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Bitcoin Value = $0? Morgan Stanley Makes a Flawed Argument

Last Updated March 4, 2021 5:03 PM
Joseph Young
Last Updated March 4, 2021 5:03 PM

Earlier this week, Morgan Stanley, the third largest investment bank in the global finance market with a $95 billion market cap behind Goldman Sachs and JPMorgan Chase, stated in a research paper that the future value of bitcoin could drop to zero, given its lack of “intrinsic value” and base price.

A few days ago, Morgan Stanley analyst James Faucette told the bank’s clients and investors that it is difficult to justify the current value of bitcoin and that the price of bitcoin could someday reach $0. He wrote: 

  1. Very difficult question to answer, but some points to consider
  2. Can Bitcoin be valued like a currency? No. There is no interest rate associated with Bitcoin.
  3. Like digital gold? Maybe. Does not have any intrinsic use like gold has in electronics or jewelry. But investors appear to be ascribing some value to it.
  4. Is it a payment network? Yes but it is tough to scale and does not charge a transaction fee.
  5. Bitcoin average daily trading volume of $3bn (last 30 days) vs $5.4 trillion in the FX market.
  6. Est. <$300mn in daily purchase volume vs. $17bn for Visa.

The highly critical and inaccurate conclusions drafted by Faucette which were then sent to the clients of Morgan Stanley could backfire heavily on the bank since the bank’s analysts have encouraged Morgan Stanley clients to dismiss bitcoin and the cryptocurrency market based on false premises.

To begin with, the lack of interest rate of bitcoin is a feature, not a weakness, because the fixed supply of bitcoin is what provides the cryptocurrency its value. According to one of the most basic economic concepts, if the demand for an asset increases but its supply remains fixed or decreases, its value surges. Bitcoin, for the past eight years, has demonstrated an increase in value due to its fixed supply.

In October, CCN.com reported that even Mark Cuban, a bitcoin critic turned investor, stated that the concept of intrinsic value is flawed, primarily because the value of every currency and asset in the global market is subjective.

“It is interesting because there are a lot of assets which their value is just based on supply and demand. Most stocks, there is no intrinsic value because you have no true ownership rights and no voting rights. You just have the ability to buy and sell those stocks. Bitcoin is the same thing. Its value is based on supply demand. I have bought some through an ETN based on a Swedish exchange,” said Cuban.

Hence, to falsely condemn bitcoin given its lack of inflation rate and intrinsic value is inaccurate and deceptive, as the same argument can be applied to any currency or asset such as the US dollar and gold. Both the US dollar and gold do not have intrinsic values. In 1933, as Goldman Sachs CEO Lloyd Blankfein explained, the US government abruptly abandoned the gold standard and introduced the fiat currency system, or paper bills representing the value of gold.

Over time, the representation of gold’s value by fiat money was ruled out and eventually, the US government started to provide the US dollar value with quantitative easing, or by printing more supply of the US dollar. Currently, there is demand for the US dollar because businesses and individuals are using it to transact.

However, a fiat currency can also lose its value if the demand for it declines, as demonstrated by the Venezuelan bolivar as of date.

Goldman Sachs and JPMorgan, two of the largest investment banks in the world, have moved toward embracing and adopting bitcoin, along with other cryptocurrencies in the market. Banks that fail to adapt to the trend and acknowledge the significance of the emergence of a new asset class in bitcoin will inevitably become isolated.

Featured image from Shutterstock.