Cryptocurrencies will ‘go to zero’

Hedge fund manager John Paulson made $20 billion predicting the downfall of the US housing

Hedge fund manager John Paulson made $20 billion predicting the downfall of the US housing market in 2008. Now, he’s predicting cryptocurrencies will “go to zero.”

“Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless,” Paulson told Bloomberg in an interview. “Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies.” 

Despite Paulson’s bearish stance on crypto, he said the short-term volatility of the digital asset makes it too risky for him to short, or place bets against.

Ultimately the price fluctuation has to do more with the relative supply of the coins, Paulson added. “There’s no intrinsic value to any of the cryptocurrencies except that there’s a limited amount.”

For now, Paulson says he’s betting on another alternative asset — gold — as a safe haven.

Paulson’s hard line against crypto stands in stark contrast to many of his hedge fund colleagues who have embraced Bitcoin and other digital coins in recent months.

For some top trading shops, the volatility in the price of crypto is seen as an opportunity to make a fortune from arbitrage.

Steve Cohen’s Point72 Asset Management is working on launching crypto-focused trading funds. And Israel Englander’s Millennium Management has begun trading crypto derivatives. Hedge fund titans like Paul Tudor Jones and Alan Howard have also taken stakes in cryptocurrencies.

Of course the likes of Englander and Cohen may be looking to make a quick buck — not exactly investing in the long-term future of digital coins.

John Paulson said yesterday, “I wouldn’t recommend anyone invest in cryptocurrencies.”
AP

Established institutions, meanwhile, including Goldman Sachs and Citigroup have looked to expand their footprint in the space. Goldman allows certain clients to trade crypto through a derivative product and Citigroup is looking to begin trading cryptocurrency through a fund.

Morgan Stanley was the first bank to allow clients access to trade crypto and now it’s even investing its own money in the speculative coin. Just days ago, the bank bought almost a quarter of a billion dollars worth of Grayscale Bitcoin Trust.

Even JPMorgan — whose chief executive officer Jamie Dimon has referred to bitcoin as a “fraud” — is offering clients access to six cryptocurrency products.

But others fall squarely in Paulson’s camp — and are avoiding digital coins like the plague.

One of the most famous investors, Warren Buffett, has notably referred to cryptocurrency as “probably rat poison.” Berkshire Hathaway chairman and CEO Buffett doesn’t own crypto and says, he “never will.”

Berkshire’s vice chairman Charlie Munger has also weighed in, saying, “I don’t welcome a currency that’s so useful to kidnappers and extortionists.”

Other massive brokerage firms are cautioning clients not to rely on the risky asset. Brokerage firm Charles Schwab warns retail investors that crypto is a “speculative asset” and that “there are no methods for assessing it’s value that we endorse or find persuasive beyond the trading value.”

While Schwab allows customers indirect exposure to Bitcoin through various “coin trusts” they suggest clients “consider the high volatility and risks involved.”

Bitcoin value
Paulson believes cryptocurrencies like Bitcoin will eventually be “worthless.”
Getty Images

Crypto remains a largely unregulated industry but is under tremendous scrutiny by Congress, the Federal Reserve, and the Securities and Exchange Commission.

Federal Reserve Chairman Jerome Powell has suggested the central bank could offer its own digital currency — possibly as a way of undercutting cryptocurrencies.

The recent infrastructure bill sought to crack down on cryptocurrency by mandating anyone involved in crypto transactions disclose it to the IRS. It’s unclear if this rule will be adopted.

SEC Chairman Gary Gensler has signaled he will make crypto regulation a priority. Earlier this month in a speech at the Aspen Security Forum, Gensler said, crypto is “rife with fraud” and “If we don’t address the issues, I worry a lot of people will get hurt.” Still, Gensler has yet to unveil specific proposals or even a timeline for when he will introduce possible rules

In the last year alone, the notoriously volatile Bitcoin has jumped from around $10,000 in October to more than $60,000 at one point in April. Last month the price of Bitcoin dropped below $30,000 but has been steadily climbing to $47,000 since that point.

Other cryptocurrencies have seen even more dramatic spikes. Dogecoin, which trades at around three cents, has surged as much as 400 percent in a single week.

Crypto prices can easily be influenced by tweets from the likes of Tesla CEO Elon Musk — who at various points has accepted bitcoin as payment for Teslas.

Billionaire investor Mark Cuban also has a history of moving the price of cryptocurrencies with his tweets — Dogecoin surged after he announced he would accept it as payment for various products he sells as part of his Dallas Mavericks franchise.

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