I know a lot of smart people that have invested in Bitcoin (CCC:BTC-USD).
At this point, those smart people look like geniuses given Bitcoin is up 8,500% in the past five years.
However, I also know a lot of smart people who have not invested in Bitcoin. Bitcoin bulls might say those people have missed the boat, but some very smart people still don’t believe in Bitcoin.
That opinion has opened them up to public criticism and ridicule, but many of them are sticking to their guns.
Sure, the price of Bitcoin has skyrocketed. But nothing has changed about the Bitcoin bear thesis. Bitcoin is still an extremely risky investment with no inherent value.
Paulson’s Bitcoin Take
It takes a brave person to stand up and publicly criticize a popular investment that has skyrocketed in price. Yet billionaire hedge fund manager John Paulson recently did just that when he ripped Bitcoin and other cryptocurrencies.
Paulson is famous for spotting the bubble in the housing market back in 2007. Paulson shorted that bubble prior to the subprime mortgage crisis and made a killing when the bubble burst.
In a recent interview, Paulson didn’t mince words when explaining his position on Bitcoin.
“There’s no intrinsic value to any of the cryptocurrencies except that there’s a limited amount,” Paulson said.
He said overenthusiastic investors are scrambling to buy up cryptocurrencies because they see that there is a limited supply. But Paulson said scarcity in itself does not create value.
“Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless. Once the exuberance wears off, or liquidity dries up, they will go to zero.”
Paulson Isn’t Alone
I’m sure the first instinct of any Bitcoin bull is to dismiss Paulson. “OK boomer,” is one response. But Paulson is just one person in a long list of decorated Wall Street experts that have serious doubts about cryptocurrency.
The “Oracle of Omaha” Warren Buffett has said Bitcoin is a “delusion” and “rat poison squared.”
Like Paulson, hedge fund manager Michael Burry (of The Big Short fame) took a lot of heat predicting the collapse of the mortgage market bubble.
One of the biggest criticisms I receive when I question Bitcoin is that I just don’t understand it. That critique has always been a pet peeve of mine because it’s the lowest-hanging fruit in any debate.
I believe I understand Bitcoin, but that’s exactly what someone who doesn’t understand would say.
Instead of defending my understanding, I bring up Buffett. Or Shiller. Or Harris. Maybe I actually don’t understand Bitcoin.
But if a Nobel Prize-winning economist, the founding CEO of the largest digital payments app and the CEO of the biggest U.S. bank don’t understand it, that’s a red flag in itself.
A Better Inflation Hedge
I get why people are concerned with the trillions of dollars in U.S. government stimulus since the beginning of the pandemic.
There has already been inflationary fallout from that spending, and the value of the U.S. dollar will almost certainly continue to trend lower indefinitely.
I understand that a piece of paper with George Washington’s photo on it has no more intrinsic utility than a square of toilet paper. But the U.S. dollar always has and always will be backed by the U.S. government.
I don’t trust the government for a second, with one exception. I trust politicians will always do what’s best for themselves.
The collapse of the U.S. dollar is bad news for the U.S. government, so I expect politicians will always do whatever they can to maintain U.S. dollar stability.
In the meantime, rather than speculate on a digital currency that generates no cash flow, has no intrinsic value and pays no interest, I’d recommend investors buy a low-cost S&P 500 index fund like the Vanguard 500 Index Fund ETF (NYSE:VOO) as an inflation hedge.
The Federal Reserve is projecting 3.4% inflation in 2021. The VOO fund’s total return in the past year is 34.3%, about 10 times that projected inflation rate.
On the date of publication, Wayne Duggan held a long position in VOO. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.