According to Nobel Laureate Eugene Fama, Bitcoin is a retailer of value in general. However, only if it is accepted as money or a form of exchange. And that might be a long shot.
The economist notes that if there is a chance value, then something acquires a price. That chance value is limited in what it can supply for an alternative medium. The limited supply of 21 million Bitcoins makes it a potential contender to become a medium of exchange. For the primary cryptocurrency, there are still certain obstacles to overcome.
Bitcoin As A Trading Medium
A unit of account, cash must be consistent. It has to be a retailer of value and hold that value over time.
Bitcoin, meanwhile, has not been consistent. The coin's value increased by 2% on average between 2013 and 2017, even before it started its incredibly erratic pattern in 2017. The coin's value increased from less than $1,000 to more than $19,000 in 2017, then dropped all the way to $8,000 in 2018. The spikes and declines have been more abrupt during the outbreak. Before falling below $20,000 this year, bitcoin reached an all-time high of $65,000 in November 2021.
Even if since 2008 the coin has outperformed most other asset classes in terms of returns, the economist notes that without something providing it with that value, the coin cannot be a long-term retailer of value.
Bitcoin won't stable until people start to accept it as a legitimate form of payment. However, for good reasons, people aren't doing that just yet.
Fama won the Nobel Prize in 2013 for his contributions to asset pricing, portfolio theory, and environmentally responsible market idea speculation. According to the Nobel laureate, Bitcoin's volatility indicates that the currency may experience a sharp surge or decline from one day to the next. It is therefore a subpar medium for business.
Financial activity is an alternative to goods and services, and it depends on a medium whose value can be maintained with little fluctuation. A financial system that relies primarily on an unstable medium is doomed to failure.
Different Store With Good Options
Despite its limited supply, Bitcoin doesn't have intrinsic value either. Gold, on the other hand, has an intrinsic value but is not a good store of value because its supply is similarly constrained. Foreign exchange reserves used to be the store of value, but when the Fed bought bonds in enormous numbers, even those reserves are now viewed as an endless supply.
Despite being at 40-year highs, inflation appears to be slowing down as August's client worth index rose by 8.3% rather than the 8.5% reported for July. Core inflation, however, increased 0.6% from July, indicating that higher prices will likely persist for some time.
The economist believes that interest rates—not bitcoin or gold—are the only tool available to combat inflation.
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