Aswath Damodaran predicts digital currencies will eventually be as important as the major paper currencies. He said cryptocurrencies have already replaced gold for younger investors.
CNBC's Mike Santoli spoke with Damodaran in an exclusive interview for CNBC PRO. Santoli asked the valuation expert about bitcoin and other cryptocurrencies.
"All currency is ... based on trust. If you don't trust paper currency, historically what you've done is you dumped paper currencies [and] you bought gold," he said. "Cryptocurrencies have taken the role of gold at least for younger investors because they don't trust paper currencies."
Digital currency prices are surging this year. The ethereum cryptocurrency is up more than 2,400 percent year to date through midday Tuesday, while bitcoin is up more than 140 percent this year, according to data from industry website CoinDesk.
Cryptocurrency miners use graphics cards and computers to "mine" new coins, which can then be sold or held for future appreciation.
Damodaran defended digital currencies against skeptics who criticized "coin mining" as a misallocation of resources such as computing power and electricity:
"If you think about it, the printing presses that run paper currencies. It's kind of a useless transaction. You're just printing paper. In a sense all currency creation, it's not creating real economic growth by itself. The only reason currencies exist is for us to transact … If a digital currency can do it more efficiently than paper currency can, I think there is going to be a digital currency sooner or later that competes with the major paper currencies. Whether it is one of the existing cryptocurrencies I don't know."
Damodaran is professor of finance at the New York University Stern School of Business. He is widely regarded as the foremost expert in valuing companies and is often referred to as Wall Street's "dean of valuation."