1 Investing Guru's Take on the Future of Bitcoin

Hailed by The New York Times as a "guru to Wall Street's gurus," value investing expert Bruce Greenwald takes some time to offer his insight and advice to The Motley Fool. A professor at Columbia University's Graduate School of Business, Greenwald has also written multiple books, including Value Investing: From Graham to Buffett and Beyond.

In the following video, Greenwald examines the definition of money -- as a medium of exchange, a measure of value, and a unit of account -- and then looks at how Bitcoin fits, or doesn't fit, each of those meanings.

Full transcript below.

Matt Koppenheffer: Let me finish up with kind of a fun one here. We heard Cameron and Tyler Winklevoss, the Winklevoss Twins, talking about Bitcoin. They're backing and have gotten involved in Bitcoin. Do you think that this is something that has legs, maybe can steal some market share from traditional banking?

Bruce Greenwald: I don't think it's traditional banking. Don't forget that what traditional banking does is, it enables you to write checks or do wire transfers. There is a transaction infrastructure.

If you go back to the traditional definition of money, it's as a medium of exchange, it's as a measure of value, and it's as a store of value. It's a unit of account, it's a medium of exchange, and it's a store of value.

It turns out, as a unit of account, nobody's going to price anything in bitcoins. It's always going to be the currency, because that's just the dominant way to do it, and there are big network effects from that. It's very hard to get people to change.

In fact, they measure the value of bitcoins in -- you guessed it -- dollars, or whatever currency it is, so you're not going to get it as a unit of account.

It's not a medium of exchange. You don't have to keep a bitcoin balance to pay your bills, so what you're left with is a store of value.

We've got lots of stores of value. We've got gold, we've got all sorts of other kinds of real assets that you can have. We have inflation, we have TIPS, we have all sorts of real stores of value that are probably more liquid than the bitcoins, and are less easy to manipulate, and are less subject to insider trading.

Look, in the old days every bank used to issue its own currency.

Koppenheffer: Oh, right. Yeah.

Greenwald: It was very unstable what the relationships between the currencies were. Having lots of different bitcoins has a lot of the flavor of that, but it's got no natural advantages over gold or any other real measure of value.

Koppenheffer: It's fun to talk about in the meantime.

Greenwald: I think there's a rule. If the Winklevoss Twins are talking about it, it's almost certainly opportunistic, and they almost certainly are not the people who know how to make money out of that idea, as Facebook showed.

Koppenheffer: That's very fair.

Greenwald: You don't want to invest with them.

Koppenheffer: All right, Professor Greenwald we really appreciate you talking to us. Thank you so much.

Greenwald: It's always a pleasure to talk to you guys!

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  • Report this Comment On October 13, 2013, at 9:27 AM, jzcjca00 wrote:

    Why do people insist on expressing opinions on things they know nothing about?

    Greenwald's first criticism of Bitcoin is that it does not have a transaction infrastructure. Total hogwash! The entire system is built around a transaction infrastructure that is faster, cheaper, and more flexible than regular banks. Half the world's population currently doesn't have bank accounts, and with Bitcoin, they don't need them. Bitcoin has fast, cheap, global banking for all mankind built into the currency itself!

    Then he goes on to say that Bitcoin has "no natural advantages over gold or any other real measure of value." Seriously?

    Money should be scarce, durable, portable, divisible, easy to recognize, easy to store, fungibile, hard to counterfeit, and in widespread use.

    Scarce. Bitcoin blows fiat currencies away because it cannot be inflated by governments to cover reckless spending. It blows gold away because the mining rate is carefully controlled by its algorithm.

    Durable. The blockchain is stored on millions of computers on the Internet. As long the Internet and at least one of these computers survives, and your password remains secure, your bitcoins are safe.

    Portable. Much more portable than gold or fiat. You can send any amount of bitcoins (that you own), anywhere in the world, any time of day or night, at the speed of the Internet.

    Divisible. To eight decimal places. Much more divisible than fiat or gold.

    Easy to recognize, easy to store, fungibile, hard to counterfeit. These things are all built-in.

    Widespread use. Not yet. Gold and fiat currencies have been around for thousands of years, while Bitcoin was invented only 4 years ago. Given that Bitcoin is vastly superior to fiat and gold in so many ways, I say it's only a matter of time until Bitcoin replaces them.

    I think initially Bitcoin will grow in the area of international money transfers, particularly for poor people sending money home to their poor families in other countries, an area where banks are especially slow and greedy. Then perhaps in areas of the world with particularly unstable currencies. Then perhaps in industries with low profit margins, where credit card fees are killing them.

    Today, investors have a unique opportunity to get in early on what is perhaps the biggest innovation of our age. Everyone should have at least a few bitcoins in their portfolio. The downside risk is a few hundred dollars. The upside potential is an orders of magnitude increase in value.

  • Report this Comment On October 14, 2013, at 3:13 AM, lakawak wrote:

    jz...your whole comment is embarrassingly ignorant.

  • Report this Comment On October 14, 2013, at 4:58 AM, seweso wrote:

    Comparing bitcoin to dollars is like comparing the internet with the telephone.

    If you only take the features of dollars to evaluate bitcoin then of course it doesn't seem very appealing.

    Its always easy to have an opinion when you actually do not understand what you are talking about.

  • Report this Comment On October 14, 2013, at 6:43 AM, snerglebutt wrote:

    It would be ok if this guy was chuckling and snickering about something he knew anything about but he clearly is totally in the dark about BTC.

    It would be refreshing if you made an effort to learn about a subject first, or if you actually do know something about it, stop your guest and gently correct them when they make embarrassing mistakes about things. I guess it's more comfortable in the moment but it's really a disservice to your audience.

  • Report this Comment On October 14, 2013, at 12:49 PM, bentonkb wrote:

    "I think initially Bitcoin will grow in the area of international money transfers, particularly for poor people sending money home to their poor families in other countries, an area where banks are especially slow and greedy. Then perhaps in areas of the world with particularly unstable currencies. Then perhaps in industries with low profit margins, where credit card fees are killing them." - jzcjca00

    This is going to be something to watch for when Bitcoin hits rural Africa things are going to change very fast.

    When I first heard about Bitcoin I was working in an office next to a guy from Guinea. We added up a total of 25% in fees to get money from cash in the US to Guinean Franc in rural Guinea. I asked him how many people in his home village have a bank account - answer: zero. I asked him how many people have a smartphone - answer: one in every family. The condtions are right for Bitcoin in a country like Guinea.

    Any country that has significant income from ex-pats sending money home is going to find Bitcoin competing with the local fiat money. If the local money is inflated and unstable to boot then it won't fare well against the Bitcoin.

    People often dismiss Bitcoin as a poor substitute for the Euro or Dollar, but that misses the point. Bitcoin will be a success when it replaces PayPal and some of the weaker fiat currency.

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