Bitcoin topped $6,100 this weekend, up more than six times in price this year at a record high. The digital currency traded late Tuesday afternoon about 6 percent lower on the day at around $5,548, according to CoinDesk.
"I think we need to stop talking about how much it's gone up in the last year. A good currency is not something you boast about how much money you made in it," Damodaran said. "The pricing is getting out of hand relative to its use as a currency."
Most vendors who say they accept bitcoin cannot give buyers an actual price in bitcoin until the day of the transaction, since bitcoin is so volatile, Damodaran said. In contrast, he pointed out that government-backed, or "fiat" currencies, are typically widely usable in their home country regardless of their exchange rate with another currency like the U.S. dollar.
A major point of debate among bitcoin developers is whether to improve the digital currency's ability to be a store of value or a way to quickly transact around the world. Other developers are working on new digital currencies to try to address those issues.
Greater interest from institutional investors has contributed to bitcoin's gains. But many major investors and banking executives remain skeptical. On Monday, Saudi billionaire investor Prince Alwaleed bin Talal said on CNBC's "Squawk Box" that bitcoin will "implode" one day and is "Enron in the making."
In giving bitcoin a chance, Damodaran said he disagrees with JPMorgan Chase CEO Jamie Dimon, who called the digital currency a "fraud" in September.
Separately, in a blog post on Tuesday, Damodaran laid out why he sees bitcoin as a currency without investable value.
"I will argue that bitcoin is not an asset, but a currency, and as such, you cannot value it or invest in it. You can only price it and trade it," he wrote in the post. "Since you cannot value Bitcoin, you don't have a critical ingredient that you need to be an investor. You can trade Bitcoin and become wealthy doing so, but it is because you are a good trader."
The professor said bitcoin is not an asset since it does not and is not expected to generate cash flows in the future. Damodaran also said the digital currency is not a commodity because it is not derived from a raw material to meet a fundamental need.
"The choice then becomes whether it is a currency or a collectible, with its supporters tilting towards the former and its detractors the latter," he said.
Damodaran said he sees three possible paths for bitcoin as a currency. Listed from best to worst, they are:
- Global digital currency
- Gold for millennials
- The 21st century tulip bulb.
In August, he wrote a blog post discussing how bitcoin may just be a "dangerous pricing game."