Should-Read: I agree with David here: BitCoin will have long run value only if some organization decides that it wants BitCoin to have long-run value, in which case it is no longer a decentralized emergent phenomenon, but rather a managed one—managed in the interest of the stabilizing entity, not of BitCoin holders: David Glasner: Noah Smith on Bitcoins: A Failure with a Golden Future : “Noah Smith and I agree that… Bitcoins have no chance of becoming a successful money…

…However, I think that Bitcoins must sooner or later become worthless, while Noah thinks that Bitcoins, like gold, can be a worthwhile investment for those who think that it is fiat money that is going to become worthless. Here’s how Noah puts it….

Why has gold increased in price? One reason is that it’s not quite useless—people use gold for jewelry and some industrial applications, so the metal slowly goes out of circulation, increasing its scarcity. And another reason is that central banks now own more than 17% of all the gold in the world…. But another reason is that people simply believe in gold. In the end, the price of an asset is what people believe it’s worth…

Yes, but it sure does help when there are large central banks out there buying unwanted gold, and piling it up in vaults where no one else can do anything with it…. The problem with cryptocurrencies is that there is no reason to think that central banks will start amassing huge stockpiles of cryptocurrencies, thereby ensuring that the demand for cryptocurrencies will always be sufficient to keep their value at or above whatever level the central banks are comfortable with. It just seems odd to me that some people want to invest in Bitcoins, which provide no present or future real services, and almost no present or future monetary services, in the belief that it is fiat money, which clearly does provide present and future monetary services, and provides the non-trivial additional benefit of enabling one to discharge tax liabilities to the government, is going to become worthless sometime in the future. If your bet that Bitcoins are going to become valuable depends on the forecast that dollars will become worthless, you probably need to rethink your investment strategy.

February 3, 2018


Brad DeLong
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