Does the Price of Bitcoin Matter?
It is human nature to construct narratives around the most recent event, be it yesterday’s closing value of the S&P 500 or the score of last weekend’s football game. Those simplistic narratives often ignore long-term fundamentals in order to explain the most recent event in a satisfying way. In the face of wild swings in the price of bitcoins in the last several weeks and months, some pundits may be tempted to offer grand pronouncements about its viability as a future currency, or the usefulness of cryptocurrencies in general. We should be very skeptical of those pronouncements.
In the past four days (since Saturday, June 24), the market price of a bitcoin has fallen from about $2,750 to just over $2,500, reaching a low near $2,350 yesterday. The fall looks more dramatic if we zoom out a bit to the all-time high of almost $3,000 just over two weeks ago. What has happened?
First, let’s put this recent price drop in perspective. A year ago, a bitcoin’s price was around $650. Three months ago, it was still below $1,100. Most observers attribute the run-up in price to increased demand for bitcoins in China. But no matter what anyone thinks of the overall surge in price, the recent drop is a relative blip on the radar screen.
Has any fundamental change in market demand or supply precipitated this recent price drop? It’s hard to find many close observers who think so. Instead, articles about the price in recent days focus on mathematics useful only to speculators, picking apart various trend lines and finding the “neck line” in “head and shoulders” patterns. (I don’t know what finding a neck line means either.)
This type of analysis indicates that the BTC-USD market has not reached a level of maturity where significant swings in price are generally driven by the revelation of important new information. We don’t have any more inkling about Bitcoin’s viability as a major global currency in the future than we did this weekend (and likely almost no more information since the run-up began a few months ago What seems to be mostly going on is speculation.
Let’s take a look a few decades into the future. If bitcoin were to become a widely used global digital currency, it would have to command far more purchasing power than it does today with a market cap around $40 billion. To make that possible, you might be looking at bitcoin prices in the millions in today’s dollars. My own view, and I could be wrong, is largely the opposite: in the time it would truly take for the world to adopt a cryptocurrency, new competitors to bitcoin will come along with innovations we haven’t even thought of yet (some argue that with Ethereum and others, such competitors have already arrived). In this future world, bitcoins would lose virtually all their value. They should be nothing more than a short-term speculative bet in anyone’s portfolio. Far too much uncertainty about the future exists to learn much of anything from current swings in Bitcoin’s price.
Max Gulker
Max Gulker is a former Senior Research Fellow at the American Institute for Economic Research. He is currently a Senior Fellow with the Reason Foundation. At AIER his research focused on two main areas: policy and technology. On the policy side, Gulker looked at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker was interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy.
Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxg_econ.
