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Why the ‘Big Short’ Guys Think Bitcoin Is a Bubble


Michael Burry (as played by Christian Bale in The Big Short) believes bitcoin will crash. To date though, it just keeps going up.
Photo-Illustration: Konstantin Sergeyev/Intelligencer. Photos: Paramount Pictures; Getty Images

During the past year of COVID-induced market mania, cryptocurrencies have gone up so much — bitcoin is up about fivefold, while many other crypto projects are up far, far more — that even reluctant Wall Street institutions have begun to tiptoe into the arena. A blazing rally that began this month has helped bitcoin shoot up nearly 50 percent in two weeks. It was driven by various pieces of news — for instance, George Soros’s family office disclosed that it holds some — but the biggest force was the increasingly certain expectation that the federal government will approve the first bitcoin-based exchange-traded fund, which will allow retail investors to buy in more easily, including for 401(k) accounts. (The ETF could begin trading as early as Monday.) But doubters remain — and their ranks just happen to include many of the same prominent investors who saw the financial crisis of 2008 coming.

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.” 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. 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.

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, 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.’”

Since then, though, the bitcoin bulls have only grown more optimistic. Despite a steep sell-off in May and the growing certainty that the Securities and Exchange Commission, the U.S. Treasury, and even the Department of Justice are getting ready to clamp down on the cryptocurrency world, retail and institutional investors alike have kept buying. When China announced on September 24 that it would ban all cryptocurrency activities, bitcoin fell less than 6 percent.The total value of all cryptocurrencies is now estimated at $2.5 trillion, and a single bitcoin trades for around $60,000 (up from a low of around $4,000 during the broader market crash in March of last year).

Cryptocurrency investors have also been largely unfazed by the fact that, in the case of bitcoin, the term “currency” is something of a misnomer. “Nothing is priced in bitcoin,” Roubini noted in a recent Goldman Sachs research report. While Starbucks might offer customers the option of buying their coffee with bitcoin, no one actually chooses to do so.

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.)

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.

It’s undeniable that bitcoin pessimism has been costly (at very least in opportunity terms) over the past decade, making it easy to dismiss the naysayers for spreading “FUD” — or “fear, uncertainty, and doubt.” 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.

Bitcoin, of course, was born of the Great Financial Crisis and the beginnings of an erosion of trust in Wall Street and monetary authorities. The first block of the now 12-year-old blockchain encodes mention of a news story about bank bailouts. The once-niche and -derisive term “fiat currency” — money issued by central bank fiat rather than, say, mined out of the ground as gold was — has, rather remarkably, gone mainstream as bitcoin and the worldview that inspired it have taken root in the public imagination.

“What’s the value, what’s the purpose of bitcoin? To take away the Fed?” asks one outspoken short seller, who wanted to remain anonymous, because “I don’t need the bitcoin guys after me.”

“I kind of like to have the Fed run by Ph.D.’s who went to work for the government being the people deciding fiscal policy more than a bunch of kids,” he says, referring to the generation of extremely online young people who have figured prominently among the early adopters of bitcoin. “And the U.S. dollar is backed by the full faith of the United States. Does bitcoin have an army?”

“It’s just a big scheme,” he says, “and so intellectually wrong.”

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.

Bitcoin, its critics like to say, is nothing but electricity. “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.”

As Roubini put it in the Goldman report, “Bitcoin and other cryptocurrencies have no income or utility, so there’s just no way to arrive at a fundamental value.” He also scoffs at those who call it digital gold. “Bitcoin could disappear one day, but gold won’t.”

Bitcoin’s advocates tout it as an inflation hedge — but the jury remains out on that question. In practice, it has been heavily correlated to the stock market, if a lot more volatile (going up more on good days and down more on bad ones). While bitcoin has lately showed some ability to move independently of the S&P 500, posting gains even when  the market declined, critics still see it behaving more like a meme stock than an established asset class.

“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…

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