwhile, Bitcoin is marred in a prolonged slump that’s seen its value fall by nearly 2/3 from its December 2017 high.
However, Mr. Smith contends, Bitcoin is unlikely to go away.
Most importantly, Bitcoin is becoming increasingly integrated into the financial system. Bitcoin futures are already available at CME, Cboe, and Goldman Sachs, and rumors of an impending Bitcoin ETF are picking up steam. Therefore, Mr. Smith writes,
“So my prediction is that Bitcoin will stick around, experiencing repeated bubbles and busts, but slowly gaining in value. That is why I personally still own some Bitcoin.”
Despite his confidence in the digital currency, Mr. Smith is quick to point out his reservations about his outlook.
Results Are Inconclusive
Despite its similarities to gold, Mr. Smith contends that Bitcoin could still be a bust. Based primarily on the work of University of Chicago Booth School of Business economist, Eric Budish, Mr. Smith notes that a lack of established trust and the possibility for malfeasance by malicious actors as a potential downfall of the digital currency.
Mr. Budish’s academic paper, “The Economic Limits of Bitcoin and the Blockchain,” notes that Bitcoin will need to become significantly more valuable than to become a viable, secure financial asset in the future.
Of course, While Mr. Smith’s outlook is supported by compelling evidence as the future of digital currencies remains uncertain. It’s still a relatively new technology, and its fate is still in progress.
Cover Photo by Aperture Vintage on Unsplash