A bitcoin economy would lead to ‘unrest’: David Yermack, professor of finance

Is bitcoin (BTC) a revolutionary currency on the verge of taking down the financial establishment or is it an electronic payments system that is on the cusp of competing and defeating the likes of Visa and PayPal? That’s the debate that is going on right now in Silicon Valley and in the bitcoin community.

When it comes to the question regarding currency, there is one definitive answer for one writer: no.

David Yermack, professor of finance at the NYU Stern School of Business, New York University, and also Adjunct Professor of Law at NYU Law School, published an op-ed piece in the MIT Technology Review in which he argues against the concept of the cryptocurrency being a legitimate currency.

Yermack started off his piece discussing its dramatic increase in value last year as well as the immense adoption by merchants occurring all over the globe. He also noted that it’s not distributed by any government and is a decentralized system.

bitcoinYermack cited financial experts who believe bitcoin is essentially a flash in the pan. A viable currency maintains three properties: medium of exchange, a unit of account, and a store of value. The finance expert says it lacks two of the three properties of a currency: unit of account and store of value.

“Bitcoin’s extreme fluctuations undermine any useful function for it in these roles. During 2013 its volatility was three to four times higher than that of a typical stock, and its exchange rate with the dollar was about 10 times more volatile than those of the euro, yen, and other major currencies,” wrote Yermack. “Bitcoin’s dollar price exhibits no correlation with the dollar’s exchange rates against other currencies. Nor does it correlate with the value of gold. With a currency whose value is so untethered, it is nearly impossible to hedge against risk.”

He further explained that bitcoin cannot be deposited in banks and the money must be stored in “vulnerable” digital wallets. Therefore, virtual currency holdings are not subjected to the federal deposit insurance.

“No lenders use bitcoins as the unit of account for consumer credit, auto loans, or mortgages, and no credit or debit cards are denominated in bitcoins,” stated Yermack.

A paucity of inflation is also a negative, according to Yermack. With only 21 million units, “a fixed money supply is incompatible with a growing economy. In a bitcoin-dominated economy, workers would have to accept pay cuts every year, and prices for goods would gradually fall.”

In the end, a bitcoin economy would lead to “unrest” akin to the 19th century free-silver and populist movements.

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