In December, as the bitcoin price neared $20,000, a friend asked me whether she should invest. I said that I hadn't the faintest idea. Today, with the price below half that, my reply remains the same.
Over the next year, the bitcoin price could double, soar tenfold, or collapse by 95 percent or more, and no economic analysis can help predict where in that range it will lie. Its value is arbitrarily determined by the collective psychology of the mass of investors; it goes where, on average, they think it will. Like other cryptocurrencies, bitcoin serves no useful economic purpose, though in macroeconomic terms, such currencies probably also do little harm.
In a modern economy, money has a well-defined real value because governments accept it as payment of taxes and issue debts in defined monetary amounts, and because central banks ensure that total monetary creation, by either the state or the private banking system, grows at a pace compatible with relatively low and stable inflation. In some sense, money is an arbitrary social construct; but its value and ability to serve crucial economic functions are rooted in the authority and institutions of the currency-issuing state.
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