Former Federal Reserve Chairman Alan Greenspan said that bitcoin bears many similarities to the Continental dollars that the American Congress printed during the War for Independence to finance the war against Great Britain.
Greenspan, who chaired the Fed from 1987 to 2006, told CNBC that bitcoin is a classic example of fiat money because it creates value out of nothing other than consumer demand. In that sense, it is quite similar to the Continental dollars that George Washington and other American leaders used to buy armaments and other supplies during the war.
“A significant share of it was creating real goods and services,” Greenspan said, despite the fact that it was ultimately worthless since it was not backed by hard assets and the Congress continually devalued it by printing more currency.
Likewise, he said, bitcoin is “not a rational currency,” but that does not mean it is worthless.
“Bitcoin is really a fascinating example of how human beings create value, or estimate or judge value,” Greenspan said. “And it’s not always rational. You cannot tell me that you can create out of nothing something which has a medium of exchange value. It is not a rational currency in that sense, but that does not mean it will not trade, because so long as people believe they can sell it to somebody else or unload it on somebody else, that’s all you need to create a market.”
Perhaps betraying his ignorance of cryptocurrency’s underlying technology, Greenspan said that bitcoin’s future depended on how many units of currency its issuers introduced into the market. Of course, as even the most casual bitcoin users know, bitcoin’s currency supply is programmed into the software protocol and will enter the market at a predictable rate until it reaches a hard cap of 21 million coins.
But even if bitcoin did prove to be fundamentally worthless, Greenspan said it would not necessarily make the price crash to zero because humans do not always behave rationally.
“Humans buy all sorts of things that aren’t worth anything,” Greenspan concluded. “People gamble in casinos when the odds are against them. It has never stopped anybody.”