Billionaire John Paulson Warns Bitcoin is Going to $0 | Buy This Instead

What about cryptocurrencies? Are you a believer in cryptocurrencies?

No, I'm not a believer in cryptocurrencies, and I would say that cryptocurrencies are a bubble. Billionaire hedge fund manager John Paulson said in a recent interview that Bitcoin is going to zero. This is the same investor that made himself and investors in his fund 20 billion dollars during a different crash: the U.S. housing market more than a decade ago.

In this video, we are going to discuss his comments and see if there is any merit to what he is saying, as well as see what investments this billionaire likes instead. Let's jump into the video.

John Paulson is an American billionaire hedge fund manager. He leads Paulson & Co., a New York-based investment management firm he founded in 1994. He has been called one of the most prominent names in high finance and a man who made one of the biggest fortunes in Wall Street history.

Ever since John Paulson successfully bet against the U.S. housing market more than a decade ago, people keep asking him about his next big trade. The billionaire hasn't found anything to rival his massive short, but that's understandable given the difficulty to top the 20 billion dollars that Paulson made himself and investors during the housing crash that sparked the great financial crisis.

Now, more than 14 years after his legendary bet paid off, Paulson is again seeing signs of excessive speculation. Let's see what he had to say about cryptocurrencies.

No, I'm not a believer in cryptocurrencies, and I would say that cryptocurrencies are a bubble. I would describe cryptocurrencies 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. Well, based on what you've just said, why would you not put a big short of some type on cryptocurrencies? Or maybe you have, but do you think that's a good short?

Well, you know, when we look for these subprime, the reason why we shorted the subprime in size was because it was asymmetrical. You're shorting a bond at par that has a limited duration that trades at a one percent spread of treasury, so you can't lose more than the spread in the duration.

Yet if it defaults, you can make the poor amount. In crypto, there's unlimited downside. So even though I could be right over the long term, in the short term, as in the case of Bitcoin, you know, it went from 5,000 to 45,000. I would be wiped out on the short side, so it's just too volatile to short.

There are two particular areas from this clip that I want to elaborate on further. The first is what Paulson means by saying Bitcoin and other cryptocurrency have no intrinsic value. For any type of investment, its intrinsic value is calculated based upon two things: the cash flows that investment will produce over its lifetime and the interest rates at which those cash flows will be discounted back to the present day.

This goes for any type of investment, whether it is a stock, bond, apartment building, or farmland. The intrinsic value is determined by projecting out the cash flows of any of those investments. However, since Bitcoin does not produce any cash, Paulson makes the argument that its intrinsic value is zero.

Instead, the value of Bitcoin is based upon supply and demand. Since the supply of Bitcoin in existence is limited, if demand for it increases, the price will rise. On the other hand, if demand for Bitcoin decreases, the price will fall.

If you want to learn more about Warren Buffett's thoughts on Bitcoin, check out the video we made on it here. This brings up another important question: if John Paulson believes Bitcoin is going to zero, why doesn't he put that thought into a strategy that can make him money if it proves to be true?

He did, after all, make his name by, in effect, shorting the U.S. housing market and benefiting from the decline in home prices. The way that Paulson could benefit from the price decline in Bitcoin would be to short it.

The reason he won't short Bitcoin is that the price for Bitcoin is extremely volatile, meaning the price for it moves up and down rather dramatically. If Paulson is short Bitcoin and the price rises dramatically in a short period of time, Paulson could lose a substantial amount of money. This is because when you short a stock or any type of asset, your losses are theoretically unlimited.

Let's use an example to demonstrate this and show how Paulson could lose billions even if Bitcoin does eventually go to zero. Let's say Paulson shorts Bitcoin at fifty thousand dollars, and the size of this position is one billion dollars.

In our example, Bitcoin does eventually go to zero, but before that, the price continues to rise from the price at which it was shorted. When the price of Bitcoin doubles to one hundred thousand dollars, he will lose a billion dollars. When the price goes up to one hundred and fifty thousand dollars, he will lose another billion dollars, bringing his total loss to two billion dollars.

And if Bitcoin goes up to two hundred thousand dollars, you guessed it, he would lose another billion dollars, bringing his total loss to three billion dollars. This demonstrates why it is so difficult to short an investment. Even if you are correct over the long term, if the price of that asset that you shorted is volatile, you can lose a ton of money as the price continues to climb before the crash eventually comes.

So now that we understand why John Paulson doesn't like Bitcoin as an investment, let's see what other investments he likes instead. After you've made your famous trade that we talked about, yeah, I think you put on a trade where you bought a lot of gold or gold futures and you were what was called by some a gold bug. You're a big believer in gold.

Gold's now about 1700 an ounce or so. Are you believing that gold is now a good investment at this price?

Yeah, we do, and thank you for bringing that up. We do believe that gold does very well in times of inflation. We saw what happened the last time gold went sort of parabolic was in the 70s when we had two years of double-digit inflation. The reason why gold goes parabolic is that basically, it's a very limited amount of investable gold. I think it's on the order of several trillion.

Well, the total amount of financial assets is closer to 200 trillion, and fixed income is somewhere above 120 trillion. So what happens is if you own long-term treasury bonds that are yielding two percent and interest rates move up to five percent, those bonds fall materially in value. Likewise, if you have cash sitting in a bank that you're earning zero percent on, inflation's four percent, you're gradually eroding the value of your money.

So as inflation picks up, people try and get out of fixed income. They try and get out of cash, and the logical place to go is gold, especially if it starts to rise in inflationary times. But because the amount of money trying to move out of cash and fixed income dwarfs the amount of investable gold, that the supply and demand imbalance causes gold to rise. The more it rises, it sort of feeds on itself. It has the potential to go what I call parabolic.

So today, you are a big believer in gold as a good investment now? Yes. So we thought in 2009 that with the Fed doing quantitative easing, which is essentially printing money, that that would lead to inflation. But what happened was that while the Fed printed money, they at the same time raised the capital and reserve requirements at banks.

So the money sort of recycled; when the Fed bought treasuries, it created money that wound up in the banks and then was redeposited at the Fed. So the amount of excess reserves that the Fed almost rose by the same amount they were printed, and the money never really entered the money supply, so it was not inflationary.

This time around, the money has entered the money supply, so the money supply was up something like 25 percent last year. The best indicator of inflation is the money supply, so I do think we have inflation coming well in excess of what the current expectations are.

Paulson likes gold so much because he believes inflation is going to be substantially higher than what most people expect. During the clip, Paulson references the increased money supply as a result of the government printing money in response to the most recent economic downturn. He says that this will be the driving force that is going to cause high inflation.

Take a look at this chart that shows just how rapidly the money supply has expanded. Gold has historically been a way to profit from inflation as investors sell out of other investments such as stocks and bonds and move that money into gold as inflation increases. During times of inflation, the value of physical assets tends to increase, and gold is no exception. This is why he thinks the price of gold could rise substantially, despite being already at a relatively high price.

Take a listen to another investment Paulson likes. If somebody came to you and said, "John, I just got a hundred thousand dollars. What should I do with a hundred thousand? What would you tell them?"

I always say the best investment for an individual, an average individual, is to buy their own home. So, if you took that hundred thousand, put ten percent down, got a nine hundred thousand mortgage, or whatever you can buy a home for a million dollars, and you just reported that home prices were up twenty percent in the last month.

So if you bought a home for a million dollars with a hundred thousand down, the home was up twenty percent; that's two hundred thousand on a hundred thousand investment. You'd be up two hundred percent, and over time, essentially that's what's going to happen. The longer you wait, the more the house is going to appreciate, and the greater return you'll have on your equity investment.

So I think the single best investment for anyone with that type of money would be to buy their own house or apartment. Paulson says there are two reasons why owning a home can be a great investment. The first is that owning your home protects you from the impact of inflation.

Take a look at this chart. Home prices in America have increased pretty consistently year in and year out, providing you with a way of benefiting from inflation. Additionally, if you buy a house on a 30-year mortgage, you will have the same mortgage payment for 30 years, helping you limit the increase in your cost of living every year.

If you are a renter, on the other hand, your rent increases pretty much every year by anywhere from three to five percent annually. Another reason why John Paulson likes real estate is that you can buy it using leverage. Leverage is just a fancy way of saying that you can borrow money to make the purchase.

When you use leverage to purchase an investment such as a house, your returns are magnified. Let's use a simple example. Say you buy a one hundred thousand dollar house using a ten percent down payment. That means you put down ten thousand dollars and borrow the other ninety thousand dollars.

Let's say the price of the house increases by 10 percent to 110 thousand dollars. What's the return on your investment in percentage terms? It's not 10 like you might think, but instead a staggering one hundred percent. Your house is now worth ten thousand dollars more than what you paid for it, and that is double the ten thousand dollars you put down as the down payment.

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