Fama on Crypto and Bitcoin

Fama Questions Crypto’s Future

In a wide-ranging interview at UChicago’s Capitalisn’t podcast ¹, Eugene Fama, the Nobel Prize-winning economist widely regarded as the father of modern finance shared a stark assessment of Bitcoin and other cryptocurrencies, predicting that Bitcoin will eventually collapse.

“I would say it’s close to one,” Fama says when asked about the probability⁵ of Bitcoin going to zero within the next decade. However, Fama acknowledges this prediction comes with uncertainty, adding, “The distribution has a long tail. It’s very flat.”

Fama, 86, whose groundbreaking work on efficient markets revolutionized financial theory, believes crypto runs counter to everything we know about money. “Cryptocurrencies are such a puzzle because they violate all the rules of a medium of exchange,” he explained. “They don’t have a stable real value. They have highly variable real value.”

This volatility, according to Fama, makes cryptocurrencies unsustainable in their current form. “That kind of a medium of exchange is not supposed to survive. People don’t want to do business in something that itself can put them out of business because of the variation in its value,” he said.

When pressed on Bitcoin’s current $2 trillion market cap and status as the world’s seventh most valuable asset, Fama refused to label it a bubble due to the unpredictability of its collapse. “I can’t predict when it will bust. I’m hoping it will bust, but I can’t predict it,” he said, adding that if Bitcoin endures, “we have to start all over with monetary theory. It’s gone.”

Fama is also skeptical of blockchains, describing them as “an expensive way” to handle transactions compared to traditional systems. While acknowledging that recent blockchain innovations like Ethereum’s Proof-of-Stake may be more energy-efficient, he remains doubtful of their fundamental value.

On regulating crypto, Fama prefers a laissez-faire approach with a caveat: “If you’re a libertarian, the way I am, you say the government should never do anything, but if the government’s going to do something after the fact, then you have to solve it backwards.”

Specifically, Fama suggests that if cryptocurrencies collapse, investors will likely seek government bailouts, which may then trigger regulatory intervention. He believes keeping cryptocurrencies entirely separate from the traditional financial system may be the optimal solution.

Regarding stablecoins, Fama seemed more receptive, noting that “if you put something in there that has a stable real value, it’s fine.” However, he questioned why people wouldn’t just use dollars directly instead.

Fama’s crypto skepticism stands in contrast to other captains of finance, like Larry Fink³ or Ray Dalio⁴, who have shifted from crypto critics to cheerleaders in recent years. Despite this, Fama stresses the basics: assets must have real value to sustain their worth — something he believes Bitcoin fundamentally lacks.