High-profile investor Jim Chanos – widely know as the man who predicted the fall of Enron – has expressed his belief that Bitcoin would fail should there ever be a serious crisis.
As an investor who relies on fundamentals – intensive research into the businesses in which he chooses to put money, or not as the case may be – as opposed to technical indicators, Chanos’ research into the operations of the oil giant Enron allowed him to profit greatly from its 2001 demise. Now, in a similar vein to comments from another big shorter – Steve Eisman, who served as the basis for Steve Carrell’s character in The Big Short, which examined the economics behind the 2008 financial crisis – he doesn’t see much mileage in cryptocurrencies. Especially, he says, should things go very, very wrong.
As reported by Bloomberg, Chanos told the Institute for New Economic Thinking that he believes that traditional fiat currencies have backstops to prevent complete collapse – like the fact that governments can mandate their use and act to prop them up should the need arise – the lack of which would see Bitcoin fall under similar pressures.
Those features, rather ironically, are factors that led to the birth of Bitcoin in the first place, however – lest we forget Satoshi Nakamoto’s genesis block easter-egg. The decentralised nature of his creation was also designed to circumnavigating what he/she/they saw as the cause of the 2008 collapse – large financial institutions, and the governments that acted to support them even at great costs to taxpayers.
Chanos then appeared to move on to a far more serious doomsday-ish scenario to make his point.
“For those who believe that you need to own digital currency as a store of value in the worst-case scenario, that’s exactly the case in which a digital currency will work the least,” he said. “The last thing I’d want to own is Bitcoin if the grid goes down.”
That’s a view which appears to reflect little respect for the decentralised nature of distributed ledgers, and – while short term issues regarding payments would inevitably occur – how robust such systems should be in the mid-term even if a large part of their network disappeared almost instantly.
What’s more, it does appear that fiat currencies can be fallible to something as serious ‘grid going down’ these days – as the problems caused by VISA’s payments system in recent days attests to. Thus his assessment that “food would be better” in such a circumstance, seems to apply there too – and to pretty much any modern financial instrument in the face of such a crisis, as you’d suspect even cash would suffer from rampant inflation as it has in the past under such intense circumstances.
Respect must be show, however, to Chanos’ proven ability to spot problems ahead of the curve. Therefore, while perhaps less headline-worthy, his comparison of Bitcoin and other crypto to a so-called “fraud cycle,” is interesting.
The concept describes a phenomenon where investors become less sceptical of the longer that markets keep rising – eventually putting money into things that would have seemed questionable previously. This comparison, then, would put cryptocurrency on the same trajectory as Enron and the dotcom bubble of the late-90/early-00’s, and the banking crisis of 2008.
“As cycles go on, we tend to see higher instances of fraud,” Chanos commented, before adding that frauds “generally come to light after the financial cycle turns down. We saw this again after the crisis following the bull market of 2003 to 2007.”
The view that crypto is bubble similar to those two eras echoes other opinions from more traditional financial institutions over recent months. Though it’s not an argument that impresses everyone, it has found supporters. Specifically, it is a point of view that has begun to resonate with more conservative fundamentals-based investors of Jim Chanos’ ilk. Exactly the type of investors who tend to see these things coming – though Chanos has been wrong in the past.
“This is simply a security speculation game masquerading as a technological breakthrough in monetary policy,” is his current conclusion on the cryptocurrency, however.