Billionaire John Paulson has explicitly called on investors not to invest in Bitcoin.
This was revealed by Bloomberg, citing an interview of his broadcast by Bloomberg Wealth with David Rubenstein.
Who is John Paulson
Paulson rose to fame more than a decade ago with his successful bet against the then booming US housing market, although it seems he has not been able to repeat that huge deal since. At the time, he earned as much as $20 billion when subprime bonds collapsed.
Now, some 14 years later, Paulson again sees signs of excessive speculation in the financial markets.
Paulson in favour of gold investments
During the interview, he also expressed concern about inflation, with the rapid expansion of the money supply in the US likely to push it well beyond current expectations. At this point, he said he believes it may be time to buy gold.
Gold is known to be the main hedge against risk-off inflation, and it performs best during crises.
For example, up to 2007, it had never exceeded $800 an ounce, but in 2008, at the height of the financial crisis, it reached almost $1,000 and then took off in the following years to exceed $1,800 an ounce in 2011.
However, its value subsequently fell, just as the financial crisis was beginning to recede (especially in the US), to around $1,000 at the end of 2015.
From mid-2019 onwards, however, it surged again, first back above $1,500, and then due to the pandemic, it shot up again to an all-time high 12 months ago above $2,000 an ounce.
It then fell back below $1,700 for a brief moment in March this year, just as the new crisis was beginning to pass, before rising back above $1,800 as the first worrying inflation news broke.
Paulson talks about Bitcoin
On the subject of cryptocurrencies, such as Bitcoin, Paulson said he believes they are merely a bubble, and that they will eventually prove to be worthless.
He explicitly said:
“I wouldn’t recommend anyone invest in cryptocurrencies”.
He added that he believes cryptocurrencies will eventually prove to be worthless, and that once the exuberance wears off, or the liquidity runs out, they will go to zero, describing them as:
“a limited supply of nothing”.
However, he then also added:
“So even though I could be right over the long term, in the short term, I’d be wiped out. In the case of Bitcoin, it went from $5,000 to $45,000. It’s just too volatile to short”.
John Paulson’s mistakes on Bitcoin and cryptocurrencies
During the interview, Paulson made a mistake by not distinguishing Bitcoin from other cryptocurrencies. This is actually a symptom of a lack of knowledge about Bitcoin.
Furthermore, the price trend of Bitcoin in recent years in some ways also resembles that of gold, albeit with slightly different timing. In fact, while gold is a hedge against risk-off inflation, Bitcoin is meant to be a hedge against risk-on inflation, so while gold performs better in times of crisis (such as March 2020), Bitcoin performs better in times of euphoria (such as the start of the recovery in late 2020).
For example, looking at the last three years, gold started to recover in late 2018, with a strong rise in mid-2019, and a real surge after March 2020 that took it to all-time highs in August 2020. It then dropped a bit, and has now been effectively lateralizing since late 2020.
In contrast, Bitcoin fell at the end of 2018, and then rose a bit until mid-2019. After a downward lateralization phase, it collapsed in March 2020, and then quickly returned to more or less where it was before. But at the end of 2020, it started a bullrun that took it up to all-time highs in April 2021. Right now it is 26% below the highs of four months ago, while gold is 12% below the highs of a year ago.
If we also add the S&P500 to this comparison, for example, we notice that over the last three years it has had a trend more similar to that of Bitcoin, than to that of gold, since between late 2018 and early 2020 it rose, only to collapse in March 2020, and recover within five months. It subsequently surged, hitting all-time highs the day before yesterday.
Looking at the charts, Bitcoin’s trend does not look like a purely speculative, worthless asset on which a bubble is bursting, but more like the S&P500, only much more volatile. The same cannot be said for all other cryptocurrencies.