NEW YORK (Project Syndicate) – On February 8, Elon Musk’s electric car company Tesla TSLA, at -2.27%, announced that it had already invested $ 1.5 billion of its cash reserves in Bitcoin in January. The news helped push the already skyrocketing BTCUSD price of the cryptocurrency by an additional 10% from + 0.62% to a record high of more than $ 44,000. But especially with Bitcoin, what goes up can crash just as easily.

Bitcoin was invented in 2008 and started trading in 2009. In 2010, the value of a single Bitcoin rose from around eight hundredths of a cent to 8 cents. In April 2011, the price was quoted at 67 cents before rising to $ 327 by November 2015. Bitcoin was trading at around $ 6,200 on March 20 last year, but the price has increased more than sevenfold since then.

Today, Bitcoin is a perfect 12 year old bubble. I once described Gold GC00, -1.56%, as “shiny Bitcoin” and characterized the price of metal as a 6,000 year old bubble. That was a bit unfair to gold, which used to have intrinsic value as an industrial good (now largely superfluous) and is still considered a long-lived consumer of jewelry.

Its worth is what the markets say

In contrast, Bitcoin has no intrinsic value. it never did and never will. It’s a purely speculative asset – private fiat currency – whose value is what the markets say.

Yabba dabba doo: Don’t fall for the bitcoin bubble, the Flintstones also had a better system, warns economist Nouriel Roubini

Bitcoin is also a socially wasteful speculative asset because it is expensive to manufacture. The cost of “mining” an additional Bitcoin – solving arithmetic puzzles with energy-intensive digital devices – is increasing at such a rate that the total cryptocurrency inventory is limited to 21 million units.

Now read the following: The electricity used to power Bitcoin is rising to a new level with Tesla’s price hike

Of course, even if the Bitcoin protocol is not changed to allow for a larger supply, the entire exercise can be repeated by issuing Bitcoin 2, Bitcoin 3, etc. This also replicates the real cost of mining. In addition, there are already established cryptocurrencies – for example Ether ETHUSD, -2.19% – that work in parallel with Bitcoin.


Without an obvious fundamental anchor of value, Bitcoin is likely to remain a textbook example of excessive volatility.

Looking for a balance

As the success of government-issued fiat currencies shows, the universe of speculative bubbles is by no means limited to cryptocurrencies like Bitcoin. After all, in a world of flexible prices, there is always an equilibrium where everyone believes that the official fiat currency has no value – in this case, consequently, it has no value. And there are an infinite number of “non-fundamental” equilibria where the general price level – the reciprocal of the price of fiat currency – either explodes and goes to infinity or implodes and falls to zero, even if the money supply remains fairly stable or does not move at all changes.

Finally, there is the unique “fundamental” equilibrium where the price level (and the value of the currency) are positive and neither explode nor implode. Most of the government-issued fiat currencies appear to have gotten into this fundamental equilibrium and stayed there. Keynesians ignore these multiple equilibria and view the price level (and therefore the price of money) as clearly determined by history and gradually updated through a mechanism like the Phillips curve, which represents a stable and inverse relationship between (unexpected) inflation and unemployment.

Regardless of which perspective one takes, real hyperinflations – think of Weimar Germany or the recent cases of Venezuela and Zimbabwe – which effectively reduce the value of money to zero, are examples not of non-fundamental equilibria, but of fundamental equilibria that have gone bad . In these cases the money stocks exploded and the price level reacted accordingly.


Tesla’s recent Bitcoin buy-in shows that a large additional buyer entering the market can significantly increase the price of the cryptocurrency, both directly (if the markets are illiquid) and indirectly through demonstration and emulation effects.

Private cryptocurrencies and public fiat currencies have the same infinite range of possible equilibria. The zero price equilibrium is always an option, as is the unique, well-behaved basic equilibrium.

Bitcoin clearly doesn’t have any of these balances right now. What we have instead appears to be a variant of a non-fundamental explosive price equilibrium. It’s a variant because it needs to allow Bitcoin to make an unexpected jump from its current explosive price development to either the good fundamental equilibrium or the not-so-nice zero price scenario. This multiple equilibrium perspective undoubtedly makes it seem risky to invest in intrinsically worthless assets such as Bitcoin and other private cryptocurrencies.

Illiquid market: Who Owns Bitcoin? Around 80% are held by long-term investors

The real world, of course, is not constrained by the range of possible equilibria supported by the mainstream economic theory outlined here. But that makes Bitcoin even riskier as an investment.

The market fluctuated on opinions, not fundamentals

Tesla’s recent Bitcoin buy-in shows that a large additional buyer entering the market can significantly increase the price of the cryptocurrency, both directly (if the markets are illiquid) and indirectly through demonstration and emulation effects. However, a single key player exit would likely have similar effects in the opposite direction. Positive or negative opinions from market makers have a significant impact on the Bitcoin price.

The spectacular price volatility of the cryptocurrency is not surprising. Deeply irrational market swings like the one that drove GameStop’s stock price to unprecedented highs in January (followed by a significant correction) should be a reminder that with no apparent anchor for fundamentals, Bitcoin is likely to remain a textbook example of excessive volatility.

This will not change over time. Bitcoin will continue to be an asset with no intrinsic value, whose market value can be all or nothing. Only those with a healthy risk appetite and a solid loss-making ability should consider investing.

Willem H. Buiter is visiting professor of international and public affairs at Columbia University.

This comment was published with permission from Project Syndicate – Schrödinger’s Bitcoin.

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