Is Bitcoin a Bubble?

New York Magazine has offered up a rogue’s gallery of pessimists this morning. The subject: Bitcoin. The offer a contrarian take. They see it as a bubble or a Ponzi scheme or worse. 

Despite all the contrary opinion, or perhaps because of it, Bitcoin seems to be holding its own in the market. It is currently selling for around $61,000. 

Then again, if the past is any indication those who counter the conventional wisdom are often early. The proverbial voice crying out in the wilderness is most often crying out alone. Nimble traders will doubtless make some good money on Bitcoin, until the bottom drops out and everyone else is left holding the bag. 

Anyway, many of the biggest names in finance are down on Bitcoin. Allow us to follow NY magazine in naming names.

First, John Paulson:

Hedge-fund mogul John Paulson, who was behind the “the greatest trade ever” — in 2007, he personally made $4 billion on his short of subprime mortgages — thinks cryptocurrencies are a bubble that will prove to be “worthless.” 

And then, Michael Burry:

Michael Burry, the quirky hedge-fund manager made famous in The Big Short movie (played by Christian Bale), complains that no one is paying attention to crypto’s leverage. For months, he has been suggesting that bitcoin is on the precipice of collapse. 

The leverage could kill it, Michael Burry argued in a series of tweets that have since been deleted. “If you don’t know how much leverage is in crypto, you don’t know anything about crypto, no matter how much else you think you know,” he tweeted in June, saying its collapse will trigger “the mother of all crashes.” He likens it to the dot-com bubble of 1999 and the housing one of 2007.

Notably quirky professor Nassim Nicholas Taleb believes that Bitcoin is a Ponzi scheme:

And NYU professor Nassim Taleb, whose now-canonical book The Black Swan warned about the dangers of unpredictable events just ahead of the subprime crash, argues that bitcoin is functionally a Ponzi scheme.

And then, Nouriel Roubini and Paul Singer:

Other famous critics include economist Nouriel Roubini, one of the few in his profession to predict the financial crisis, and hedge-fund billionaire and hard-money acolyte Paul Singer, whose speech at a prestigious investment conference in 2006 described the eventual “wipeout” of mortgage securities.

Singer thinks that cryptocurrencies are basically a fraud:

Singer, the founder of the $48 billion investment firm Elliott Management, thinks cryptocurrencies are a fraud, but is apparently tired of complaining about them. “Pulling out your hair is an option, though only if you have hair to spare,” the balding 77-year-old Singer wrote in his first-quarter letter to investors this year. “We continue to press on for the day when we can say, ‘We told you so.’”

He offers a charming rendition of what Bitcoin is:

“To tell me that something that’s constructed as a computer program, where you engage in some process of sitting there in front of your computer and, after a period of time and the expenditure of a bunch of electricity, a message appears on your screen that you have created something, that’s ridiculous,” Singer said on an investment podcast earlier this year. “It’s nothing.”

And then, one Mike Green:

But Mike Green, a prominent investment strategist who was also short subprime before the financial crisis, when he worked at hedge fund Canyon Capital, nonetheless shares the perspective of his fellow ’08 Cassandras. “These guys tend to be good b.s. sniffers,” he says. “My view is that bitcoin will ultimately end up going to zero. And I think we are in the final stages right now.”

Green says he began looking into bitcoin because clients were clamoring to invest in it. “As I dug into the actual underpinnings, it just became very clear that what was actually going on was cultlike behavior with no real understanding of the asset or the economic implications for the model that it was proposing,” he says.

Of course, some people are pushing back, against Burry, for example:

But one of the crypto world’s most powerful and influential investors has a theory on why 2008 Cassandras — Burry in particular — only see gloom and doom ahead for bitcoin. Zhu Su, founder of Singapore-based Three Arrows Capital, tweeted earlier this month: “The desire to be consistent with oneself is the source of poor decision-making. The winners of the Big Short came to define themselves as bears and proceeded to underperform everyone for 13 years. There’s never a need to define yourself. The market does not care who you are.” He tagged Burry in the thread. A few days later, he opined: “22yo old Burry would be max long Bitcoin imho. Age changes a man, and if he’s not careful, cringes him.” (In other words, these are just old guys who can’t help fighting the glorious last war.)

And yet, these people are not shorting Bitcoin:

It was, in part, a response to Burry musing on Twitter about actually going short on bitcoin — that is, making a real-life financial bet that it will go down, rather than just talking about it. The fact is that most bears — including the ones quoted here — aren’t actually shorting bitcoin, even as they predict its demise. In a Bloomberg interview, Paulson noted that unlike his lucrative “big short” trade, cryptocurrencies are too volatile and risky to make them a good short.

One suspects, because why not speculate, mentally if not financially, that beneath it all lies the question of the reserve status of the dollar. If  the American experiment is going to come to ruin, the chances are good that it will happen when the almighty dollar loses its reserve status.

While everyone is running around wailing and whining about democracy-- even though not a one of them was defending democracy in 2017 when they were trying to overrule the will of the people-- the truth is that the real battleground lies with the currency. To be fair, some of us, myself included, do not know enough to have an educated opinion about how this might come about.

Anyway, so says hedge funder Ken Griffin:

In recent days, hedge-fund billionaire Ken Griffin, CEO of Citadel, joined the chorus of critics, calling cryptocurrency a “jihadist call” against the dollar. “What a crazy concept this is that we as a country embrace so many bright, young, talented people to come up with a replacement for our reserve currency,” he said at the Economic Club of Chicago.

And Mark Spitznagel:

“Crypto people think it’s an antidote to central-bank bubbles, but it has actually become a symptom,” says Mark Spitznagel, founder of Universa Investments, a hedge fund that made headlines by producing eye-popping gains during the COVID crash last year. Spitznagel, also a fervent critic of the Fed’s monetary policies post-crash, says cryptocurrencies themselves are fiat currencies, because they are “created out of thin air.”

“People buy it thinking that the next guy will come along and subjectively value it higher,” he says. “That looks like a Ponzi scheme.”

And yet, the article concludes, none of these great market players is shorting cryptocurrency-- at least not now:

Beyond all the specific arguments and counterarguments, the fact remains that those from the “big short” set making the case against bitcoin are generally not making the same kind of real-life short bets that made them so much money in 2008. Whether that is the real tell here or just an oddity of this particular bubble remains to be seen.

“You can’t be short it in scale,” agrees the short seller. Like some of the others who fundamentally dislike it, he even has a small position in bitcoin. “If it goes up, I’ll make a little bit of money. If it goes to zero, I’ll be so happy, I will gladly lose the money.”