It feels as though cryptocurrency has been deemed a worthless fad since Bitcoin first emerged from the guts of an anonymous engineer’s computer rig back in 2009.
While some of the criticism has come from the general public, who may not have a clear grasp on what cryptocurrencies are, how they work or why they possess any value whatsoever, some very clued-in financial minds have also questioned crypto’s rising prominence.
One such critic is billionaire investor John Paulson, who, in recent comments, called digital currencies a bubble that will “eventually prove to be worthless.”
The volatility seen in crypto markets over the last few days — Bitcoin dropped by 17% at one point on Tuesday, the same day El Salvador began accepting it as legal tender — doesn’t provide much of a defense against Paulson’s criticism.
Let’s see what his issue with crypto is, and if you should be cashing out or buying the dip.
Paulson’s reasons for being bearish on crypto
Paulson has experience exposing at least one notable financial scam. As the co-founder of the Carlyle Group, he was one of the hedge fund heavyweights who saw the corruption at the heart of the subprime mortgage industry and subsequently shorted the U.S. housing market before it tanked in 2007, earning himself a reported $4 billion.
And he seems to be just as skeptical about crypto.
“I wouldn’t recommend anyone invest in cryptocurrencies,” Paulson said during an appearance on Bloomberg Wealth with David Rubenstein Bloomberg TV.
“I would describe them as a limited supply of nothing. So to the extent there’s more demand than the limited supply, the price would go up. But to the extent the demand falls, then the price would go down. There’s no intrinsic value to any of the cryptocurrencies except that there’s a limited amount.”
It’s also worth wondering just how much value an asset can truly have if it’s price can swing so wildly from one minute to the next, as Bitcoin’s did on Tuesday. According to analysis by CoinMarketCap, the entire crypto market shed about $300 billion in value between Tuesday morning and Wednesday afternoon.
That kind of volatility brings to mind the dot-com bubble of the early 2000s and the housing crash Paulson previously profited from. Both were the result of empty assets attracting billions in ignorant money.
Paulson went on to say that cryptocurrencies could eventually be worthless.
“Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies,” he said.
The other side of the Bitcoin
As Bitcoin values plummeted on Tuesday, at least one investor bought on the dip: the country of El Salvador.
Bitcoin’s plunge on Tuesday came at an awkward time for the Central American country, as it was just launching its plan to accept the cryptocurrency as legal tender. Despite the tumult, El Salvador purchased 150 more Bitcoin while prices were declining on Tuesday morning.
El Salvador’s president, Nayib Bukele, clearly sees more value in Bitcoin than Paulson does. But his decision -- anybody’s decision -- to buy a volatile asset as its value is crashing is about as risky as investing gets.
Bukele tweeted that he purchased his 150 new coins at 11:15 Tuesday morning. (Twitter posts are automatically date stamped using local time, so that would make it 11:15 CST, or 1:15 EST.) Assuming he nabbed them within an hour or two of the tweet, El Salvador likely landed their 150 coins for about $51,000 a piece.
The problem is, Bitcoin ate it after the purchase. By 4:15 p.m. on Tuesday, it was selling for $46,927. It fell to just over $44,000 early Thursday morning, before climbing back to over $46,500 by 4:00 p.m.
That’s the catch with buying the dip. You never really know if it truly is a dip — or a trough, or a Marianas Trench-sized pit of hell — until enough time passes for hindsight to kick in.
Get in the game
Whether you view crypto as the currency of tomorrow or a get rich quick scheme whose days are numbered, there are plenty of ways to put your money to work for you.
For risk-averse investors, focusing on assets that produce cold, hard cash is a good place to start.
For instance, some popular investing services make it possible to lock in a steady rental income stream by investing in premium real estate properties — from commercial developments in LA to residential buildings in NYC.
You’ll gain exposure to high-end properties that big-time real estate moguls usually have access to, and you’ll receive regular payouts in the form of quarterly dividend distributions.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.