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Curiosity of Bitcoin Begets High-Level Economic Talk For Students at the Tepper School of Business

Bitcoin, the digital currency that debuted in 2009, has garnered international attention and sparked debate among economists, particularly with the recent collapse of its largest exchange, Mt. Gox, as to how it should be classified and whether or not it can survive long term.

Students at the Tepper School of Business received answers to these questions from two distinguished economists and faculty members during a special presentation on the topic. Marvin Goodfriend, the Friends of Allan Meltzer Professor of Economics, and Stephen Spear, professor of economics, explained how the bitcoin system works and what its future may hold.

“I’m here to discuss money,” began Goodfriend, “even though I don’t think Bitcoin is money. It’s a niche financial service. Bitcoin provides an inexpensive means of payment that is especially useful internationally.”

He questioned Bitcoin’s ability to survive, and highlighted critical factors, most importantly, the apparent demand for Bitcoin in our current low-interest-rate environment.

“This is the first in a long line of digital currencies that has gotten traction,” Goodfriend explained. “Perhaps that is due to today’s exceptionally low interest rates. The opportunity cost of holding Bitcoin instead of bank deposits today is zero. Once we have a normalized economy where interest on deposits increases, so do Bitcoin’s hurdles.”

He also indicated that there is little reason for our government to regulate Bitcoin in the way it regulates our paper currency. But Bitcoin’s survival likely will require a degree of self-regulation, particularly given the recently reported disappearance or theft of 6 percent of all existing Bitcoins.

Professor Spear discussed the nuts and bolts of the bitcoin system. He pointed out the main benefit of the online currency is in minimizing transaction costs, but noted that another often-touted advantage, anonymity, is “something of a myth.”

Spear highlighted a number of issues faced by bitcoin, including the need for authenticity, transaction irrefutability and protection against double spending. He discussed encryption and explained public key cryptography with its public and private key system.

Like Goodfriend, Spear said bitcoin is a work in progress and argued that the e-currency, with its necessary tie to computing, is not anonymous, that its fluctuation in value makes long-term contracts problematic, and that national governments would have an interest in taking control.

“In monetary economics, we call bitcoin a fiat currency,” Spear said. “It has value only because there are people who believe it will continue to have, or grow, in value. Economists frequently characterize this situation as an asset bubble.”

Spear referenced examples like the Internet technology bubble of the 1990s and the Dutch tulip mania of the 1600s, and enumerated asset bubbles’ pros and cons. He closed with a series of questions regarding bitcoin yet to be answered.

The speakers then opened the floor to questions, and the packed room of students raised topics from alternate digital currencies to bitcoin mining costs.

“This is a very current topic and we are all familiar with the impact that it could potentially have,” said Moises Morgenstern, MBA’14. “I came to hear these very highly regarded professors. It was very impressive and very interesting to learn their perspectives.”