Bitcoin as a hedge against the weakness in the broader market makes Paulson wrong

Is Paulson wrong? Specifically, is he wrong about Bitcoin being, well, pretty much garbage? I am alluding to what he said not so long ago, and which I even tweeted about two months ago (see the tweet embedded below). 

John Paulson is a well-known investor who has made some serious money speculating in the markets. However, he was a somewhat obscure fund manager, if one is to believe his Wikipedia page, for most of his career until the great mortgage lending crisis of 2007-2010. He was astute enough to bet against the lenders back then, a move that made him a few billion dollars. He is now worth about 4 billion US dollars and that appears to be just the right amount of money for a man to afford a girlfriend half his age. Lucky man, indeed. 

But everyone can be wrong. If only from time to time. Just as everyone can be spectacularly right - sometimes - when most are blind to the truth staring them in the face. No one is absolutely perfect and hence no one can possibly be infallible. This is especially true when one makes rather extreme statements, and his claim that Bitcoin is just worthless, despite years of proving to be a pretty resilient financial instrument, seems to be on the extreme side of things. 

I believe that one thing he is overlooking here is the fact that even right now Bitcoin can be used as a hedge against the weaknesses in the broader market, that of stocks, bonds and regular national currencies. 

Until it becomes a more stable currency, which would be very legitimizing for it, it may play the same role that gold used to play until recently. And still does, but in a more limited manner, in large part, I believe, due to the public growing infatuation with digital currencies. Gold ain't what it used to be. In fact, even copper, for which there is always a strong business demand, seems to be a better protection against the inflation and declines in the financial markets than gold. 

It is frequently stated in the media, by journalists as well as the so-called experts, that the fiat currency is backed by the central bank of a nation that issues it. Meaning, apparently, that this is what makes such a currency more viable than any digital currency, behind which no fat banking cat will rally when it finds itself in trouble. Well, this is pretty naïve if not misleading a picture. 

Fiat currencies are not necessarily better in this, or pretty much any other, respect than the digital ones. They are based on trust in the central bank interventions - and nothing else. And what can the central bank do when the currency is in trouble? Well, not really that much. Which is why sometimes currencies simply disappear being replaced by others. Or, in a better scenario, end up seriously weakened for many years. 

Bitcoin and other cryptocurrencies are also based on trust. On trusting that they can be used for transactions without the interference of central bankers. It's one trust against the other. Nothing else. The fact that Bitcoin continues to rise means that this trust keeps on growing. 

That is not exactly good news for the bankers. No wonder then that some of them openly disparage it. But the digital currency, in one form or another, is here to stay. Of course, Bitcoin needs to become more stable to be taken seriously as a currency by the masses. Until this happens, it will be used mainly for speculation, including hedging, which is where its main strength seems to be at this point. However, its adoption will continue to grow and with it should come an increasingly greater stability. 

I have never had any position in Bitcoin or any other currency of this kind, so I have not written this text to encourage you to invest in these markets. That is entirely up to you. However, I am more and more convinced that people like Mr. Paulson are dismissing cryptocurrencies too smugly and too easily. They may be right in one respect: most of them will be buried sooner or later. The cryptocurrencies, that is. The strongest ones, though, I believe, will stay around for many more years to come.

Posted on November 21st, 2021.

Last updated on January 25th, 2022.