Robert C. Merton the Nobel Laureate Economist got it all Wrong About Bitcoin

By Prashant Jha

Robert C. Merton is an American economist who was awarded the prestigious Nobel Memorial Prize in Economic Sciences in 1997. Merton has continuously denied any credit to the newly emerging cryptocurrency market as he firmly believes that any form of currency which is not authenticated via a government is not the ‘Real money.’

In China, while attending the fintech forum in Hangzhou, Mr. Merton again stressed on his believe saying that any form of currency which is not protected by law or backed by a central agency like a bank or government cannot be seen as money at all. An excerpt from the interview.

“Don’t believe in bitcoin, unless it is supported and officially recognized by governments. But I think this will never happen,”

The current bearish trend of the market has resulted in significant cryptocurrencies losing a chunk of their market value. Mr. Merton when asked about the significant loss in market capitalization, stated that he doesn’t think cryptocurrencies would ever be able to become mainstream. He says,

“The only possible legal tender currency is one controlled by the government, Fiat but legal tender currencies have intrinsic value because by law they can be used to settle all tax and other payments to the government and they MUST be accepted as payment for obligations denominated in that currency.”

Mr. Merton’s belief is highly dependent on the centralized idea and does not seem to be aware of the technicalities behind the cryptocurrencies. He later supported his argument by taking the example of gold. He says, what if government decide to ban Bitcoin? Gold which is a legal entity today in the United States was banned from 1933 to 1975. Thus, people from that generation could never use Gold as an entity.

Merton also says that even the most diehard bitcoiners are not able to justify its ‘currency for the future’ tag as they are keeping it only for the store value.

“When asked what value it has, they point to gold, no one really has a good theory of the price of gold. It’s a puzzle. And so I believe it’s a sign of how desperate the bitcoiners have become that the only argument for bitcoin as a serious store of value is by analogy to something whose value we don’t understand its value!”

 

How the Nobel Laureate Economist got it all wrong?

Mr. Merton is either not aware of the legacy behind the Bitcoin or solely based his presumptions on the noise made outside the crypto domain. The classic case of centralized authentication was thoroughly looked at by the pioneer Satoshi nakamoto and that was the whole point of creating a virtual currency.

The main aim behind the Bitcoin or any cryptocurrency, in general, is an independent peer-to-peer network which would be decentralized. The first white paper produced by Nakamoto notes,  “Governments are good at cutting off the heads of centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.”

Another viewpoint of Mr. Merton which seems to be horribly out of place is, you cannot use Bitcoin to complete your daily task as in case of mainstream currency and it can only be used as a store value. However, there are multiple institutions, big and small accepting payments in bitcoin and many other cryptocurrencies. Even the earliest transactions when Bitcoin was just another news, People bought Pizza from papa johns in exchange of bitcoin.

Final thoughts

The cryptocurrency and the technology which they have been built upon are relatively new. However, there are many governments and institutions making provisions to allow a broader use of Bitcoin and cryptocurrencies. Recently Ohio allowed its citizens to pay their taxes in Bitcoin. So, completely negating the importance or value of a new technology won’t be right. Only time will tell whether Mr. Merton is right on his views or millions of people investing and using bitcoin.