Harvard Economist Explains Why the Bitcoin Bubble Was Doomed to Burst

Roggoff likened Bitcoin to "a lottery ticket" in his Guardian op-ed.

Roggoff likened Bitcoin to “a lottery ticket” in his Guardian op-ed. Dan Kitwood/Getty Images

As of this morning, Bitcoin has lost over 80 percent of its dollar value from its peak a year ago. While many crypto bulls see the recent plunge as a rare opportunity to buy, a Harvard economist who has over five decades of experience working on currency issues warns that this may just be the beginning of a worse collapse.

Kenneth Rogoff, an economics and public policy professor at Harvard University and the former chief economist of the International Monetary Fund (IMF) from 2001 to 2003, believes Bitcoin’s long-term value is “more likely to be $100 than $100,000,” he wrote in an op-ed for The Guardian on Monday.

His reasons are two-fold: increasing pressure from regulators and Bitcoin’s intrinsic flaws.

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As many so-called “crypto evangelists” have argued, for Bitcoin to see another surge like that of December 2017, the cryptocurrency has to reach widespread adoption in day-to-day transactions. However, as long as governments exist and hold the power to regulate money, there will be little room for Bitcoin to move forward.

Since Bitcoin’s peak last December, several countries, including China, Russia, Japan and Korea, have banned Bitcoin transactions to various degrees. “Regulators are gradually waking up to the fact that they cannot countenance large expensive-to-trace transaction technologies that facilitate tax evasion and criminal activity,” Rogoff wrote.

And on a broader level of currency innovation, “the private sector may innovate, but in due time the government regulates and appropriates,” the former IMF chief economist added.

That doesn’t mean that Bitcoin will be completely worthless, however. One promising area for its short-term adoption, for instance, is countries where government-backed currencies have gone dysfunctional. (Venezuela, which has been suffering from unstoppable hyper-inflation this year, even issued a government-pegged cryptocurrency called “petro.”)

But for perfectly functional governments, hasty adoption of cryptocurrencies has proven a disaster. “Any single large advanced economy foolish enough to try to embrace cryptocurrencies, as Japan did last year, risks becoming a global destination for money-laundering,” Rogoff wrote.

Another key vulnerability of Bitcoin, Rogoff noted, was its energy-intensive verification process.

Every Bitcoin transaction requires the entire Bitcoin network to verify and record, which consumes large amounts of computing power. Bitcoin miners, who perform the computing to confirm transactions, get paid in Bitcoin. Amid Bitcoin’s sharp decline last month, JP Morgan found that some Bitcoin miners had quit as the reward wasn’t enough to cover the mining costs.

“The very nature of decentralized ledger systems makes them vastly less efficient than systems with a trusted central party like a central bank,” Rogoff wrote. “Take away near-anonymity and no one will want to use it; keep it and advanced-economy governments will not tolerate it.”

Of course, for Bitcoin believers who got into the game early enough (say December 2012 when Bitcoin was $13), the recent collapse was no reason to panic. And a bearish long-term forecast of $100 isn’t too bad, either.

“The price of these coins is not necessarily zero,” Rogoff concluded. “Like lottery tickets, there is a high probability that they are worthless. There is also an extremely small outside chance that they will be worth a great deal someday, for reasons that currently are difficult to anticipate.”

Harvard Economist Explains Why the Bitcoin Bubble Was Doomed to Burst