Bitcoin Is a Bit of a Miracle at Any Price

(Bloomberg View) -- There is a joke circulating on Twitter: “A boy asked his bitcoin-investing dad for 1 bitcoin for his birthday. Dad: What? $15,554??? $14,354 is a lot of money! What do you need $16,782 for anyway?”

To put it mildly, the price of bitcoin has been volatile as of late. Last week, the price rose about 40 percent in 40 hours, with plenty of seesawing before and after.

In August I argued that bitcoin is here to stay, due to its role in helping people transact without a gatekeeper, and its function as a store of value and for portfolio diversification. The next question, of course, is what the price of bitcoin should be, and whether the recent range of $15,000 to $20,000 is insanely high, just right or still undervalued.

One approach is to ask what role bitcoin and other cryptoassets are likely to play in global portfolios. Under one (very rough) estimate, total global wealth is about $241 trillion. Because the total value of cryptoassets has been hovering in the neighborhood of $300 billion, that constitutes about one-eighth of 1 percent of the total global portfolio. If you think of cryptoassets as taking on some of the hedging functions of gold or government securities, that valuation doesn’t sound so crazy.

To consider some other rough estimates, the total estimated value of the above-ground gold stock is about $7.5 trillion. Diverting 1 percent of gold holdings into bitcoin gets its value up to about $5,000. The current bitcoin price is several times beyond that, but a range of $15,000 to $20,000 again seems within the bounds of reason, at least to this observer. To the extent bitcoin is a store of value and a hedge, it is competing with gold more than with government fiat currencies, which ultimately are defined by their transactions uses.

Or compare a $200 billion to $300 billion market cap for bitcoin to a $450 million price for a single painting by Leonardo da Vinci -- one that is arguably mediocre and perhaps not by Leonardo’s hand at all. Bitcoin values seem at least as easy to defend, even if they have a subjective component just as artworks do. In recent years, the world has moved more broadly to much higher valuations for focally important stores of wealth, whether they be Swiss government bonds, famous paintings or bitcoin. We don’t know those higher valuations will prove correct in the longer run, but seeing bitcoin as part of that broader trend is very different from simply asserting it is a bubble to be banned, as Nobel laureate Joseph Stiglitz has done.

On one common view, the high and rapidly fluctuating price of bitcoin is a sign of a malfunctioning market. Maybe so, but there is an alternative hypothesis that bitcoin is still not very well understood. That means even small pieces of information can cause big revaluations. Perhaps it will take us a very long time to understand the properties ruling the value of bitcoin and other crypto-assets. That could mean the asset’s price gyrations become the new normal rather than an exceptional period of unusual froth.

One striking feature of bitcoin is the sociology of its acceptance and promotion. There is a small coterie of people who have mastered the details of its operation, and ownership is quite concentrated. You can take that as evidence for a manipulative clique and thus a bubble, or it may be a sign that the price could yet rise. I am regularly struck by how many people, including business sophisticates and my professional economists, have little idea how bitcoin works. They seem to have no interest in buying it, but perhaps that will change, if only through their pensions and mutual funds.

The real story of bitcoin is a heartening one of community. Less than 10 years ago, the bitcoin asset was worth virtually nothing, but a small group of people believed in it and worked tirelessly to promote it, and now the whole world is watching. It’s a tale at least as old as Christ and the Apostles. Maybe the bitcoin believers are as much of a miracle story as that of the brilliant inventor Satoshi.

The thing is, I don’t always believe in miracle stories of community, not in these days of declining governance and possibly fraying social order. Yet I’ve become emotionally involved in tracking the bitcoin price, perhaps because I realize that if one such miracle of “ex nihilo” creation can be sustained, others are on the way. I don’t think bitcoin is a bubble, but every morning I wake up doubting.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg View columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “The Complacent Class: The Self-Defeating Quest for the American Dream.”

  1. To clear the air, please note I have never (to my regret) held or traded in bitcoin or other cryptoassets. Furthermore, nothing in this piece is to be construed as investment advice.

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