Counting Our Bitcoins: The Value of Cryptocurrency

Written by Vanna Mavromatis

“There’s a great desire to get capital out of China. Bitcoin is a way to do that without being detected,” Yermack states.

Over the past few months, the world has watched with bated breath as the value of bitcoin, a popular cryptocurrency considered all but irrelevant not too long ago, has continued to rise, reaching a new historic high virtually every day, and even breaking $15,000 per coin in early December.

While many consider Bitcoin’s value to be artificially inflated, the recent surge in popularity of bitcoin could indicate that the cryptocurrency is here to stay. But what is Bitcoin, and is the surge sustainable?

Put simply, Bitcoin is an anonymous currency built using blockchain technology—a system where transactions between two people with anonymous usernames are kept track of in a public ledger accessible to all nodes in the network. The names cannot be traced, a function which makes bitcoin uniquely secure, but all transactions in the ledger are public and permanent.

This semi-private characteristic has labeled bitcoin as a “dark market currency.” However, this is an unfair judgement. “Real money, like USD, is also used for prostitution and drugs,” David Yermack, Professor of Finance and Business Transformation, states. “The black market is hardly the main source of demand for Bitcoin. What [criminals] may not know is that, with bitcoin, you leave a footprint in a way that you just don’t with physical currency. There’s a path that can be traced back to you.” In terms of the price surge, “Nothing can rise this quickly sustainably. But that doesn’t mean it’s going to [burst],” Yermack says. “The boom is now possible because the overcrowded [Bitcoin] network has been scaled up.”

But where does Bitcoin’s popularity come from? “Bitcoin is not a currency you would use day to day. Very few people accept bitcoin as payment. Its value is mostly speculative,” Yermack said. However, there may exist a market for using Bitcoin as payment in China: “There’s a great desire to get capital out of China. Bitcoin is a way to do that without being detected,” Yermack states.

Still, despite bitcoin’s seemingly bright future, Yermack doesn’t think things look too rosy for the currency. “I think Bitcoin will be overtaken by other forms of cryptocurrency. We see that a lot [with technology]. [A service] is created, and it dominates the market for a few years, like iTunes, but then it eventually gives way to a better-designed technology, like Spotify. Netscape gave way to Firefox which gave way to Internet Explorer which gave way to Google Chrome,” Yermack says. “There will be historical interest in Bitcoin—it was the first cryptocurrency—but there’s going to be a lot of innovation by entrepreneurs in this field in the next ten, twenty years, and I think, eventually Bitcoin is going to be overtaken by a cryptocurrency that maybe hasn’t even been invented yet.”