Nobel Prize-winning economist Eugene Fama argues that Bitcoin is fundamentally flawed and predicts it has a near-certain chance of becoming worthless within a decade. In a conversation with Luigi Zingales and Bethany McLean, Fama explains why Bitcoin’s extreme volatility, lack of intrinsic value, and violation of basic monetary principles make its long-term survival unlikely.
Eugene Fama, pioneer of the efficient market hypothesis and Nobel laureate in economics, predicts that Bitcoin has a close to 100% probability of becoming worthless within the next decade. The stark prediction from the University of Chicago professor comes at a time when Bitcoin has achieved a $2 trillion market capitalization, making it the seventh most valuable asset globally.
“Cryptocurrencies are such a puzzle because they violate all the rules of a medium of exchange,” Fama explained during an interview on the Capitalisn’t podcast with hosts Luigi Zingales and Bethany McLean. “They don’t have a stable real value. You know, they have highly variable real value. That kind of medium of exchange is not supposed to survive.”
Fama’s skepticism stems from fundamental contradictions in Bitcoin’s design. As Zingales explained during the discussion, “The problem with all the cryptos is, in order to create some trust in the system, you basically bound the supply, and once you bound the supply, the price is driven entirely by demand.” This fixed supply combined with fluctuating demand leads to price volatility that makes Bitcoin unsuitable as a currency.
When asked directly by Zingales about the probability that Bitcoin’s value would go to zero within 10 years, Fama responded “I would say it’s close to one.” However, he acknowledged uncertainty about the timing, noting that “the distribution has long tails,” meaning there’s significant uncertainty about exactly how and when any potential collapse might occur.
The Future of Monetary Theory
Fama’s prediction carries particular weight given his foundational work on efficient capital markets, wherein prices fully reflect what we know about future values. While acknowledging that his efficient market hypothesis is “just a model” that must be wrong to some extent – as all economic models are – he maintains that it accurately describes how most people should approach investing.
The persistence of Bitcoin poses a challenge to established economic principles. “I’m hoping it will bust,” Fama said, “because if it doesn’t, you have to start all over with monetary theory.” He suggested that if Bitcoin maintains its value long-term, economists would need to fundamentally rethink their understanding of money and markets.
Blockchain and Technical Challenges
The Nobel laureate’s skepticism extends beyond Bitcoin to the underlying blockchain technology. Blockchain is the digital, indelible ledger that records a bitcoin’s exchange over time and affirms its current ownership. While proponents argue that blockchain solves trust issues in international transactions, Fama contends that the technology is energy-expensive and potentially unsustainable.
“There are always incentives for people to corrupt the blockchain,” Fama explained. “You can have more and more people entering whose sole purpose is to corrupt it. And if they can bring together enough computing power, they can bring it down.”
Despite his overall skepticism, Fama acknowledged one potential use case that Zingales proposed: as a hedge for ultra-wealthy individuals facing political risk. As Zingales argued, “If I am an oligarch and I want to hide some money, I think that bitcoins look pretty attractive to me.” However, this limited use case doesn’t change Fama’s overall assessment of Bitcoin’s future.
Regulation and Government Intervention
When asked about government intervention, Fama predicts that the government will be pressured to give bail outs if cryptocurrencies “blow up.”
“If you’re a libertarian, though, the way I am, you say the government should never do anything,” Fama said, “but if the government’s going to do something after the fact, then you have to solve it backwards and decide what to do before the fact to minimize the cost of doing that. And I don’t know what that is at this point.”
As Zingales suggested during the discussion, one solution might be to “keep it separate from the traditional system.” He argued that since Bitcoin and the entire movement started with the idea of replacing the current financial system, they should “build their own system that is completely separate. If it succeeds and we’re wrong, fine, if it collapses, we don’t have to pick up the pieces.”
Looking Ahead
While Fama’s prediction is stark, he acknowledges the uncertainty inherent in such forecasts. His analysis suggests that the next decade will be crucial in determining whether Bitcoin represents a genuine innovation in monetary systems or, as he suspects, an unsustainable deviation from fundamental economic principles.
The debate over Bitcoin’s future highlights broader questions about the nature of value, the role of government in financial markets, and the potential for technological innovation to reshape our understanding of money. Whether Fama’s prediction proves correct or not, his analysis underscores the profound challenges that cryptocurrencies pose to traditional economic theory and practice.
Author disclosure: ProMarket writers are employed by the Stigler Center for the Study of the Economy and the State. Capitalisn’t and ProMarket are both funded by the Stigler Center, where Zingales is faculty director. Both Bethany McLean and Luigi Zingales are advisory board members of ProMarket and are paid by the Stigler Center.
Zingales’ disclosures can be found here. Eugene Fama has a long-term consulting arrangement with Dimensional Fund Advisors.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
