Cryptocurrencies might not be a fad, but they are definitely failing as currency, said Aswath Damodaran, professor of finance at the NYU Stern School of Business.
The only way to value the likes of Bitcoin correctly is to recognise that it’s a speculative investment and not a currency, said Damodaran who is known for his work on valuing companies and understanding stock investments. “If you put the currency in pocket and you forget about it for a year then at the end of the year if you put it out then it shouldn’t have lost half its value.”
Bitcoin – easily the most popular cryptocurrency – saw its peak in December 2017 when it crossed the $20,000 mark. Since then, it has fallen nearly 60 percent to $8102, making a number of analysts and experts question the euphoria around it. Ethereum, another cryptocurrency has also fallen more than 45 percent from its peak in February.
A currency has two two features – it’s a medium of exchange and a store of value. “This is where I found cryptocurrencies starting to break down. If I put 100 bitcoins in my pocket and leave my house with just that in my pocket, my guess is I will spend the day hungry and thirsty,” Damodaran explained. “Also it is not a great store of value because I am not sure that if I put a bitcoin in my pocket and later take it out, if anybody will take it.”
Proponents of bitcoin must make up their minds on whether they want to use it as a currency or to make a 1,000 percent return, he said. “Those two objectives can’t co-exist in the same world.”
There will be a digital currency 10 years into the future but none from the current crop are likely to take that place, Damodran said.