In a recent interview, Eugene Fama predicted that the price of Bitcoin will fall to zero:
This newfound mainstream adoption has given Bitcoin an illusion of legitimacy, but Fama argues that it doesn’t change the fundamental issue: Bitcoin still has no intrinsic value. “If demand for Bitcoin disappears, so does its pricing,” Fama emphasized.
When pressed by podcast hosts about whether Bitcoin’s price could eventually crash to zero, Fama delivered a chilling response: “I would say it’s close to one.”
He went even further, stating that he hopes Bitcoin collapses because if it doesn’t, you have to start all over with monetary theory.”“I’m hoping it will bust, because if it doesn’t, you have to start all over with monetary theory.”
Before responding to this, I should mention that I am not a Bitcoin investor and have no opinion on where the price is headed. Instead, I’d like to respond to Fama’s claim that Bitcoin presents challenges for monetary theory. This is false, because Bitcoin is not money. For an asset to be money, it must be a medium of account. Bitcoin is not a medium of account, as the prices of goods, services, labor and financial assets are rarely denominated in Bitcoin. The success of Bitcoin presents no challenges at all for monetary theory.
I think of Bitcoin as sort of like electronic gold. Gold is a store of value for the boomer generation, and Bitcoin is store of value for the zoomer generation—for people brought up in the era of iPhones and computers.
Gold has a few industrial uses, but most of its value comes from its use as a store of value. People value gold primarily because they believe that in the future other people will value gold.
Bitcoin is occasionally used in transactions, but most of its value comes from its use as a store of value. People value Bitcoin primarily because they believe that in the future other people will value Bitcoin.
READER COMMENTS
Garrett MacDonald
Feb 15 2025 at 2:10pm
The most speculative upside case for bitcoin and other crypto is that it might in the future become a MoA for autonomous AGIs.
OTOH, it might be that future AGIs create their own coins, invalidating the bull case for all current coins
Andrew_FL
Feb 15 2025 at 4:01pm
I’m skeptical that the medium of account and medium of exchange are separable in practice, but is it not the latter, not the former, that is the defining feature of money? Of course Bitcoin is not widely accepted as a medium of exchange, either.
Don Geddis
Feb 16 2025 at 1:15pm
I haven’t used physical cash (paper bills, metal coins) in a long time. What do you think the Medium of Exchange is, exactly? I “pay for” transactions, once upon a time with checks, now with credit cards, Apple Pay, Venmo, etc. Those are the actual tools that facilitate exchanges.
But none of them are the Medium of Account. Monetary theory concerns the path of the Medium of Account. The actual exchange media are not especially important … as long as they all share the same Medium of Account.
Scott Sumner
Feb 16 2025 at 4:47pm
“the defining feature of money?”
It depends what issue you are looking at. If you are interested in explaining the price level, then you need to look at the MOA. The price level is the inverse of the value of the MOA
Craig
Feb 15 2025 at 4:03pm
Paypal merchant account currently supports AUD, BRL, CAD, CNY, CZK, DKK, EUR, HKD, HUF, ILS, JPY, MYR, MXN, TWD, NZD, NOK, PHP, PLN, GBP, SGD, SEK, CHF, THB and of course USD. Paypal does not do BTC. All of those are instantly convertible to USD which I do, though in theory I could hold a balance in that currency (Here I do Euros, CAD, AUD amd JPY, other countries have to pay me USD and to get that USD you can give the gateway whatever currency paypal deals with). In this platform any trx is theoretically subject to a chargeback so that means, effectively, I only ship to ‘good’ 1st World countries. I even exclude Singapore because apparently Singapore sees Malaysians get freight forwarded and too high a possibility of the purchase being a scam.
For the ‘sketchy’ mostly developing countries though that would include UAE, Saudi Arabia, Brazil, South Africa, formerly Russia though not now. I do it BUT ONLY with Bitcoin because ….. no chargebacks. This is basically, for me, Mexico, Brazil, Saudi Arabia and Singapore.
For me, USD is money, but I’d suggest ANYTHING instantly convertible to USD is also money. Its all money to me, they all make my phone ping.
“For an asset to be money, it must be a medium of account.”
Even if 100% of everything in BTC I’d have to have USD as accounting for tax purposes, but for which I wouldn’t even bother.
steve
Feb 15 2025 at 6:33pm
Money is even more quickly converted to money and you dont need to remember a special set of rules about using it for the huge majority of transactions. No special learning either. So at present it’s estimated that crypto accounts for about 0.2% of e-commerce, much less for all commerce. Also, still too many scandals and grifters in the sector.
Steve
Scott Sumner
Feb 16 2025 at 4:49pm
Don’t conflate money and wealth. Things convertible into money are liquid wealth.
Alan Goldhammer
Feb 15 2025 at 6:53pm
MicroStategy has staked their entire company on the premise of Bitcoin have value beyond a collectible. They have used a lot of leverage to purchase as much Bitcoin as they are able (over $42B right now). This is a gutsy bet and maybe it pays off or doesn’t. My worry about Bitcoin is that Satoshi Nakamoto, the creator, is supposed to have held back 10% of the total amount of Bitcoin which is worth almost twice what MicroStrategy holds. It’s said that he destroyed the key to those holdings but who really knows whether this is true or not. Imagine if it is true and he wants to cash in. Price of Bitcoin drops precipitously.
There have been unsuccessful attempts to make Bitcoin a part of commerce but since the value fluctuates so much and the time to clear transfers has made it unwieldly.
Matt
Feb 15 2025 at 6:54pm
Very few thought the credit card would replace cash 30 years ago when we were still using carbon paper to copy a transaction. I remember trying to use my card at a grocery store and a lady saying “hun we don’t use that here, you must be from the city” 😆 well I will tell you that grocery store was behind the times and now they take credit by tap and go.
Bitcoin will continue to be adopted. All assets from stocks to gold to real estate will be exchanged on a blockchain.
Mark Brophy
Feb 16 2025 at 3:02pm
The transaction price of Bitcoin is too high. It can only be used for real estate and other expensive goods.
Scott Sumner
Feb 16 2025 at 4:51pm
Bitcoin may become a medium of exchange, but it won’t become a medium of account. Imagine a store pricing a candy bar in Bitcoin. Americans are that good at math.
Dylan
Feb 16 2025 at 5:21pm
There are a lot of reasons that bitcoin will likely never be the unit of account, but this isn’t one of them. The smallest unit of bitcoin is a Satoshi, a hundred millionth of a bitcoin. At current prices, a satoshi (or sat) is worth about a tenth of a US penny. I don’t see anything particularly difficult about a candy bar being priced at 1000 sats.
Trump tried to coo
Feb 16 2025 at 11:36pm
Depends on what you mean by “price a candy bar in Bitcoin”. A seller might superficially price in Bitcoin, like the Mavericks team merchandise was. That means they actually price it in USD but superficially display that they are willing to accept an equivalent amount of Bitcoin for the next 5 minutes. If you wait more than 5 minutes, the original USD price is converted to a new Bitcoin price for display purposes.
To substantially, not superficially, price in Bitcoin means to ask for a certain number of satoshis for a particular candy bar. 5 minutes or 5 weeks or 5 months later that is still the price. Maybe you change the price once or twice per year to reflect inflation, costs, competition, and willingness to pay. Why would a seller do this? The only reason I can think of is that they pay for sugar, chocolate, rent, taxes, equipment, fuel, electricity, and labour in the same currency, that is Bitcoin. This candy bar maker signs contracts in Bitcoin. Since there are currently no candy bar makers that pay for inputs in Bitcoin, the only Bitcoin use is superficial. Bitcoin can be a medium of exchange but the prices are superficial.
Dylan
Feb 17 2025 at 6:18am
I agree, the lack of price stability in bitcoin over long periods is one of the reasons I think that bitcoin won’t ever be a unit of account. I might have read too much into Scott’s reply, but I thought he was suggesting that trying to price things in fractions of a bitcoin, like the candy bar for .00001 BTC wouldn’t work because Americans aren’t that good at math.
Scott Sumner
Feb 17 2025 at 12:04pm
Dylan, Thanks for that info.
Arqiduka
Feb 16 2025 at 3:50am
I certainly agree that Bitcoin isn’t money anymore than rare paintings are, but that is due to the choices made on the issue of supply.
That some sort of electronic token could be devised that could, perhaps in time, become money, I find to be very easy to believe, and that would certainly not require anyone to rethink monetary econ at all.
Trump tried to coo
Feb 16 2025 at 11:41pm
FedNow is electronic money.
Arqiduka
Feb 17 2025 at 4:31am
I mean a standard different from the USD, but yeah.
Creigh Gordon
Feb 16 2025 at 3:54am
Bitcoin is a commodity, like gold, only virtual. A commodity may be used as a medium of exchange in a form of barter, but commodities are not money.
Billy Kaubashine
Feb 16 2025 at 8:31am
While the supply of one chain of bitcoins may be finite or at least difficult to expand, there is the option of creating clones.
If you accept the notion that bitcoin is a credible form of money and a currency alternative, then it follows that its value relative to other crypto currencies will be capped by the emergence of fungible alternatives.
As there are more and more fungible alternatives, the value of each and every one of them should weaken.
Someone compared bitcoin to art. Bitcoin is like art — without copyright and forgery protection.
Dylan
Feb 16 2025 at 9:43am
Except, there have been countless alt coins launched that (at least apparently) haven’t done anything to weaken the value of bitcoin. Even direct forks of BTC, like Bitcoin Cash in 2017 where every holder of BTC received an equal amount of bitcoin cash, didn’t show value in the long term. I think you are underestimating network effects, not just in terms of users of the coin but also the miners. There is opportunity cost to going to an alt coin, and miners will devote their resources to the coin that is viewed as most profitable. This tends to coalesce resources around one main winner.
Billy Kaubashine
Feb 16 2025 at 8:37am
The graveyard that everyone seems to be whistling past is the scenario of a “run on the bank” if the crypto currency faith collapses.
Think Long Term Capital Management and October 1987…….
How is the Fed going to deal with the vaporization of all that wealth?
Alan Goldhammer
Feb 16 2025 at 9:26am
The LTCM collapse had implications for world financial systems just as the 2008 collapse had a huge impact. If Bitcoin collapses, nobody other than the holders of Bitcoin will be affected. This is why I don’t want to see the banking regulations changed in favor of crypto holdings. Even “stable coins” are at risk if they are loosely regulated. There was a story a while back that one stable coin holding company had not allowed for an independent audit that would assure investors in the company and holders of the coin that it was indeed backed by proper assets.
Maybe the crypto bros in the Trump Administration get their way but I have a pretty strong feeling that this will not turn out well. The blockchain has a lot of use cases but nobody should be fooled into thinking it is secure or that assets are not subject to huge swings in value.
Scott Sumner
Feb 16 2025 at 4:55pm
The Fed did nothing in response to the 1987 stock crash, and the economy was fine. They did react somewhat to LTCM–overreacted in my view.
Scott H.
Feb 16 2025 at 12:38pm
Exactly right. I find bitcoin very analogous to baseball cards. As long as there are baseball fans then the more notorious baseball cards will be worth a lot of money.
We have A LOT of young digital currency fans. So, bitcoin could last a while.
Billy Kaubashine
Feb 16 2025 at 7:56pm
It’s like tulip bulbs…..or old Fender guitars, or beanie babies. (except you can play a worthless Fender guitar or hug a worthless beanie baby, or sniff a worthless tulip).
When there is limited supply, and people see the value going up, they hop on the money train.
The problem with crypto currencies is that even though the existing ones might be limited in supply, new ones can be launched. What’s the difference between the last crypto currency and the next?
I would think that anyone who wanted to make money from cryptos would want to invest in the newest one. After all, who wouldn’t wish they had bought Bitcoin at the beginning? At some point the new players are going to stop buying Bitcoin and the older cryptos and start buying the newest ones.
Ultimately, they all should have the same exact value, and when the supply of new cryptos explodes, that value should be about zero.
Devin
Feb 16 2025 at 5:06pm
There’s a huge, critical difference between gold and Bitcoin.
Gold has a track record of being (literally) treasured by humans for millennia. While its value may vary, with all of that history it’s safe to bet that it will never go close to zero within any sensible time horizon
Dylan
Feb 18 2025 at 11:02am
This is true, and that history is a big advantage for gold. But Bitcoin has advantages that gold doesn’t, it is much easier to store and move Bitcoin than gold.
Alan Goldhammer
Feb 17 2025 at 8:29am
The problem with crypto currencies is that even though the existing ones might be limited in supply, new ones can be launched. What’s the difference between the last crypto currency and the next?
This is something that has always puzzled me. Aside from meme coins which are vanity collectibles and maybe nothing more than scams, how many stable coins do we really need (assuming there is a good business use case)? If the answer is >1, some justification for this is needed and is the system that manages multiple stable coins truly interoperable? FTX tried to provide a seamless exchange but was brought down by other forces. As I am not a crypto investor, I don’t have much knowledge about these issues.
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