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Monday, February 11, 2019

Point of View: Three Pitt Scholars Discussthe Future of BitcoinFriday, February 1, 2019

Bitcoin — the world’s first digital currency to operate independent of any centralized institution — had a wild 2018and enters an equally tumultuous 2019, experts predict. How will it fare? Pitt researchers weigh in. (Getty Images)

To mark the 10-year anniversary of the creation of the first block in bitcoin’s famous blockchainin January, Pittwire invited three Pitt scholars to share their opinions on the technology and itsfuture.

Bitcoin, a digital currency with no centralized administrator, has gained traction as a lasting,difficult to spoof way to transfer data that can be used for transactions around the world.

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At its peak in December 2017, bitcoin traded at $18,000 per token with a market capitalization ofaround $305 billion. By the end of January 2018, the currency had dropped to around $10,000per token and market cap was slashed to around $170 billion. At the start of December 2018,tokens were worth around $4,214 each and market capitalization had fallen to around $73billion.

The basics of blockchain

Want to learn more about bitcoin and other cryptocurrencies? Check out Pitt Magazine’sinterview with Chris Wilmer in the latest issue.

The sharp peaks and valleys along bitcoin’s path have led to equally divergent opinions about itsfuture. Was the 2017 peak a sign that a global marketplace is anxious for a new medium ofexchange? Did the subsequent drop in value prove bitcoin lacks the stability to become theworld’s next dollar bill?

Christopher Wilmer, an assistant professor of chemical and petroleum engineering in theSwanson School of Engineering, has an optimistic view on what’s to come for bitcoin. He is theco-managing editor for Ledger, an open-access publication devoted to research oncryptocurrency and blockchain technology, and co-author of the book, “Bitcoin for theBefuddled.”

Meanwhile, Department of Mathematics Professor Gunduz Caginalp, a pioneer in quantitativebehavioral finance, and his son Carey Caginalp, a mathematics department visiting scholar andresearcher with Novateur Research Solutions in Virginia, argued in a Proceedings of theNational Academy of Sciences (PNAS) article, “Valuation, Liquidity Price and Stability ofCryptocurrencies,” that because bitcoin lacks traditional value, share price is ultimatelydetermined by the market’s fringe buyers.

Wilmer and Carey Caginalp said bitcoin and other cryptocurrencies gained customers due tointerest in a new investment, but Caginalp said that investment was most likely part of aneconomic bubble.

“As with other bubbles (electronics in the 1960s or dot com in the late 1990s, for example),people are fascinated by a new technology and feel that this is somehow their path to riches. Ofcourse, they see some people making enormous profits with these technologies and they feelthat this wealth will somehow spill over to them, without considering the possibility that thewealth, in some cases, was made at the expense of people like them,” he said.

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And while it’s natural to compare cryptocurrency performance and use to that of euros and yen,Wilmer said digital currencies have the potential to transcend boundaries drawn with traditionalcurrencies.

“In a very loose analogy, religion and nationality used to be highly correlated; there were statereligions. So, if you were from France or Spain, that meant your religious beliefs aligned withthose of the nations. In modern society, we don’t have state religions; people are free to believein whatever they want regardless of what country they’re in,” he explained. “In the future, it couldbe that currency is also separated from state and people would use whatever currency they like,regardless of the country they live in. But today, that’s a very radical idea.”

From left: Pitt’s Carey Caginalp, Chris Wilmer and Gunduz Caginalp.

For that future to unfold, Gunduz Caginalp said buyers must rely upon blind faith in currenciesthat aren’t backed by physical commodities or geopolitical guarantees.

“Although the dollar is not currently backed by gold, it is different from bitcoin in severalimportant ways. First, there is a long history of stability for the dollar. Second, there are manycontracts written in the dollar. For example, many people have a job where they are assured ofpayment in dollars. They also have a rent or mortgage that is set in dollars. Third, the supply ofdollars is effectively controlled by administrators appointed by elected officials,” he said. “As faras we know, the owners of bitcoin do not have a vote on anything, unlike shareholders. Forexample, we hear news bits such as: Developers and miners (engineers who createcryptocurrencies and individuals who use their computing power to produce new crypto coins)

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got together in New York and decided XYZ. It sounds like tribal leaders in a primitive society.They want to dress it all up as though the technology automatically bestows a higher level ofcorporate governance, but it is exactly the opposite.”

All three researchers agree that cryptocurrency eases the burden of transferring funds from oneperson to another across countries because it eliminates challenges tied to the differencesbetween currencies. But Carey and Gunduz Caginalp hold the firm belief that bitcoin won’t bewidely adopted as a currency without major changes while Wilmer said adoption is up to thebroader market.

“It is possible, as we suggested in our PNAS article that one could design a cryptocurrency thatis anchored to something like the gross world product, so that one unit would be worth aparticular fraction of the world’s output. This could be ensured by a large private or public entity.But as it stands now, bitcoin cannot be used as a currency for major transactions,” said CareyCaginalp.

“Bitcoin is like a new language, except it’s a new currency. It could become the new globalcurrency, but it will only become that if that’s what people want. There’s no way to force bitcoinagainst the will of the people. If people around the world find it more convenient to use Bitcointhan domestic currencies, then it will become the universal, global currency of humankind,”Wilmer said.

Media Contact: Amerigo Allegretto, aallegretto@pitt.edu, 412-624-6128 | 814-512-8930 Deborah M. Todd,dmtodd@pitt.edu, 412-624-6687 | 412-519-5965

Category: Faculty & Teaching

Schools: Kenneth P. Dietrich School of Arts and Sciences, Swanson School of Engineering

Tags: Department of Mathematics Department of Chemical and Petroleum Engineering expertiseThe Plan for Pitt: Engage in Research of Impact cryptocurrency bitcoin

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