To find some answers, we talked with a Nobel laureate in 2023
A Bitcoin is now worth more than $17,000. Given that the price was about $1,000 at the start of the year, you might be excused for feeling a pang of regret: after all, if you’d purchased $100 worth of the cryptocurrency back then, you’d have roughly $1,700 now if you cashed out today.
The trip has grown even wilder in the last month or two, with the value of Bitcoin more than doubling since mid-November.
People are rushing to get in on the ground floor—or, maybe, the third floor—of a fresh exciting investment in the aftermath of this recent, spectacular rise. For our part, we enlisted the help of two experts: Yale economist Robert Shiller and MIT professor Christian Catalini to discuss Bitcoin: what it is, where it is headed, and what we should do about it. The material provided here is for educational purposes only and is not intended to be financial advice. Use this material in any way you see fit. We’re not suggesting to invest or not to invest; rather, we’re urging to be well-informed before making any significant financial choices. Let’s get started:
Is it too late to invest in Bitcoin?
In a nutshell, no one knows. Unless you have the ability to travel across time. Predictions, particularly concerning the future, are difficult, as the old adage goes. We asked Robert Shiller, author of Irrational Exuberance and 2013 Nobel Memorial Prize laureate in Economic Science, what he thought.
“It’s difficult to predict when the bubble will burst,” he adds. It is impossible to predict if the price will continue to rise, and even speculating is difficult. We also don’t know if going “short,” or betting that the price will fall, will be better than going “long,” or wagering that the price would rise over time.
Unfortunately, the unsatisfactory response is correct: nobody knows.
Let’s take a step back. What exactly is Bitcoin?
In a nutshell, it’s a cryptocurrency—the term “crypto” refers to cryptography, which is a component of the system’s technology. (For a more in-depth explanation of Bitcoin, go here.) This digital currency has value in part because some people accept it as a form of payment (similar to how a dollar has value despite the fact that it is no longer backed by gold), in part because it is scarce (there is a limited supply), and in part because you can exchange Bitcoin you own for dollars through an exchange like Coinbase.
But what supporters appreciate about Bitcoin and other digital currencies is that they are not controlled by a central authority, such as a bank. It is a peer-to-peer network that is decentralized.
“It was intended as something that could be completely censorship-resistant and function in a decentralized network without depending on any single trusted intermediary,” Catalini explains. In other words, it does not need PayPal, MasterCard, or Chase to operate.
That decentralized network is critical, as is the blockchain system, which is a public ledger that records all Bitcoin transactions. This is a representation of one such transaction, with the sender and recipient represented by the two lengthy strings of numbers and characters at the top.
“Every participating node in the network maintains this shared data, this shared ledger,” Catalini adds. “Not only do these nodes keep it running, but they also protect it from attacks.”
Should I invest in Bitcoin instead of anything else, such as my 401(k)?
Bitcoin is very volatile, making it an unwise investment for something as important as retirement. Bitcoin and other cryptocurrencies are so young that the market is still attempting to determine their worth. We don’t know what it’ll be like next week, much alone when you’re approaching retirement age.
Catalini compares what is occurring with Bitcoin right now to individuals worrying about the “worth of stock in a company.” As expectations about a startup’s future potential vary, so does its perceived worth, which may swing dramatically. Something similar is going on here.
“The value of Bitcoin is determined by whether this network has the potential to become a significant financial network in the future,” he says. In short, the more it is seen as an essential system in the future, the more people want to become involved with it.
You used the term ‘bubble’ earlier. Is this a speculative bubble?
Bitcoin has already suffered a bubble. In December 2013, the price surpassed $1,000 before falling to the $200 range by early 2015. (All prices in this post are from this website.)
According to Shiller, the current Bitcoin scenario “has elements of a bubble in the sense that it’s a virus.” “Bubbles are times of infectious enthusiasm about some investable asset, fueled by public observations of price rises and jealousy of individuals who earned a lot of money so easily.”
While Shiller is concerned about some of the indications he sees—discussions about a Bitcoin bubble, for example—innovation around the currency lends it legitimacy as well. For example, the start of trade in Bitcoin futures has helped the currency’s credibility.
Okay, I guess I’ll get some. But how do you do it?
If you want to dip your toe into the stormy cryptocurrency waters, Coinbase is a prominent Bitcoin exchange. Through them, you may invest in Bitcoin as well as two other cryptocurrencies, Ethereum and Litecoin.
“Don’t put too much into it,” Shiller advises. “It’s similar to going to a casino—maybe you’ll learn something from the experience.”
In other words, only invest money that you can afford to lose.
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