Robert Shiller, the Nobel-prize-winning economist who teaches at Yale, said it’s not possible to come up with an accurate value for bitcoin, the digital currency that has risen about twentyfold in the past 12 months.
“Real understanding of the economic issues underlying the cryptocurrency is almost nonexistent,” Shiller said in an op-ed for the New York Times. “It is not just that very few people really comprehend the technology behind Bitcoin. It is that no one can attach objective probabilities to the various possible outcomes of the current Bitcoin enthusiasm.”
Shiller is internationally recognized for his work on measuring prices and values of various assets, such as public companies. But as Berkshire Hathaway CEO Warren Buffett has observed, bitcoin is hard to value because it doesn’t create a cash flow like a company does. (Of course, negative cash flows didn’t stop investors from speculating on the value of dot-com stocks.)
“Bitcoin might well be replaced by something different and better, and end up being worth nothing at all,” Shiller said. “Many people are making analogous attempts to put a fundamental value on Bitcoin — but such efforts will be intrinsically and absurdly inaccurate. The results of a serious attempt to assess the value of Bitcoin can only be ambiguous.”
Shiller also discussed his ideas about valuing bitcoin in an interview with CNBC.
"There is the medium of exchange function that it's offering, and there's also a store of value function; that is, you can hide away your wealth in there. And it's mobile; you can go anywhere, and get at it,” he said. “How valuable is that, though? I don't personally see any value to that. That's the problem; they have a really clever technique to generate something, and it could be valued. But that's why it's especially likely to become a bubble, because when you see people valuing it, you start to wonder, 'Maybe they're right.'"
Shiller said investors have embraced the cryptocurrency as the first in its class and the alluring tale of its mysterious creator, "Satoshi Nakamoto."
"People believe in 'first mover,' and so it sounds right to them. I can't say that it's definitely wrong, but it sounds like a flimsy argument," he said.
Because the value of anything is what someone is willing to pay for it, bitcoin is subject to psychological factors that underpin all valuations. The currency is slowly being accepted as a medium of exchange, while its supply will be limited to 21 million coins (creating more coins would require changing bitcoin’s technical rules while ensuring that existing coin holders receive a proportionate number of new coins).
Bitcoin proponents say the digital currency’s protocols prevent it from being debased like fiat currencies that lose value when overleveraged countries default or central banks succumb to political pressures to help governments print their way out debt.
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