John Paulson who made $20bn predicting 2008 financial crisis calls cryptocurrency ‘worthless bubble’

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An investor who made $20 billion betting on a housing crash ahead of the 2008 financial crisis believes cryptocurrencies like Bitcoin are a ‘worthless bubble’ and encourages people to invest in gold in light of coming inflation.

John Paulson, 65, made the comments on an episode of Bloomberg Wealth with David Rubenstein published Sunday. 

He said he avoids the ‘volatile’ crypto market and encouraged people to put their money in gold because it does well in times of inflation, which may soon worsen as the country slowly recovers from last year’s COVID-19 economic shutdown.

‘We believe that gold does very well in times of inflation,’ he said, explaining that when prices are high people try to put their money into something that will hold its value in the future.

Paulson is a major investor in gold companies, having reportedly sunk as much as 10 percent of his fortune in gold in 2009.

John Paulson, 65, made billion of dollars betting that a housing crash was coming in 2008

John Paulson, 65, made billion of dollars betting that a housing crash was coming in 2008

In a recent interview, he talked up gold and called cryptocurrencies a 'worthless bubble'

In a recent interview, he talked up gold and called cryptocurrencies a ‘worthless bubble’

‘People try and get out of fixed income. They try and get out of cash. And the logical place to go is gold. But because the amount of money trying to move out of cash and fixed income dwarfs the amount of investable gold, the supply and demand imbalance causes gold to rise,’ he added.

The Consumer Price Index, a federal measure of the change in prices of goods and services, rose 5.4 percent in July compared to last year.  The Personal Consumption Expenditures index, a similar index used by the Federal Reserve, rose by 4.2 percent in July – the fastest pace since 1991, according to the New York Times. 

Both indexes point to rising inflation, or rising prices.

Meanwhile, the Federal Reserve is keeping interest rates at near zero to encourage borrowing and investing as the country slowly climbs out of the pandemic, and it will probably keep them there until 2023. 

‘The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered,’ the Federal Reserve said in a statement last month.

‘Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.’

Paulson suggested that federal intervention, such as stimulus checks and increased unemployment aid, drove up the amount of money people have, which is contributing to the current pace of inflation and is making gold a more attractive investment.

‘The money supply was up about 25 percent last year and the best indicator of inflation is money supply. So I think we have inflation coming well in excess of what the current expectations are.’

On the other hand, cryptocurrencies like Bitcoin and Ethereum, which promise independence from governments and large financial institutions, ‘will eventually prove to be worthless,’ Paulson said.

Paulson said cryptos like Bitcoin and Ethereum will 'eventually prove to be worthless'

Paulson said cryptos like Bitcoin and Ethereum will ‘eventually prove to be worthless’

He called the digital currencies 'volatile.' Above, a graph shows the price of Bitcoin over a period of three months this year

He called the digital currencies ‘volatile.’ Above, a graph shows the price of Bitcoin over a period of three months this year

‘Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies,’ he said.

He added: ‘I would describe them as a limited supply of nothing. So to the extent there’s more demand than the limited supply, the price would go up. But to the extent the demand falls, then the price would go down. There’s no intrinsic value to any of the cryptocurrencies except that there’s a limited amount.’

Between 2007 and 2009, Paulson’s firm made $20 billion, netting him about $4 billion personally. He did it by buying $1 billion worth of insurance on risky mortgages in 2006, effectively betting that a housing market was coming, according to the Wall Street Journal.

Overall, prices of Bitcoin have steadily risen since its beginning in 2009. One Bitcoin was worth $123 in May 2013, going up to $1,179 in February 2017 and up to $48,000 today. 

The price of the digital currency is known to fluctuate dramatically, however, dropping $258 in a period of 24 hours ending Monday at 12.24pm.

Paulson's firm made $20 billion after buying $1 billion worth of insurance against risky mortgages. Above, traders at the New York Mercantile Exchange in September 2008

Paulson’s firm made $20 billion after buying $1 billion worth of insurance against risky mortgages. Above, traders at the New York Mercantile Exchange in September 2008

The 2008 crisis left many Americans homeless and unemployed and led to tax cuts, bailouts and other measures to revive the economy

The 2008 crisis left many Americans homeless and unemployed and led to tax cuts, bailouts and other measures to revive the economy

In 2008, Paulson made a fortune by betting that financial companies attached to the risky loans would crash. 

He quickly became one of the biggest beneficiaries of a financial crisis that left many Americans unemployed and homeless.

The Queens, New York, native dropped out of the hedge fund game last year and turned it into a family investment affair after several losses depleted his assets to $9 billion in 2019 from a peak of $38 billion in 2011.

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