By Kim Jae-kyoung
Digital currencies such as Bitcoin should not become legitimate currencies due to a lack of features that money must have, said Sohn Sung-won, a former White House economic adviser, Sunday.
He said the unusual craze for digital coins is driven by the irrational beliefs of market players that the decentralized virtual currencies will continue on an upward spiral.
“It is a greater fool’s theory, and it is a big bubble,” Sohn, professor of economics at California State University-Channel Islands, said in an interview.
A currency in his words should have something behind it like a healthy economy (U.S. dollar), or gold or silver.
“Bitcoin has nothing behind it except greater fools,” he added. “Like any bubble it will burst.”
He forecast it could go higher for a while but its bubble will pop if interest rates rise.
“As interest rates rise, the opportunity cost of holding a cryptocurrency rises,” he said.
Under the greater fool theory, the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants.
In other words, one Bitcoin investor may pay a price that seems “foolishly” high because they may rationally expect the coin can be resold to a “greater fool” later.
His view came as a growing number of financial firms are beginning to view Bitcoin as a legitimate currency as it gains wider use.
PricewaterouseCoopers’ Hong Kong offices announced they’d started receiving payments for their accountancy services in Bitcoin this week.
In order to become a legal tender, he believes Bitcoin should have four characteristics _ 1) medium of exchange; 2) store of value so it can be a vehicle of storing wealth; 3) unit of account; and (4) standard of deferred payment so future value is reasonably predictable.
“Bitcoin or any existing cryptocurrency does not meet any of the four criteria. It is an investment product, not money,” he said.
“To be sure, we need some sort of a virtual currency preferably supported by central banks around the world. Bitcoin or cryptocurrency is not it.”
Sohn, who served as a senior economist on the President’s Council of Economic Advisers at the White House, expects the U.S. Federal Reserve will create its own official digital currency.
“Someday a digital currency will be needed,” he said.
“However, it will be backed by a government entity with proper regulation. It would be a companion to the U.S. dollar.”
Last week, William Dudley, president of the Federal Reserve Bank of New York, said the U.S. Federal Reserve is beginning to consider its own digital currency.
Despite severe fluctuations, the former chief economist at Wells Fargo said it is too early to regulate the digital currency market because the market is not big enough and the average person in the street is not affected by it yet.
“At the moment the market is relatively small so that its existence does not matter to the macro economy,” he said.
“If cryptocurrency were to grow to reach much bigger sales, it will invite government regulation including Korea.”