Breaking down the arguments made by an economics expert.
Renowned American economist Eugene Fama expects Bitcoin to collapse to zero within a decade.
The 2013 Nobel laureate and co-creator of the Fama–French three-factor model (used in analysing stock returns) shared his doubts about Bitcoin’s long-term viability in a recent episode of the Capitalisnt podcast (the interview with Fama begins around the nine-minute mark, and his Bitcoin/crypto insights commence around 14 minutes in).
Let’s break down why he holds this view, and I’ll share my perspectives.
Bitcoin “goes against monetary policy”
He claims cryptocurrencies violate the rules of a medium of exchange, especially due to their wild volatility, which I partially agree with. However, I argue that altcoins with ultra-low fees and fast settlement times (e.g., XRP, SOL, LTC and XLM) provide better alternatives than conventional currency conversion services.
Crypto assets are much more than just a payment method: they are purported inflation hedges akin to gold, utility tokens, and highly portable censorship-resistant assets, to name a few.
Expanding on the latter, Capitalisn’t co-host Luigi Zingales periodically challenged Fama during this interview, pointing out the value of Bitcoin among ultra-high-net-worth investors seeking to move assets out of a country, whether due to international sanctions (e.g., Russia), capital controls (China), or the abovementioned hyperinflation.
Moreover, Bitcoin has become less volatile over time, in percentage terms. As it matures, many expect this trend to continue.
Fama mentioned his preference for gold, justifying its price due to its multiple use cases, even though the co-hosts (Zingales and Bethany McLean) disagreed with him on the idea that the precious metal’s value of gold is solely attributed to its utility.
“Is that then the core of the argument: Does it have to have a use to be valuable?”
When you look at expensive art, high-end real estate, and certain collectibles, many would argue an asset’s value isn’t predominantly determined by utility.
Rarity, quality, and other factors come into play here.
Economists and governments can thank the GFC for creating Bitcoin, allowing it to flourish into a ~$2 trillion behemoth, making it the seventh-largest global asset by market cap.
It’s a bit rich for economists to scoff at the idea of Bitcoin when (hyper)inflation of fiat currencies has shafted billions of people, contributing to poverty in countries such as Argentina, Turkey, Venezuela and Zimbabwe.
The USD’s purchasing power over the decades also leaves much to be desired.
51% attack
One of Fama’s arguments against Bitcoin is that its blockchain can be compromised by a small group of entities carrying out a coordinated 51% attack on its network, giving them majority control of block creation and carrying out a double-spend attack.
With an estimated cost of five to 20 billion dollars (as of February 2024) – predominantly on hardware costs – and tens of millions of dollars of electricity required per hour, not to mention having a reliable and consistent supply of this energy during this period, it would be extremely difficult to pull this off, let alone sustain it.
Although it is concerning that only a handful of players dominate Bitcoin mining hashrate (computing power used to secure a proof-of-work network), this has been the case for years. Fama is far from the first person to recognise this issue, but I’m glad he referred to this phenomenon. I’ll give credit where it’s due.
Despite this hashrate dominance and a brief period in 2014 when a miner, GHash.io, had majority control of its overall hashrate, Bitcoin has never been hacked.
“There are always incentives for people to corrupt the blockchain. If more and more people enter and their sole purpose is to corrupt it. If they can bring together enough computing power, they can corrupt it.”
Eugene Fama (see 16:45 into the episode)
It’s a shame he didn’t bother spending two minutes listening to Bitcoin and open-blockchain expert Andreas Antonopoulos on the practicality of a 51% attack on Bitcoin’s network.
The elephant in the room
For everyone who constantly peddles the “Bitcoin will go to zero” argument conveniently ignores an important fact:
This is currently (almost) impossible.
Why? An estimated 3.9 million BTC have been lost due to missing recovery seeds, damaged and discarded hardware, and desktop and mobile non-custodial wallets.
A portion of this will most likely be recovered via specialist recovery services that aim to re-access these BTC wallets. Nonetheless, at least three million won’t be retrieved in Bitcoin’s current form.
Thus, these cannot be sold off, and BTC’s price can’t fall to zero…but there is an exception.
The only way these can eventually be recaptured is via quantum computing powerful enough to decrypt the Elliptic Curve Digital Signature Algorithm (ECDSA) used to secure BTC wallets, specifically the public-private key pairs.
Per mining, Bitcoin uses the Secure Hash Algorithm 256 (SHA-256).
Antonopoulos also acknowledges that QCs will eventually be able to capture BTC in these inaccessible wallets, which won’t be able to migrate to a quantum-resistant algorithm in future.
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Additional thoughts
Even though Fama has a profound understanding of economics, this doesn’t mean he has a solid grasp of Bitcoin and cryptocurrencies in general, not compared to long-term industry experts, notably Antonopoulos.
Warren Buffett has amassed an enormous net worth due to over 80 years of wise investments. But his advice about Bitcoin has been atrocious, so don’t assume past and present financial gurus are well-versed in this nascent asset class.
(Zingales): “What probability do you attribute that within 10 years, the value of Bitcoin will go to zero?”
(Fama): “I would say it’s close to one. I still believe in monetary theory, though; I may be wrong.”
I believe Fama holds antagonistic views of Bitcoin because it threatens to overhaul the existing monetary system, which a single entity cannot control, unlike fiat currencies. He would contradict himself by arguing otherwise, so it’s best to continue with these perspectives.
At least he acknowledges he could be wrong about Bitcoin, which I believe he is.
Additionally, he doesn’t realise the inefficiencies with the status quo due to multiple intermediaries involved or insists there’s nothing wrong with the current system.
Even though the current system has worked for him and others in relatively stable Western democracies, it doesn’t mean fiat currencies function well everywhere.
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Despite all the mud thrown at Bitcoin and various altcoins, these assets keep bouncing back, some pumping harder than before.
Now that the flagship cryptocurrency has achieved the coveted $100K price tag – translating to a nearly $2 trillion market cap – discussions surrounding its future will only intensify, particularly if it continues climbing as many expect.
If you are concerned about a potential collapse in Bitcoin’s price, remember only to invest what you are willing to (and can afford to) lose.
Given the constant concerns surrounding Bitcoin’s “collapse,” it is worthwhile to diversify your crypto portfolio (but not spread it too thin) and develop an exit strategy to take profits and reinvest those gains elsewhere.
Am I worried about Bitcoin? Not really, but I am conscious of following tech advancements and how these (positively or negatively) impact digital assets.
I am glad Fama doesn’t consider Bitcoin a “bubble”, a term many Bitcoin haters and sceptics enjoy using, frequently likening it to the Tulip Mania centuries ago.
Why? Fama defines a bubble as “something that has a predictable ending.”
Even if Bitcoin doesn’t remain dominant long-term, digital assets are here to stay. Even if centralised equivalents, such as Tether USD (USDT) and USD Coin (USDC), take over, these stablecoins operate on Ethereum, Solana and other distributed networks, albeit less decentralised than Bitcoin.
Comparing stablecoins with a truly decentralised option like BTC is chalk and cheese. There will still be a demand for censorship-resistant assets in a world with greater surveillance, alongside government and corporate overreach, particularly since the pandemic (Canadian truckers, anyone?).
What do you think about Fama’s assessment? Which crypto assets will make it in the long run? Leave your thoughts below.
Disclaimers
- The opinions expressed within this piece are my own and might not reflect those behind any news outlet, person, organisation, or otherwise listed here.
- N.B. None of this is financial advice; I am not a financial advisor. This content is for educational purposes only. You are ultimately responsible for crypto investments, let alone in any asset class.
- Please do sufficient research before investing in any crypto assets, staking, NFTs or anything promoted by these people and organisations, let alone other products affiliated with this space.
- Information is correct at the time of writing.
- Bitcoin (BTC) and Ethereum account for about half of my crypto holdings, followed by Cardano (ADA) and XRP, making up another 25%.
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