Cryptocurrencies are intrinsically worthless assets, says professor of public policy and economics

Economist Kenneth Rogoff, a Professor of Public Policy and Professor of Economics at Harvard University, has written a provocative article titled “Cryptocurrencies are like lottery tickets that might pay off in future,” published in The Guardian.


One of Rogoff’s points is:

“The right way to think about cryptocurrency coins is as lottery tickets that pay off in a dystopian future where they are used in rogue and failed states.”

Rogoff adds that the long-term value of bitcoin is more likely to be $100 than $100,000.

Now, it’s worth noting that The Guardian is a politically biased outlet with a long story of rabid hostility against privacy cryptocurrencies.

It’s also worth noting that Rogoff himself doesn’t care for privacy. In his book “The Curse of Cash,” published in 2016, he urged that the United States phase out the 100-dollar bill, then the 50-dollar bill, then the 20-dollar bill, leaving only smaller denominations in circulation. According to Rogoff, cash is mostly used “to finance tax evasion, corruption, terrorism, the drug trade, human trafficking, and the rest of a massive global underground economy.”

On the contrary, I am persuaded that we should forcefully defend cash as a bastion of privacy. Cash is better than today’s cryptocurrencies, because it’s really anonymous and untraceable. Digital cash should be an equivalent of cash that can be sent electronically, but today’s cryptocurrencies fall short of this goal.

However, the fact that The Guardian and Rogoff are politically biased doesn’t mean that we shouldn’t acknowledge that the article makes some good points. Rogoff says:

“The ultimate obstacle for any cryptocurrency is that eventually there has to be a way to buy a range of goods and services beyond illicit drugs and hit men.
“Take away near-anonymity and no one will want to use it; keep it and advanced-economy governments will not tolerate it.”

Rogoff seems to think that cryptocurrencies are used only by criminals for criminal activities, which is plainly wrong. But the point that cryptocurrencies are not used enough by normal people for legitimate activities is valid.

The vast majority of bitcoin holders are not criminals, but speculators who buy bitcoin in the hope of selling their coins much higher when the price goes up.

When the price goes up, the speculators “hodl” their bitcoins instead of spending them. When the price goes down, most people panic-sell. This doesn’t help establishing bitcoin as a form of digital cash that is actually used, and therefore has intrinsic value. I have argued that bitcoin and other cryptocurrencies are doomed to failure if they don’t become digital cash that people actually use.

Another real problem underlined by Rogoff is that governments aren’t likely to tolerate currencies that they don’t and can’t control for much longer.

“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… [When] it comes to new forms of money, the private sector may innovate, but in due time the government regulates and appropriates.”
And if governments ever make it illegal to use coins in retail stores and banks, their value must ultimately collapse.”

Rogoff is wrong in thinking that cryptocurrencies are only used for tax evasion and criminal activity, but he is right in thinking that governments are against cryptocurrencies that offer a potential for anonymous or difficult to trace transactions, and he is right in thinking that governments are likely to clamp down on cryptocurrencies, more and more. Cryptocurrencies are not “too big to fail” — they are still a tiny mote in the overall scheme of things — and total bans are certainly plausible if not likely.

Add this vulnerability to the fact that cryptocurrencies are not routinely used as digital cash, and the future looks gloomy indeed. Rogoff says:

“[Economists] (including me) who have worked on this kind of problem for five decades have found that price bubbles surrounding intrinsically worthless assets must eventually burst.”

But cryptocurrencies are not necessarily “intrinsically worthless assets.” On the contrary, if and when cryptocurrencies will take off as private digital cash, they’ll have a lot of intrinsic worth, just like paper cash.

Image from Wikimedia Commons.