A future without digital assets is hardly imaginable but Bitcoin (BTC) is far from being perfect by design, according to a finance professor at the London School of Economics (LSE).
LSE financial professor Igor Makarov believes that digital money and digassets will undoubtedly be part of the future of finance and their efficiency will depend much on their design.
In an interview with Cointelegraph, Makarov said that there has not been much evidence that Bitcoin can become a store of value as it has been extremely volatile over the past 10 years.
Since Bitcoin’s volatility remains high despite its massive rise in value and increased liquidity, there is no guarantee that its price will become more stable one day, he said.
“Without any government backing Bitcoin, the cryptocurrency’s value depends on the willingness of the general public to hold it, which, in turn depends on changing investor sentiment and its standing against other cryptocurrencies,” Makarov stated.
The professor also assumed that allowing United States public institutions to invest in BTC would almost certainly result in a “temporary price appreciation.” However, this appreciation will mean that early adopters benefit “at the expense of the general public” and other stores of value, especially fiat currencies, Makarov said, adding:
“Since Bitcoin is an unproductive asset — given its current design — its returns come entirely from price appreciation and in the long run we should not expect them to exceed the growth rate of aggregate output.”
Makarov is known for co-authoring a study claiming that 10,000 Bitcoin investors, or 0.01% of all BTC holders, own 5 million BTC, which accounts for 25% of all mined 19.1 million Bitcoin currently in circulation. The analysts argued that top BTC holders control a bigger share of crypto than the richest Americans control dollars.
According to Makarov, the study is based on Bitcoin network data as well as public data from blogs, chat forums and others. “We also use Bitfury Crystal Blockchain information about identity of large public entities such as exchanges, online wallets,” he noted. Makarov also said that very few individuals in the U.S. hold large amounts in cash as the majority of wealth is held in real estate and securities, adding:
“Cash transactions might be difficult to trace, but, unlike Bitcoin transactions, the cost of cash transactions increases with the transacted amount. Also, storing large amounts of cash is costly.”
Despite being skeptical about Bitcoin’s design, Makarov is still positive about the future of digital assets. He has been involved in arbitrage and trading in crypto markets since 2016 and became excited about the financial applications of crypto and blockchain, working on many related projects, including the investigation of the Terra ecosystem crash.
“I find many developments in crypto space fascinating. They start with Bitcoin and its ingenious design and include many others, including smart contracts, oracles and others,” Makarov said. But to benefit from the industry, it is important to properly address issues like governance, regulation and others in a timely manne, the expert emphasized, stating:
“There is little doubt that in the future we will have digital money and digital assets. Their efficiency will depend on their design. Therefore, it is important to get it right.”
Makarov said he doesn't hold any cryptocurrencies at the moment.