The digital token Bitcoin has been on a remarkable tear, smashing through price records as a speculative frenzy surrounds the volatile cryptocurrency. But a renowned economist has stark warnings about the crypto craze, predicting that the Bitcoin mania will ultimately lead to widespread misery for investors caught up in the hype.
On Friday, Bitcoin prices ripped past $70,000 for the first time ever, hitting an all-time peak as the buzzy digital asset continued its stratospheric rise this year. While Bitcoin has gained more mainstream acceptance from major companies and institutional investors, its rocketing valuation is spurring concerns that the world’s largest cryptocurrency is just the biggest current example of a market bubble.
Dr. Burton Malkiel, the famed American economist and author of the seminal investing book “A Random Walk Down Wall Street,” cautioned that Bitcoin has become a dangerous speculative bet as prices have become wildly divorced from the digital token’s utility. In an interview, Malkiel warned that many investors have unrealistic expectations about Bitcoin’s future that could lead to heavy losses down the line.
“A lot of people are ultimately going to get very hurt by Bitcoin, which is now hitting new highs,” Malkiel said bluntly. “I’m afraid a lot of people are going to be hurt.”
Bitcoin’s scarcity has been often cited as the reason it represents a robust store of value and why prices could continue climbing sharply higher. Only 21 million Bitcoins can be created, giving it more in common with precious metals like gold than fiat currencies.
But Malkiel dismissed the philosophy behind Bitcoin’s capped supply as being a key factor that will allow it to become a true alternative to money. He noted there are already thousands of other cryptocurrencies — with many more inevitably being created — that could sap demand for Bitcoin.
“There’s not a limited amount of cryptocurrency. There are many other cryptocurrencies and there’ll be many more in the future,” Malkiel said, pointing to a key reason why he’s skeptical of Bitcoin’s value proposition long-term.
Risk of Government Crackdowns
Malkiel’s biggest concern about Bitcoin is its use in illicit activities like drug dealing, ransomware attacks and money laundering. These are some of the areas where cryptocurrency’s anonymity and decentralized nature have made Bitcoin transactions an attractive method for criminals.
Governments are almost certain to take action and aggressively regulate Bitcoin if these illegal use cases continue to grow, Malkiel warned. Any crackdown by authorities could be a massive blow to Bitcoin that brings its standing crashing back down to earth.
“I think a lot of people are ultimately going to get very hurt by Bitcoin…because governments are not going to allow that to keep on happening,” Malkiel said. “So I think there’s just an enormous risk involved in Bitcoin.”
He did acknowledge that some form of digital currency issued by governments could become part of mainstream finance, but challenged the idea that Bitcoin specifically would be a viable long-term currency given its extreme volatility.
Bitcoin has whipsawed wildly in recent weeks, with triple-digit intraday price swings becoming increasingly common as interest from larger investors rises. On several occasions, the token has lurched tens of thousands of dollars higher or lower in knee-jerk reactions to comments from CEOs like Elon Musk or news about bitcoin investments from major companies.
‘A Terrible Currency’
Such huge price vacillations are exactly why Bitcoin is “a terrible” actual form of currency to use for everyday transactions, Malkiel argued. Holding a currency that could plummet or skyrocket by thousands of dollars at a time based on a social media post is not a suitable medium of exchange.
“Why would I want to go and buy my cup of Starbucks coffee with a currency that’s up $2,000 or down $2,000 in a single day? I have no idea how many Bitcoin I’m going to have to use to buy my cup of coffee,” Malkiel said. “It’s so volatile, it’s not really a useful currency.”
He added: “People say Bitcoin will be fine because there’s a limited amount. I’m not against technology. There will be government cryptocurrencies. But I think a lot of people are ultimately going to get very hurt by Bitcoin.”
A Familiar Investing Warning
Malkiel has spent his career preaching about the pitfalls of trying to outsmart markets based on narratives or emotions, rather than fundamentals like profits. His seminal “Random Walk” book popularized the idea of low-cost index investing and efficient markets, advocating passive portfolio strategies over active trading and speculation.
In the Bitcoin frenzy, Malkiel sees an all-too-familiar speculative fever taking hold that is distracting many investors from basic investing principles. As Bitcoin continues hitting new highs, the “fear of missing out” or FOMO will entice more unsophisticated investors to plow into the rally, he predicted.
“I can assure you if it goes up to a new high, you’re going to draw people in the FOMO crowd. I can’t miss this,” Malkiel said. “But what I am sure of is that a lot of people who think they know exactly what it’s going to do, I’m afraid a lot of people are going to get hurt.”
The economist’s warnings about Bitcoin appear aimed at the hordes of younger, meme-driven retail traders who have helped power the crypto boom. They have flocked to easy-to-use trading apps like Robinhood, taking on excessive risk and appearing convinced that the only direction for Bitcoin is up.
Such unbridled market optimism, detached from underlying fundamentals, is a clear red flag for Malkiel. The economist has seen too many speculative crazes over his long career rise meteorically before flaming out catastrophically.
“Could Bitcoin go to $100,000? Absolutely,” Malkiel said. “Could it go to $200,000? Absolutely. But what I am sure of is that a lot of people are going to get hurt.”
Malkiel is not calling a top in Bitcoin or making a timing call. He is raising a prudent voice urging caution to counterbalance the feverish hype driving the Bitcoin trade into mania mode — a hype that could ultimately lead to heavy suffering once this particular speculative bubble bursts.
