100 or even 50 years ago, what did Indians do? They put their money in gold, or real estate, says Aswath Damodaran, Professor of Finance at Stern School of Business at New York University.
In those days real estate was not a tradeable asset, he said. And now it behaves like stocks. So, I would argue the reason you have seen the rise of cryptocurrencies and non-fungible tokens (NFTs) is that “you are looking to put your money somewhere. That is why I have described Bitcoin as millennial gold,” said Damodaran.
With high valuations of initial public offers (IPO) and continued bull run in equities and other asset classes, if there is one person who can answer valuation questions, it is Damodaran. On many occasions, he has been dubbed as ‘Wall Street’s dean of valuation’. And on many occasions, he has described Bitcoin as a millennial gold.
“If you are 35 years old, and you have lost faith, you are no longer going to buy gold. That was for your parents and your grandparents. You are going to buy bitcoin,” he told CNBC-TV18 in an interview.
Damodaran has been a long-time sceptic of cryptocurrencies. Back in 2017, he said Bitcoin has become a haven for those “who do not trust central banks, governments, and fiat currencies.” In short, he explained, it plays the role that gold has played historically for those who fear centralised authority.
“It is interesting that the language of Bitcoin is filled with mining terminology since it suggests that intentionally or otherwise, the creators of Bitcoin shared this vision,” he wrote in his blog back in 2017.
He explained three ways Bitcoin could end up. He had compared Bitcoin’s “catastrophe” to Tulip Bulbs (a speculative asset that saw its prices soar in the 1600s in Holland before collapsing). Bitcoin is like a shooting star, attracting money as it rises from people who see it as a source of profit, he had said. But then it flares out, like a shooting star and the traders move on to “something new and different”.
“There is a range of potential outcomes here right from catastrophe. This is a market in spite of its bullishness where 10-15 percent of the people think catastrophe is around the horizon. If you think catastrophe is going to be around the horizon, no financial asset class is going to meet your criteria. They are all going to look overvalued,” he said.
But if Bitcoin ends up cumulating the same power as gold, it will behave like gold does—rising during crises and dropping in more sanguine time periods, he said.
“So, in a strange way, everything is connected to everything else. Nothing in markets can be explained in isolation. This is a collective market that we have got to explain where everything’s connected to everything else,” he told CNBC-TV18.
He also had a best-case scenario for Bitcoin. The one in which it gains wide acceptance for transactions across the world. But for this to happen, he said, “it has to become more stable and central banks around the world have to accept its use.”
