From the University of Chicago, Booth School of Business' Capitalisn't pod, January 30:
In December 2024, Bitcoin, one of the earliest cryptocurrencies and undoubtedly the most famous, hit $2 trillion in market capitalization, bigger than Tesla, Meta, and Saudi Aramco. In this episode, Chicago Booth’s Eugene F. Fama—a Nobel laureate sometimes called the “Father of Modern Finance”—predicts it will go to zero within 10 years.
Legendary investor Ray Dalio called crypto a bubble a decade ago; now, he calls it “one hell of an invention.” Larry Fink of BlackRock previously referred to Bitcoin as an index of money laundering; today, he sees it as “a legitimate financial instrument.” During his first term in the White House, US President Donald Trump called crypto “not money, whose value is highly volatile and based on thin air”; less than 36 hours after launching his own cryptocurrency prior to his second inauguration, Trump appeared to have made more than $50 billion on paper for himself and his companies. Amidst this noise of crypto doubters changing tune, Fama joins Capitalisn’t hosts Bethany McLean and Luigi Zingales to discuss why he remains dubious about Bitcoin’s ambitions.
Bitcoin uses more electricity than many countries—around 91 terawatt-hours annually. Is this amount unsustainable? What makes Bitcoin’s value so volatile, and what are the implications for the banking sector and our economy? If cryptocurrencies’ purpose is a reaction to an underlying distrust in financial institutions, can decentralized blockchain, the technological ledger that enables anonymous crypto exchange, fix it? Last but not least, why do supporters of a decentralized service, whose value lies in its existence outside traditional government structures, need to spend billions in lobbying to convince politicians, including the president, of its utility?Audio transcript
Eugene F. Fama: Cryptocurrencies are such a puzzle because they violate all the rules of a medium of exchange.
Bethany: I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Bethany: On Friday, January 17, as everyone probably knows, President-elect Trump launched his own cryptocurrency. The—how do you call it—the $Trump?
Luigi: I have no idea.
Bethany: The Trump.
Luigi: I think it’s called the Dollar Trump.
Bethany: As of Sunday morning, Trump appeared to have made more than $50 billion on paper for himself and his companies. Then, on Sunday night, now-First Lady Melania Trump launched her own coin, which was worth more than $5 billion within a couple of hours. In addition, Bitcoin is now the seventh most valuable asset in the world.
Luigi: This is not The Onion or a skit for Saturday Night Live. This is capitalism—or maybe we should say capitalisn’t—in the second quarter of the 21st century.
Bethany: I have to warn you, Luigi, a disclaimer, that “Trump memes are intended to function as an expression of support for and engagement with the ideals and beliefs embodied by the symbol, Trump, and the associated artwork, and are not intended to be or be the subject of an investment opportunity, investment contract, or security of any type. Gettrumpmemes.com is not political and has nothing to do with any political campaign or any political office or government agency.” So there.
Luigi: And I’m six feet five inches.
Bethany: You can be any height you want on this podcast, Luigi.
Luigi: Fantastic. Thank you for the warning. Otherwise, I would have rushed to buy Trump. I grew up in a world in which our elderly were reminding us all the time that money doesn’t grow on trees, but they were wrong. It seems that in the 21st century, money does grow on digital trees, and it grows really, really fast.
Bethany: Maybe this isn’t new. Do you remember the Beanie Babies frenzy, Luigi?
Luigi: Of course.
Bethany: For our younger listeners, they were a line of stuffed animals that were popular in the 1990s. Beanie Babies were created as a toy, but some became collection items. The Princess Bear Beanie Baby, released in 1997 in honor of Princess Diana, is listed today on eBay at $900,000.
Luigi: Are you going to buy one?
Bethany: Are you kidding? I do like furry animals, as you know, but I like large, furry animals that make loud barking noises, not small, stuffed furry animals.
Luigi: And, hopefully, that cost a little bit less than that.
Bethany: Yes. Even my extremely deranged and expensive dogs cost quite a bit less than that.
Luigi: This is a really big puzzle, and to explain this big puzzle, we need, in fact, the father of modern finance: the 2013 Nobel Prize winner, Eugene Fama.
Bethany: Before we talk to Gene Fama, let’s do a little bit of a refresh for our listeners, and frankly for me, on some of the crypto jargon. How exactly would you define a cryptocurrency?
Luigi: A cryptocurrency is a digital currency that is not backed or maintained by any central authority but is self-supported by a network, generally called blockchain. Bitcoin is the first and by far the most famous of all the cryptocurrencies. I think it represents more than half of the entire capitalization of all the cryptocurrencies altogether.
In spite of its fame, Bitcoin has two major disadvantages. The first one is that to function, Bitcoin consumes a lot of computing power, but most importantly, a lot of energy. In a year, the function of Bitcoin takes as much energy as the entire country of Poland.
Second, it cannot be integrated into a programming language. The proper term is that it doesn’t have smart-contract functionality.
The new cryptos—and the most important one is probably Ethereum—have this smart-contract functionality, and almost all of them have moved away from this expensive, energy-burning mechanism used by Bitcoin.
The quantity of Bitcoin is, by and large, fixed. It grows slowly, there is a cap, but basically, for practical purposes, think about it as the quantity of Bitcoin is predetermined. You can have as many cryptos as you want of different types, but for Bitcoin, there is only a predetermined amount.
It’s a little bit like with Beanie Babies. For each one of them, the quantity is fixed, and you can probably invent different animals, but you cannot add more of the Princess Bear because they took it out of production.
What determines the price of Princess Bear is the demand. If demand goes up and down, prices go up and down. For Princess Bear, I don’t know what drives the demand, but for Bitcoin, a lot of the demand is driven by speculation about other people buying Bitcoin. This is very destabilizing, because it’s self-reinforcing, and that creates enormous fluctuations in the price of Bitcoin, which makes Bitcoin completely unsuitable to be a currency. Why they’re called cryptocurrency, I don’t know.
Bethany: So, they’re just like Beanie Babies. We could just call them Crypto Babies instead of cryptocurrency?
Luigi: At some level, yes. Why do people buy Beanie Babies? Not to play with them, because if you pay $900,000 for Princess Bear, by playing with it, you are basically dissipating $900,000. You’re going to keep it in a sealed bag, at the proper temperature, and maybe you watch it. Anyway, you get my point.
Bethany: I do.
Luigi: I think that the reason people buy Bitcoin is for investment. Why? Because they expect to be able to sell it to other people.
Bethany: I like my lingo suggestion. I think Crypto Babies should take off, or maybe even better, Crypto Beans. I think that would be pretty perfect.
Luigi: I would actually prefer Beanie Trump.
Bethany: That could work, too.
Luigi: We should launch our own crypto, Beanie Trump.
Bethany: Onward with terminology. Isn’t the purpose of a stablecoin supposed to be that it gets rid of this issue of volatility? What is a stablecoin?
Luigi: A stablecoin is basically a cryptocurrency whose value is tied to one of another nonvirtual currency. Think about it as tied to the dollar. Let’s take the most secure form. Imagine that you buy a lot of dollars, you put them in a vault, and then you issue some stablecoins one to one with the number of dollars in the vault.
The advantage is that now you have an instrument that you can trade with. You can buy stuff, 24/7, all over the world. You want to buy your caviar from Iran? You can buy your caviar from Iran with stablecoins. You cannot do it with US dollars.
For the issuer, the big advantage is that you don’t exactly put it in a vault. You put it in a Treasury bond, and you earn interest. You issue a liability that has zero interest, and you invest in an asset at 5 percent. If you multiply that by billions, you get rich pretty quickly.
Bethany: OK. Back to Trump, then. What is a meme coin?....
....MUCH MORE
Over the years we've poked some gentle fun at Professor Fama and his partner in crime, Professor French (now at Dartmouth).
Among our many posts on Fama and/or French, from 2014:
December 2014
What a Long Strange Trip: From CAPM To Fama-French to Four (or more) Factors
Ours goes to eleven.
To February 2020:
Feb. 25
Regarding the Efficient Market Hypothesis....
On days like today you might find Eugene Fama in some Chicago watering
hole with his designated driver, Kenneth French. As we noted in another
context ["Is semi-variance a more useful measure of downside risk than standard deviation?"]:
I have no explanation for the market's collective Wile E Coyote moments:...If yous see them together at some Chicago dive bar, Fama is the one with the Nobel around his neck, French the one saying "For Chrissakes Gene."
but I am pretty sure that at Friday's close the market was not pricing in "all available information".
This lack of facile, erudite (sounding) verbiage on my part may necessitate the implementation of either a (tardy) "pivot to video" or cooking tips. We'll try the latter first.
From Britain's Royal Society:...
The practitioner:
February 25
"How Will You Play the Oversold Bounce?"
Homie don't play.
Homie pivots to video
If you've stuck with me this far here is the Fama/French Forum hosted at Dimensional Fund Advisors....
