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cryptocurrency | IST

Professor Eswar Prasad believes Bitcoin may disappoint retail investors; here's why

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Professor Eswar Prasad of Cornell University believes that as Bitcoin came into the mainstream, it turned out not to be a great medium of exchange and so became a financial asset. However, the underlying notion that Bitcoin is scarce and thus has value is false

Have you wondered whether you are sensible to stay away from cryptocurrencies like Bitcoins? Have you wondered what blockchain is? Or how Bitcoin works? And in the midst of all this, why are central banks like the Reserve Bank of India (RBI) talking of launching digital currencies? In an interview with CNBC-TV18's Latha Venkatesh, Professor Eswar Prasad of Cornell University tried answering a few of these key questions.
Prasad, who has authored a new book titled 'Future of Money' believes that the underlying notion that Bitcoin is scarce and thus has value is false. He has also warned that Bitcoin may not end well especially for the naïve retail investors.
Bitcoin adherence will tell you that it is scarce just like gold. There are going to be at most 21 million Bitcoins of which about 18.5 million have been mined so far.
"So that seems to be the underlying notion that since Bitcoin is scarce, it is going to have value. The reality though is that people are getting taken away by the rattle dazzle of the new technology. Just because something is scarce it is not necessarily going to have value. So I fear that Bitcoin may not end well especially for the naïve retail investors who get into the party at the last stages. However, Bitcoins underlying technology is what is going to be truly transformative." Prasad explained.
Bitcoin's failure as a medium of exchange, according to Prasad, is due to the high volatility in price.
"As Bitcoin gained more traction, it came into the mainstream and turned out not to be a great medium of exchange because it has very unstable value, prices fluctuate a lot from day to day if not from minute to minute. So while it did not serve well in its basic purpose of being a medium of exchange, somewhat paradoxically Bitcoin has become a financial asset because people believe it will increase in value," he said.
Prasad also stressed the point that when Bitcoin came into the mainstream, it turned out not to be a great medium of exchange and so became a financial asset.
"Bitcoins initial lure was that it would be a medium of exchange. It would allow you to conduct financial transactions without the use of central bank money or through a trusted intermediary which is a commercial bank. That was certainly an alluring prospect because it happened right after the global financial crisis when trust in central banks and commercial banks was at an all-time low." he said.
Watch the video for the entire discussion.