• Nobel Prize-winning economist Eugene Fama argues that Bitcoin is fundamentally flawed and predicts that it has an almost certain probability of losing its value within a decade.

• In a conversation with Luigi Zingales and Bethany McLean, Fama explains why Bitcoin's extreme volatility, lack of intrinsic value and violation of basic monetary principles make its long-term survival unlikely.

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Eugene Fama, pioneer of the efficient market hypothesis and Nobel laureate in economics, predicts that Bitcoin has a close to 100% chance of losing its value within the next decade. The University of Chicago professor's stark prediction comes at a time when Bitcoin has reached a market capitalisation of $2 trillion, making it the seventh most valuable asset globally.

‘Cryptocurrencies are a real conundrum because they violate all the rules of a medium of exchange,’ Fama explained during an interview on the Capitalisn't podcast with hosts Luigi Zingales and Bethany McLean. ‘They don't have a stable real value. You know, they have a very variable real value. That kind of medium of exchange is not supposed to survive.’

Fama's scepticism stems from fundamental contradictions in Bitcoin's design. As Zingales explained during the debate, ‘the problem with all cryptocurrencies is that, in order to create some trust in the system, you basically limit the supply, and once you limit the supply, the price is completely dependent on demand’. This fixed supply combined with fluctuating demand leads to price volatility that makes Bitcoin not a suitable currency.

Cuando Zingales le preguntó directamente sobre la probabilidad de que el valor de Bitcoin llegara a cero en 10 años, Fama respondió: “Yo diría que es cercana a uno”. Sin embargo, reconoció la incertidumbre sobre el momento, señalando que “la distribución tiene colas largas”, lo que significa que hay una incertidumbre significativa sobre exactamente cómo y cuándo podría ocurrir un posible colapso.

The future of monetary theory

Fama's prediction carries particular weight given his foundational work on efficient capital markets, in which prices fully reflect what we know about future values. While he acknowledges that his efficient market hypothesis is ‘just a model’ that must be wrong to some extent, as all economic models are, he argues that it accurately describes how most people should approach investing.

Bitcoin's persistence poses a challenge to established economic principles. ‘I hope it breaks,’ Fama said, ’because if it doesn't, you have to start over with monetary theory.’ He suggested that if Bitcoin maintains its long-term value, economists would have to fundamentally rethink their understanding of money and markets.

Blockchain and technical challenges

The Nobel laureate's scepticism extends beyond Bitcoin to the underlying blockchain technology. Blockchain is the indelible, digital ledger that records the exchange of a bitcoin over time and affirms its current ownership. While proponents argue that blockchain solves trust issues in international transactions, Fama argues that the technology is costly in terms of energy and potentially unsustainable.

‘There are always incentives for people to corrupt the blockchain,’ Fama explained. ‘There can be more and more people coming in whose sole purpose is to corrupt it. And if they can gather enough computational power, they can take it down.’

Despite his general scepticism, Fama acknowledged one possible use case that Zingales proposed: as a hedge for ultra-wealthy individuals facing political risk. As Zingales argued, ‘if I'm an oligarch and I want to hide some money, I think bitcoins look pretty attractive to me’. However, this limited use case does not change Fama's overall assessment of bitcoin's future.

Regulation and government intervention

When asked about government intervention, Fama predicts that the government will be pressured to grant bailouts if cryptocurrencies ‘blow up’.

‘If you're a libertarian, like me, you say the government should never do anything,’ Fama said, ’but if the government is going to do something after the fact, then you have to work it backwards and decide what to do before the fact to minimise the cost of doing it. And I don't know what that is at this point.’

As Zingales suggested during the discussion, one solution could be to ‘keep it separate from the traditional system’. He argued that since Bitcoin and the whole movement started with the idea of replacing the current financial system, they should ‘build their own system that is completely separate. If it succeeds and we get it wrong, fine, if it collapses, we don't have to pick up the pieces’.

Looking to the future

While Fama's prediction is stark, he acknowledges the uncertainty inherent in such forecasts. His analysis suggests that the next decade will be crucial in determining whether Bitcoin represents a genuine innovation in monetary systems or, as he suspects, an unsustainable development.

Source: promarket