Heads or tails

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bitcoin
For 30 years he’s studied conflict. Now economist Chowdhury looks to decipher controversial Bitcoin
By Christopher Stolarski

This article was published in Marquette's Discover Magazine - 2015
This article was published in Marquette’s Discover Magazine – 2015

chowdhuryAbdur Chowdhury is a thoughtful, unassuming economist. Yet he boasts a prolific career that’s known worldwide, and his reputation within David A. Straz, Jr., Hall, home to Marquette’s College of Business Administration, is that of a research powerhouse.

But he’s no glory hound – just a smart, mild-mannered professor who, by the way, chases conflict.

Not his own, mind you. Chowdhury, a teenager in Bangladesh during the country’s Liberation War in 1971, admits that conflict left an indelible impression on him, shaping the lens through which he has examined the monetary policies of troubled nations for more than 30 years.

Throughout his career, Chowdhury’s research has pulled back the curtains on a variety of contentious issues and their impact on the economy: defense spending, terrorism, presidential popularity, infant mortality and divorce.

The macroeconomist recently turned his attention to Bitcoin, that prickly virtual currency that’s giving everyone from global investors to counterterrorist organizations fits.

“The Bitcoin phenomenon, and the technological innovation that made it possible, is interesting,” says Chowdhury, whose currency experience includes counseling the Chicago Federal Reserve as part of its academic advisory council. “But for investors, the more pertinent question is whether they should even buy it.”

According to research Chowdhury published in early-2014, Bitcoin’s strength has been predicated on three supposed qualities: it’s anonymous, difficult to hack and requires no financial middlemen, such as banks.

The problem: it’s not regulated. “No nation owns it, and no one can control it,” Chowdhury says, adding that over the past few years, Bitcoin and similar virtual currencies have been used to transfer illegal funds, particularly for drug trafficking.

Valuation is also problematic. When Bitcoin hit the market, its value against the U.S. dollar was nearly 1-to-1. At its peak, the ratio was 1-to-1,200. (It hovers around 1-to-380 today.)

For all its hitches, however, Bitcoin’s popularity and momentum are very real. In the first study to apply academic research to Bitcoin’s investment prospects, Chowdhury uses an econometric test called mean-variance spanning. In that paper, Is Bitcoin the ‘Paris Hilton’ of the Currency World?, he writes: “The momentum behind Bitcoin is coming from around the world, as amateur investors, venture capitalists and technology enthusiasts pump money into businesses that are trying to figure out how to use Bitcoin to buy and sell goods.”

His analysis further shows that Bitcoin’s low transaction costs relative to credit and debit cards are attractive to a growing number of merchants.

Nevertheless, Chowdhury is cautious. Calling Bitcoin a “tail-risk option” for investors, he equates investing in the currency to buying a lottery ticket – it only pays off if a highly unlikely event occurs.

“Taking a tiny risk won’t damage a portfolio if Bitcoin goes bust, but will have a sizable impact if it takes off,” Chowdhury says.

Is Bitcoin irreparable? Chowdhury doesn’t think so, suggesting that simply regulating the currency would solve a lot of problems.

“We need to set up a new regulatory body or assign an existing body, such as the Federal Reserve, to regulate Bitcoin,” he says, pointing out that the majority of Bitcoin transactions have occurred in the United States. “The disadvantage there, however, is the way Bitcoin was created, there was no regulatory agency in mind.”

Despite Chowdhury’s cautious optimism, Bitcoin remains fraught with volatility, misuse, regulatory issues and all the trappings of a passing fad. It seems like a currency on life support.

“Will Bitcoin die?” Chowdhury wonders aloud. “It’s possible. But given the developments we see in emerging technologies, we will see some sort of digital currencies take hold. We need to be ready for that.”

Chowdhury will surely keep an eye on Bitcoin and its inevitable mimickers and successors. After all, there’s conflict – tension – to study.

But he won’t stop there. Currently, Chowdhury is studying the effect of remittance on terrorism.

He’s even kicking around studying conflict in his beloved soccer, hoping to determine what effect a red card – the sport’s most serious penalty – has on the game itself.

A far cry from monetary policy, perhaps, but for the soft-spoken professor, there’s always a new clash worth uncovering.

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