Prices for cryptocurrencies such as bitcoin may never stabilize, and digital tokens risk simply becoming the equivalent of a pyramid scheme.
Using mathematical calculations and experimental economics, two researchers from the University of Pittsburgh tried to determine the value of bitcoin and concluded that it is “an asset that has no value in the traditional sense” and may be a bubble. Its price is largely determined by the opinions of intermediate buyers, who often have erroneous views. As these buyers jump ship, worried that their investment is not as protected as they would like, the price plummets. It rises when those buyers come back feeling secure.
“Cryptocurrency may simply be a mechanism for transferring wealth from old participants to new participants and nimble traders,” the mathematicians note in their report.
This is not the first time bitcoin has been likened to a Ponzi scheme. Unlike traditional currencies, bitcoin is not used to purchase goods and services in many countries around the world. Most owners hold it as an investment, hoping prices will rise. The value of the digital currency increased 14-fold last year, before falling 44 percent this year. In addition, bitcoin is owned by those who have enormous influence on the price of the cryptocurrency. About 1,000 people currently own 40% of all bitcoins.
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