Professor David Yermack of the Stern School of Business at New York University is used to being heckled when he gives talks about Bitcoin. After all, most of his work has involved pointing out all of the things Bitcoin enthusiasts don’t want to hear.
On the one hand, Bitcoin “believers” want a currency that is essentially free of government and corporate oversight. On the other hand, they want the establishment to believe in the fundamental benefits of it as a currency.
Professor Yermack, who once researched the economic impact of the fashion decisions of US First Lady Michelle Obama, has recently turned his hand to detailing some of the bizarre and humorous characteristics of Bitcoin. Like the Bitcoin ATM installed in Melbourne which offered to sell 1 Bitcoin for A$585 and buy 1 Bitcoin for A$523. Not only was the spread 10.5% but the current market rate for Bitcoin was $511 and so essentially the ATM company would be losing money on its transactions.
Professor Yermack argues Bitcoin should not be considered money, for a number of reasons. These include Bitcoin’s inability to act as a medium of exchange or a store of value or act as a unit of account.
In looking at the way Bitcoin is used (or not) as a medium of exchange, he points out the number of daily transactions of Bitcoins has fundamentally not changed in the past year. It has essentially stayed at around 60,000 transactions, which illustrates Bitcoin has experienced almost no growth in popularity, despite the assertion that increasing numbers of merchants are willing to accept it. For many store owners, accepting Bitcoin was about marketing to a particular demographic that is young, tech savvy and relatively well off.
As a means of payment, the fact that you have to calculate prices of purchases with amounts such as 0.00301 Bitcoin or “3.01 Bitcoin times 10 to the minus 2” effectively means it is never likely to become a unit of account.
Professor Yermack’s research on Bitcoin volatility found it displayed an average 10% price change per day with an overall volatility of 142% over the course of a year. This compared to Gold’s price fluctuation of 22% in 2013. Bitcoins’ price difference on a range of different exchanges also posed a problem for people trying to actually value Bitcoin at any given point in time. This was something you would never see with US dollars, for example, and contravenes basic economic principles of currency.
Another characteristic of Bitcoin’s price during the year was that it was in no way related to the price of any other currency. Significant events in the global economy that impacted currencies like the US and Australian dollar had no effect on Bitcoin. Bitcoin’s value is derived from its main role, which is as a curiosity and as a means of investment speculation.
As a final taunt to the Bitcoin faithful, Professor Yermack suggests the entire Bitcoin mining effort could be subverted by a person or government - such as Vladimir Putin - taking control of the peer-to-peer network that essentially validates every transaction.
In all likelihood this would be possible, but more research is required to convince the Bitcoin community of the validity of the argument.
Regardless of what the future holds for Bitcoin, the interest in it has challenged fundamental views of economics, law and finance.
Professor Yermack plans to cash this particular Bitcoin characteristic in and is running a course at NYU on Bitcoin starting this year. Hopefully something he will share with a wider audience again some day.