3 December 2020
Joe Davis
Vanguard's Chief Economist
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Bitcoin: Digital gold or fool's gold?
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“What do you think aboutBitcoin?”

Over the past few months, I’ve been asked this question morethan any other. In 2017, Bitcoin, the world’s first cryptocurrency, rose by almost 1,200%,prompting excitement and bafflement.

My answer: I’m enthusiastic about the blockchain technology thatmakes Bitcoin possible. In fact, Vanguard is using such technology. As for Bitcoin the currency? I seea decent probability that its price goes to zero.

Bitcoin price in U.S. dollars, January 1, 2017-January 22, 2018 


Are cryptocurrencies currencies? 

Bitcoin’s creators introduced thecryptocurrency in the wake of the global financial crisis. The goal was tobypass governments and banks when two individuals want to transact. No country,company, or institution controls the currency. But are Bitcoin and competingcryptocurrencies really currencies? Let’s think about what a currency is:

  • A currency is a unit of account. Cryptocurrencies qualify, as they can measure the value of other goods and services.
  • A currency is a medium of exchange. I’d give cryptocurrencies a qualified yes on this point. Currently, only a limited number of vendors globally accept cryptocurrencies, and recent volatility will only discourage increased adoption.
  • A currency is a store of value. Bitcoin is not. Its price volatility undermines its adoption, as fewer vendors will accept a currency whose value can fluctuate so dramatically. The prices of newer currencies have been similarly volatile.

The existential dilemma 

Let’s callthe verdict on the currency question mixed. Even if cryptocurrencies qualifyfor niche purposes, their prospects seem dubious.

The greatestthreat is central banks, which have begun to research blockchain-basedcurrencies and impose regulations on exchanges. Given the additional controland policy effectiveness that digital currencies could provide, central bankshave good reason to adopt digital currencies in the coming decades. Thosecurrencies would be “legal tender,” legally recognized forms of payment for alldebts and charges.

If thechoice were between Bitcoin or a blockchain-based dollar, which would yourather have in your digital wallet?

Cryptocurrencies as investments 

Theinvestment case for cryptocurrencies is weak. Unlike stocks and bonds,currencies generate no cash flows such as interest payments or dividends thatcan explain their prices. National currencies derive their prices from theunderlying economic activity of the countries that issue them. Cryptocurrencyprices, on the other hand, are generally not based on economic fundamentals. Todate, their prices have depended more on speculation about their eventualadoption and use. The speculation creates volatility that, ironically,undermines their value as a currency.

Nor arecryptocurrencies a chance to capitalize on blockchain technology, which is themethod most cryptocurrencies use to record network transactions and ensuretheir accuracy. Although cryptocurrencies are built using a blockchain, theyare not necessarily tied to the value of blockchain applications that mayimprove the cost, speed, and security of executing transactions or contracts.Bitcoin is an investment in blockchain in the same way that Pets.com was aninvestment in the internet.

Forinvestors, adding some exposure to Bitcoin would mean reducing theirallocations to tried-and-true asset classes such as stocks, bonds, and cash—thebuilding blocks for well-diversified portfolios that can help them meet theirgoals. With no cash flows and extreme volatility, the investment case forBitcoin is hardly compelling.

We are earlyin the development of blockchain technology. We’ll likely see blockchainadopted by governments and enterprises for specific purposes in the comingdecades. As innovation quickens and competition increases, the majority ofnetworks (and their associated cryptocurrencies) may be rendered obsolete,leaving many cryptocurrencies like tulip bulbs in 17th-centuryHolland—soaring to incredible heights before the speculative bubble pops. And,unlike tulips, they don’t look nice in a vase.


Allinvesting is subject to risk, including the possible loss of the money youinvest.


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