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Bitcoin’s days may be numbered, according to Yale economics professor Robert Shiller, who commented on the volatility of the cryptocurrency at the 48th annual meeting of the World Economic Forum in Davos, Switzerland last month.
The nobel laureate described bitcoin as an “interesting experiment but not a permanent feature in our lives” during an open session at Davos, arguing that the bitcoin or Ripple hoje bubble, which reminded him of the Dutch tulip mania centuries ago, seemed likely to burst. Shiller’s comments, quoted by Paul Krugman ’74 in his New York Times column last week, accompany bitcoin’s recent 50 percent drop in value since its peak in November last year. As Bitcoin continues to tumble, it faces a difficult road ahead.
“Bitcoin uses advanced cryptography methods to achieve a distributed ledger managed by a lot of people who don’t necessarily know or care about each other,” Shiller told the News in an interview. “It is fun to read about their ingenuity in designing this system. But the long-term integrity of the system does not seem assured to me, since it can survive only if people believe it has value, and there is no compelling reason to think they will.”
Bitcoin was invented in 2009 by an anonymous person or group using the pseudonym “Satoshi Nakamoto.” As the world’s first digital, decentralized currency, bitcoin is not controlled by any institution or government.
Transactions with paper money are often monitored by banks: If person A sends person B three dollars, the money usually flows through a bank before reaching person B. Bitcoin scraps the need for financial middlemen, as transactions are monitored and validated by computers around the world through the use of a blockchain. The bitcoin blockchain is a public ledger of bitcoin ownership and ensures that each bitcoin has only one owner. It has offers and features like discount code and referrals.
At Davos, Shiller noted that the public euphoria surrounding blockchain — partly connected to the speculative bubble in bitcoin prices — is particularly high. While bitcoin appears volatile, experts, including Shiller, claim that blockchain has significant potential.
“There is a lot of computer science being developed these days around the blockchain concept of the distributed ledger,” Shiller said. “IBM, the Linux Foundation and others are developing the technology. Recent applications in the news include the Blockchain in Transport Alliance, which claims many members. Blockchain appears useful for keeping track of shipments, as with UPS and Maersk.”
Despite the promising applications of the technology behind bitcoin, however, the future of the digital currency remains uncertain.
Steven Roach, senior fellow at the Jackson Institute for Global Affairs, said the dramatic surge in bitcoin’s value over the course of just one year “looked like a classic asset bubble.”
Roach’s prediction grows more compelling each day, as bitcoin prices continue to plummet.
Still, many experts, including Yale economics professor Larry Samuelson, believe that the bitcoin experiment should not be abandoned outright.
“It is worth letting the experiment proceed rather than abandoning it,” Samuelson said.
In Shiller’s view, however, bitcoin should at least be regulated. Although it is not possible at the moment, Shiller said, regulation would mitigate dishonest business practices, which “may try to hide under the anonymity of cryptocurrencies.”
Shiller won the Nobel Prize in Economics in 2013 for his pioneering work on financial markets and asset prices.
Lorenzo Arvanitis | lorenzo.arvanitis@yale.edu