Capitalisn’t: Why This Nobel Economist Thinks Bitcoin Is Going to Zero

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?

Luigi: A meme coin is a cryptocurrency that originated from an internet meme, and now it’s your turn to explain what a meme is.

Bethany: My children would probably do a better job than I would, but a meme is an image, a video, a piece of text, et cetera. It’s typically humorous in nature, and it’s copied and spread rapidly by internet users. Interesting to think of the President of the United States being a meme. Fascinating.

Luigi: Meme coins are often called s—tcoin. Now, s—tcoin is a technical term, for those of you who might feel offended, because it refers—and I’m reading the definition from CoinGecko—to a cryptocurrency with “little to no value, authenticity, or utility.”

Unlike the others that, as you know, have a lot of value, this has no value, authenticity, or utility. These tokens are created with minimal innovation or purpose, but often as a joke or for a quick profit scheme.

Bethany: We are not going to opine on whether the Trump coin is a quick profit scheme, but I do think it’s the perfect opportunity to bring in Gene Fama, because as most people know, he’s the father of the efficient-markets hypothesis, and maybe he can help us explain why all of this actually fits into an efficient-markets hypothesis.

When I think about you, Gene, I think about efficient markets, the hypothesis that share prices consistently reflect all available information, and that it’s difficult to make money in the market without taking more risk. You introduced this hypothesis in 1970. More than 50 years later—

Eugene F. Fama: No.

Bethany: It’s not 1970?

Eugene F. Fama: It was 1956.

Bethany: 1956? Oh, my God.

Eugene F. Fama: 1956.

Bethany: Anyway, all these years later, what do you think people misunderstand about the efficient-markets hypothesis? You made a fascinating comment to the Financial Times recently that the efficient-markets hypothesis is just a model, and that it’s got to be wrong, to some extent.

Eugene F. Fama: Well, that’s true of all economic models. They’re not literal truth; they’re not the truth for everybody. But this one, I think, is the truth for most people. Most people should behave as if they have no special information about market prices and just invest passively.

If you look at the active mutual funds, for example, what you find is the active ones don’t do very well. But there are insiders who do have special information about companies, and they can make money off that insider information. You have to ask yourself this question: if I’m a manager, and I have special information about prices, why would I give it to you?

Luigi: In the last 30 years, the term “financial bubble” has become commonly used. It used to be a technical term, and now everybody talks about it.

As far as I remember, you’re skeptical about the existence of financial bubbles. Why don’t you tell us what you think: do financial bubbles exist, and can you spot them?

Eugene F. Fama: Can you spot them? I can’t. My definition of a bubble is very simple. It’s something that has a predictable ending. If you can’t predict when it’s going to end, you’re just using this word loosely.

I canceled my subscription to The Economist because they were using this word all over the place without saying what they meant by it. If you’re not precise about what you mean by a bubble, then I don’t know what to do. But if you take it to be something that has a predictable ending, then I want to see you do the predicting.

Bethany: What makes something have a predictable ending? Has there ever been anything in financial markets that has a predictable ending?

Eugene F. Fama: We’re going to find out, because I think that’s the other part of the topic today, which is presenting me with all kinds of problems.

Luigi: Before we arrive at today, going back in history, there is the very famous tulip bubble. Do you think that the tulip bubble was a bubble or not?

Eugene F. Fama: I don’t know. I never saw the data. What do you know about the price of tulips? How do you know what’s the right price or what’s the wrong price, except after the fact?

Luigi: But there is no connection between the efficient-markets hypothesis and any measure of fundamentals. If you have a model of fundamentals, and the prices are 10 times the model of the fundamentals—

Eugene F. Fama: Well, I want you to take your model of fundamentals and use it to predict the way the prices are going to go in the future. If you can do that, you’ve got a way to find the market inefficiencies there. That’s fine. That’s a test I’m totally willing to accept, if you can do it.

Bethany: Is there such a thing as intrinsic value, then?

Eugene F. Fama: There is, but the problem with intrinsic value is it involves a cash flow in the numerator that you’re pricing, and a discount rate in the denominator. The problem is that the discount rate can go all over the place and generate really wide price movements, much wider price movements than the effect you can get out of the numerator.

I don’t know that intrinsic value is a concept that has any concrete meaning in terms of what I would do with it, because I don’t know what to do about the denominator.

Luigi: Before we go straight to cryptos and Bitcoin, let me ask you a more general question about the current system of payments inside the United States and across borders. Do you think that it works well? Could it work better? What are the major problems? If you were to advise a regulator about the problems, what would be the problems?

Eugene F. Fama: The problems in the past have been that the banks have delayed the payment mechanisms through the channels that we have available already. There’s no reason why you can’t have instantaneous settlement of all transactions. You don’t have to wait a day or two days to clear transactions. That’s just a way for the banks to make money.

If you open that up and have instantaneous trading, all you really need is a big computer in the middle. If you’ve got a computer you can trust and somebody who’s watching over the computer that has real rules that are enforceable, you’re fine. That’s it. That’s all you need. I wrote that paper 40 years ago.

Bethany: Does that system require . . . If you wrote the paper 40 years ago, then the answer has to be no. Does a system such as that require cryptocurrency or blockchain for any reason at all?

Eugene F. Fama: No. Cryptocurrency and the blockchain are two different things. The blockchain really wants to do transactions that are not traceable to anybody. In order to do that, it goes through a very complicated procedure that is really not sustainable. You can’t have a whole financial system built on this because it requires too much in the way of computing power. You can’t do it. It scales exponentially as soon as the number of transactions goes up.

Cryptocurrency is something entirely different. That’s the medium that’s in there. All we know about monetary theory says it shouldn’t survive. All we thought we know about monetary theory says it shouldn’t survive.

Luigi: Your idea of a big computer in a central location and somebody watching over it works extremely well inside a country. What about for international transactions? How do you solve that problem? If I want to send some money to Zimbabwe at a reasonable price, that system doesn’t work.

Eugene F. Fama: Why?

Luigi: Because there is not a central authority over the world.

Eugene F. Fama: Why? Why can’t I have a computer that translates from one currency to another through markets?

Luigi: Because you need to trust that computer, and either that computer is in the hands of the Americans or in the hands of the Chinese, and one of the two sides does not trust the other.

Eugene F. Fama: That’s the problem. That’s the problem, trust. That problem isn’t the computer. The problem is trust.

Luigi: Yeah. But my understanding of one of the selling points of cryptos is precisely that in an international arena, there is not an institution that you can objectively trust. And so, you need to rely on this complicated mechanism because the trust is self-supporting.

Eugene F. Fama: That’s fine, but the blockchain is even more complicated. I don’t know which is the poison and which is the good stuff.

Bethany: In other words, is there an argument that if trust is broken, the blockchain doesn’t solve that question of trust? Or are you coming back to the idea that it’s simply not sustainable from an energy-requirement perspective?

Eugene F. Fama: Well, there are always incentives for people to corrupt the blockchain. You have more and more people entering whose sole purpose is to corrupt it. If they can bring together enough computing power, they can bring it down.

Every system doing lots of transacting is going to have a problem like this, one way or another, a problem of verification and a problem of who is enforcing the rules. The blockchain is a particularly expensive way to do it.

Luigi: But there are different kinds of blockchains. There is the Bitcoin one that is expensive from an energetic point of view, but there is a second generation, Ethereum and all the others that use Ethereum, where they have given up the proof of work. They’ve given up the use of massive amounts of computing power. It seems to be working with the so-called proof of stake, which is much cheaper from an energy point of view.

Eugene F. Fama: OK.

Luigi: In addition to that, it can be used to program payments or to use so-called smart contracts to do automatic transactions that are very convenient. Actually, one of your former students, Campbell Harvey, who is a professor at Duke, he’s a big fan of Ethereum and all the ideas behind that. Do you see a role for that?

Eugene F. Fama: If it’s a better way of trading, I can see a role for it, for sure. The question is, what do you feed into it? What’s the unit of account? What’s the medium of exchange in there?

That’s where cryptocurrencies are such a puzzle because they violate all the rules of a medium of exchange. They don’t have a stable real value. They have highly variable real value. 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.

Luigi: I think that the problem with all the cryptos is that in order to create some trust in the system, you basically bound the supply. Once you bound the supply, the price is driven entirely by demand. To the extent that demand is fluctuating, prices fluctuate crazily. Because they fluctuate crazily, nobody is going to use it as a currency. That’s the reason why the movement now, especially with Bitcoin, says, “Oh, it’s not a currency. It’s an asset. It’s digital gold.”

Eugene F. Fama: It’s only digital gold if it has a use. If it doesn’t have a use, it’s just paper. Not paper, it’s air, not even air.

Luigi: But if I were a Russian oligarch or Saudi prince, I think I would like to invest $10 million into Bitcoin. Why? Because if it goes to zero, I go to $990 million, and I live happily ever after anyway. I don’t think it is impacted.

But if I have to run for my life from the country I’m in, and I am persona non grata all over the world, and I desperately need money, Bitcoin provides that service. If you could go from a billion to zero, it’s much better to go from a billion to $10 million, because with $10 million you can survive, at least for a little while. If you’re a billionaire, your consumption probably is pretty intense, so I don’t know how long you last with $10 million, but it still is definitely better than having zero. As a way to protect some of your wealth from rapacious governments, I don’t think it’s that crazy of an idea.

Eugene F. Fama: We’re going to come back to the same question. Where does the value come from?

Luigi: Oh, it’s a conventional value. Why is gold so valuable?

Eugene F. Fama: Gold has many uses.

Luigi: I understand, but we know that the value of a gold coin is much bigger than the value of its use. In Europe, everybody with a little bit of means owns some gold coins in a bank. Why? Because Europe has this terrible history that once in a while you have to run away because you are invaded. There is somebody evil or something like that.

In the United States, you don’t have this experience. But in Europe, it’s a common recurrence through history. And so, everybody with a little bit of means has some gold coins that they only keep for this particular extreme event.

Eugene F. Fama: If an extreme event arises, the value of those coins is just the gold value of them.

Luigi: No, you know that gold is accepted.

Eugene F. Fama: If the countries you’re talking about go out of business, it’s just the gold value in the end. That’s fine. Gold has value, because it has uses in other ways.

Bethany: But is that, then, the core of the argument? Does it have to have a use to be valuable? Does something have to have a use to have value?

Eugene F. Fama: That’s what the old theory says.

Bethany: But is that right?

Eugene F. Fama: I remember I wrote a paper in the ’60s about this. I can tell this story. I did a workshop, and I said it could be battleships. The unit of account could be battleships. And Bob Lucas said, “How do you make change?”

This is the point because it’s just a unit of account. It’s not what you’re actually transacting in. But it’s something that has a real value. That’s the point, because it has other uses.

Luigi: But if we look at the history of money, we see a lot of examples of stuff that is completely worthless that has been used as a currency. You probably know, Gene, the story of the Yap money that even Milton Friedman wrote about. It is that tribe in Micronesia that had those gigantic stones. You couldn’t do anything with those stones, but they still were an accepted form of payment, and as long as everybody else accepted them, it was a useful means of payment.

Eugene F. Fama: Yeah, that would be interesting to see whether that was an example of a currency that fluctuated dramatically in value, to see if it was anything like what we see in Bitcoin now. That would be fine.

Bethany: What about stablecoins that are explicitly tied to the value of the US dollar or something that is supposed to make them stable? I saw an example of one that crashed because once there was a run on it, the backing wasn’t as stable as was thought. I thought maybe they should be called unstable coins. But I don’t know, maybe I’m getting this wrong.

Eugene F. Fama: No, that’s fine. If you want to use US dollars in the blockchain, that can work. The blockchain itself is just the way of transacting—an expensive way. But if you put something in there that has a stable real value, it’s fine.

Luigi: But as you were saying earlier, it’s much better to do it through the banking system if the banking system gets its act together. Are you in favor of having the Fed provide a digital currency to everybody so that we can transact effectively over the internet at zero cost and live happily ever after?

Eugene F. Fama: That’s what we have now.

Luigi: Not really. I cannot deposit at the Fed, for example.

Eugene F. Fama: No, you’ve got a digital currency. It’s called dollars. It’s in limited supply. Well, it used to be in limited supply. It isn’t anymore.

Luigi: Sorry, Gene, I don’t have access to the digital currency of the Fed. If I want to send some money to you, I have to access my bank account. I cannot have access—

Eugene F. Fama: You do have access.

Luigi: What?

Eugene F. Fama: The transaction on your behalf takes place in terms of the digital currency.

Luigi: I have to go through a lot of intermediaries, and I take a lot of risk to—

Eugene F. Fama: Your bank sends digital currency to the accepting bank, which accepts digital currency.

Luigi: Yeah.

Eugene F. Fama: That’s all that happens.

Luigi: Can’t we do it without banks? Why do we need the banks in the—

Eugene F. Fama: No, it could be anybody doing it.

Bethany: But if you replace the dollar in the blockchain with a stablecoin that is backed by dollars, why not just use dollars? I mean, what problem are you solving there?

Luigi: Actually, I think you’re solving a huge problem of making sure you can transact no matter what the government decides to do.

You know the famous story that at some point during the pandemic, some truckers in Ottawa started to strike, and they generated a lot of popular support. People were sending money via PayPal, and PayPal said, “No, we don’t want people’s money to go to the truckers,” because the truckers opposed the government. They unilaterally stopped the payments to the truckers.

Anytime you have a bank, the bank can say: “You know what? You have a political view I don’t like. I’ll debank you.” That’s part of the discussion that we’re seeing today on the internet. A lot of people are concerned. The beauty of stablecoins is that nobody has the power to say, “Bethany, you can’t transact.”

Bethany: But don’t they? Why wouldn’t the government just be able to say: “Sorry, stablecoin company, we’re shutting you down. We’re raiding you. We’re staging an FBI raid on you. You’re done. You can’t transact anymore.” Why does a stablecoin fix the issue of government power?

Luigi: At the very minimum, you’re attacking the entire system. You cannot do a targeted attack on Bethany because if you attack Bethany, you attack the entire system.

Second, even if they attack the entire system, it’s not obvious that people cannot find ways around it. I can go through Singapore; I can go through other countries that are more open-minded. That’s the reason why, if I am an oligarch and I want to hide some money, I think that bitcoins look pretty attractive to me. If I am a criminal . . . And I’m not trying to defend the criminal. I’m trying to find a reason why this is useful, which from a societal point of view is not very useful. In fact, maybe it's negative, but you see the point.

Eugene F. Fama: Yeah.

Luigi: Given that you’re so negative on Bitcoin, are you short Bitcoin?

Eugene F. Fama: I don’t short anything, Luigi.

Luigi: Why not?

Eugene F. Fama: I’m a long-only guy. I’m so short otherwise, I can’t do that.

It’s too variable, and I want an easy way to trade, and I think common stocks serve my purpose and bonds.

Bethany: I think right now Bitcoin has a $2 trillion market cap. It’s the seventh most valuable asset in the world. Would you be willing to call it a bubble?

Eugene F. Fama: I can’t predict when it will bust. I’m hoping it will bust, but I can’t predict it. I’m hoping it will bust because if it doesn’t, we have to start all over with monetary theory. It’s gone. It might be gone already, but you have to start all over.

Luigi: I know that our colleagues actually took a bunch of bets a couple of years ago about the long term. Let’s make a long-term bet. What probability would you attribute that within 10 years, the value of Bitcoin will go to zero?

Eugene F. Fama: I would say it’s close to one. I still believe in monetary theory, though. I may be wrong.

Luigi: I understand. My next question is, what degree of confidence do you have in that prediction?

Eugene F. Fama: That’s a different question entirely.

Luigi: I know.

Eugene F. Fama: The distribution has a long tail. It’s very flat.

Bethany: Is there something that would make you say: “OK, the moment has come. We have to scrap all of monetary theory and start again”?

Eugene F. Fama: Luigi made me put a term limit on it. I’d take 10 years because I’m 86 years old. The likelihood that I’m going to have to pay up on this one is pretty low.

Luigi: My mother is 97, so you’re going to make it to 97. That’s my prediction.

Bethany: If you ran the world, what would you advise the government to do about crypto? You could argue, let it become whatever it wants. Government, get out of the way. Is that the right approach from a free-market theory? Let it crash and burn on its own, or let it do whatever it’s going to do and just step back from any kind of attempt to regulate it?

Eugene F. Fama: Sure. But if it does blow up, you can predict the people who invested in it are going to go running to the government.

Bethany: Yeah.

Eugene F. Fama: Are they going to ask to be bailed out for that? But you know they’re going to go run to the government, and then the government’s going to impose all kinds of rules. I predict that’s what’s going to happen at some point, but we’ll see.

Bethany: I would, too, and I’d predict that they go running asking for a bailout. Does that mean that the government should put rules on it in advance, given that the likelihood that this . . . I don’t know what the likelihood of it crashing is, but the likelihood of people—

Eugene F. Fama: That’s a good question. If you’re a libertarian, though, 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 and decide what you’re going to do before the fact to minimize the cost of doing that.

I don’t know what that is at this point. Does that mean, instead of imposing rules on Bitcoin and how it’s traded, that the people who run these exchanges have to show up front what they’re doing? Maybe that’s the direction you’ll have to go with.

Luigi: Isn’t the obvious solution to keep it separate from the traditional system? After all, Bitcoin and the entire movement started with the idea to replace the current financial system.

Eugene F. Fama: Yeah, right.

Luigi: If they want to live up to their expectations, let them 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, but we need to keep this separate.

Eugene F. Fama: Right. That’s the key part, that if it collapses, you don’t pick up the pieces.

Bethany: I know I am cynical on this point. I don’t know what the risk of Bitcoin collapsing is. I wouldn’t even opine on that. I do know that the probability that the government would have to bail it out if it does collapse is 100 percent.

Luigi: With what degree of confidence?

Bethany: One hundred percent. Do either of you disagree?

Luigi: On the 100 percent of both, yes. I don’t think I’m 100 percent confident of anything.

Bethany: I know. I’m making a rhetorical point.

Another irony at the heart of this is a question for both of you that I’ve also struggled with. If part of the value of cryptocurrency is that it is decentralized, that it exists outside of government, then why is the comeback in crypto a function of our president? Why does the crypto industry need a president on its side if they’re supposed to be independent of each other?

Eugene F. Fama: Well, it depends on whether you think the president changes the odds that the government does something to shut it down.

Luigi: I think it’s even more extreme than that. We know that one easy way to make money is to create a Ponzi scheme where more and more people buy it. A Ponzi scheme requires a constant enlargement in the community.

If the government gets in the way of enlarging this community, that’s a serious issue. The first step that they want is to get the government out of the way so they can enlarge the community. The extra step is having the government become part of the community. That’s the Trump plan of buying a Bitcoin strategic reserve because the only way that Bitcoin does not go to zero is that the government becomes the buyer of last resort.

Eugene F. Fama: You think they would have that effect? It may have the opposite effect. If the government’s in there, they might send it to zero immediately.

Bethany: My point is then that undermines the whole concept that’s supposed to be at the heart of this, right? It brings it in a circle where it’s just nonsensical.

Luigi: Businessmen don’t need to be logical. They need to make money at the end of the day, and they’re very happy to make money by being illogical. Academics, they’re so into being logical that they lose money.

Bethany: Yes, and former math majors are into being logical, too, and that’s part of my problem.

Luigi: OK, Gene, thank you very much for being such a good sport.

Bethany: Thank you.

Luigi: This is a difficult one. We are all struggling with it, and your wisdom is very much appreciated.

Eugene F. Fama: I hope so.

Bethany: I admire Gene’s consistency. There’s that great saying that we’ve used on here before, which is Emerson: “A foolish consistency is the hobgoblin of little minds.” He definitely does not have a little mind.

By the same token, when I see all these other prominent people changing their minds on crypto . . . Ray Dalio of Bridgewater 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,” one his firm has already begun offering to clients, if only indirectly.

I’m actually glad that Gene has an intellectual backing behind his dislike of Bitcoin and cryptos overall and that he’s sticking to it, in the face of possibly being wrong, but not knowing yet if he’s wrong.

Luigi: I agree, but I also admire him for the opposite. I admire him for his open-mindedness of admitting the possibility that he might be wrong.

He didn’t exactly use the term “bubble” referring to Bitcoin, but we agree that he predicts it will go to zero in 10 years. That’s a pretty strong prediction. He’s going in the direction of saying this is a bubble. In principle, bubbles should not exist in his universe. He’s willing to adapt this universe at age 86. I think that’s really remarkable.

I also think he’s very careful to say, if this stuff were to continue, we need to throw away monetary theory. He’s still in the process of learning, and without a doctrinaire attitude that unfortunately is so common among a lot of scientists, especially on social media.

I don’t remember who I heard saying this recently, but I thought it was great. He said: “Science does not have certainties. Science is a process of learning and making mistakes.”

Bethany: Yeah. I also was interested in his question about regulation, and that is a really interesting way of thinking about it and perhaps a new framework, even for a libertarian, to say, “Well, if the government is going to have to get involved, if at all goes to s—t,” since we’re in the theme of using the word s—t on this podcast, then maybe we have to think about regulation differently heading into it.

It actually made me think of something else that I wish I had asked him. Maybe you have a view on this. There has been this outcry from the crypto industry, led by Marc Andreessen, about how regulation or attempted regulation is strangling the industry, and killing American crypto and killing entrepreneurship.

Yet the industry was so heavily regulated and so ground down by the boots of the government that Sam Bankman-Fried was able to collapse in plain sight.

Wait, which is it? Is it too heavily regulated, or is it not regulated enough? Is it regulated in all the wrong ways? Is that the problem?

Luigi: There is one aspect in which I have a little bit of sympathy for what Marc Andreessen is saying, which is this issue of debanking. A friend of mine is American, but originally, he was from Romania, so he sometimes sends some money to his parents in Romania.

He received a notification from his bank, one of the large banks, saying, “We don’t want you as our client anymore.” No justification, nothing. You are out. These days, it’s not like there are 500 banks that are all the same. If you want to have a decent ATM network, there are three or four banks.

If one says, “I’m kicking you out for no reason,” then you start to become nervous. This is my interpretation, and I don’t know whether it is true or not, but I suspect that there is some regulation that starts to put more burdens on you if you have strange transactions or transactions abroad.

If you are a real criminal with real money, they’ll consider you. But if you only send $1,000 back and forth, you’re just a pain in the neck. You have the features of the criminal without having the profitability of a criminal, so they want you out.

Long story short, the accusation Marc Andreessen made in a podcast was that the Fed was debanking, on purpose, everybody that was involved in this business.

We know that that was true, for example, when marijuana got liberalized. There were a number of stories about the fact that because, at the federal level, selling marijuana is still a crime, if you are a bank regulated by the Fed, you cannot deal with people that deal with marijuana.

As a result, if I start my little marijuana store in Illinois or California, what do I do with my money? I cannot deposit it at the bank.

In that particular case, the activity was clearly illegal, and you understand why they were doing it. Maybe it was a bit excessive. With all the problems the Fed has, I don’t know why they particularly target this. That’s a different story.

With cryptos, they are not officially illegal, so why do they target people with crypto? I don’t know. To that part, I’m a bit sympathetic.

Bethany: The problem is, it’s really hard to know from the outside, because the part of the industry argument that I’m sympathetic to is the one that there’s just stalemate in the government, that you just can’t get anywhere. It’s just being stymied, and there aren’t clear rules, and there’s not a clear process for having any rules, so no one knows what’s going on. That seems like a legitimate complaint to me.

But I always wonder, when powerful people or companies say that, is the question really that they just don’t like the rules? Even though they’re crying out for rules and clarity, when they get the rules, then will they say, “No, no, no, but we didn’t want these rules.”

I think that the point you made at the end raises a really interesting question, which is the ways in which cryptocurrency might become entwined with the banking system in a way that if there’s a crisis, the two aren’t separate. The crisis starts in cryptocurrencies and brings down the banking system, or the crisis starts in the banking system and brings down cryptocurrencies. That question of the intermingling of risk, it’s really, really hard to see in advance, but I think that’s an interesting one.

Luigi: There is not only that one; there is also the question of consumer protection. We have rules in the United States to protect investors. The reason why, for the Trump meme coin, there is that long disclosure is to try not to get in the realm of a security offering, because securities offerings are heavily regulated to prevent companies from taking advantage of unsophisticated players.

I think those are good rules that should stay in place. But then, how do you explain that you can raise—not $50 billion, because it didn’t raise $50 billion, but a significant amount of money by selling Trump coins and calling them Beanie Babies and raising them? Shouldn’t we protect consumers a bit against these potential scams?

Bethany: Maybe the right answer is just to say it’s not a security. It’s not regulated. Therefore, you, crypto companies, you can’t go public. You can’t use any of the official whatevers of the government. Anything that is government property, hands off, stay away. Go for it.

Luigi: But the irony is that this is basically saying that useless stuff like the Trump coin is allowed because it’s clearly not a security. It’s useless, so it’s clearly not a security. It’s closer to a Beanie Baby than a security, for sure.

But then you have intermediate situations. If I sell you a token that in the future might be used for something useful, like buying a certain product, that’s not a security, but is it allowed? Probably yes, and that might be useful. I think we need to be very careful in this regulation.

Bethany: Yeah. I guess I would close by saying that I hope whatever regulation does get promulgated is done in the clear light of day as much as possible. If crypto enthusiasts have any intellectual honesty about the glories of the free market and the glories of this new world, then nothing that happens should be behind closed doors. There should be a recording available for every meeting that cryptocurrency people have with anybody in the government, and it should all be posted. It’ll be an enormous volume of information, but it should all be posted somewhere so that people can go through it and see exactly why rules are being made the way they are. No closed-door sessions.

Luigi: Fantastic idea, Bethany. You should launch this campaign for transparency on cryptos.

Bethany: No, transparency on Crypto Beans.

Luigi: No, no, on crypto lobbying. I think that that would be a phenomenal step.

I think that we should analyze crypto lobbying in a separate podcast, because I think it’s stunning. The amount of money that entered the last electoral cycle that was financed by cryptos and was basically targeted to weaken candidates that were anti-crypto and push candidates who were pro-crypto is enormous, and I think we should learn from that, the power of money in politics.

Bethany: Yeah, for sure. It’s another way of thinking about this question of real and not real, and bubbles and intrinsic value. Whatever you may say about cryptocurrencies, belief in them, backers of them, might have changed the history of the United States by changing both who got elected as president and who got elected to a whole host of lesser seats. If that’s not reality, I don’t know what is.