Nobel Prize-winning economist says beware of the Bitcoin craze. He may be right

Andres Oppenheimer

Bitcoin is surging to record highs following Donald Trump’s election victory, fueled by hopes of a friendlier regulatory environment. But a Nobel Prize-winning economist is warning that the crypto boom is a dangerous bubble that is likely to burst.

Eric Maskin, a Harvard professor who was one of the winners of the 2007 Nobel Prize in economics, told me in an interview that the ongoing crypto craze is both a bad idea for countries and a risky investment for individuals.

I called Maskin a few days ago, curious about the fate of cryptocurrencies after the price of Bitcoin had reached a record $93,000, or more than a 30% increase in less than two weeks since the elections. Since the beginning of the year, Bitcoin has soared by more than 100%.

Many people I know are rushing to buy Bitcoins, in part because of expectations that the incoming Trump administration will drop regulations opposed by the crypto industry, and help legitimize cryptocurrencies. Top crypto industry tycoons such as Elon Musk were among Trump’s biggest supporters, pouring millions into his campaign.

But Maskin told me that the spectacular rise of Bitcoin prices is precisely why investing in cryptocurrencies is so dangerous. “It goes way up, it goes way down. It is very far from being a safe investment,” he said.

There are three major reasons Maskin is worried about a further legitimization of cryptocurrencies.

First, he said, widespread use of these digital currencies will deprive governments of a key tool to fight recessions.

Currently, when a country enters into a recession, the central bank increases the money supply to expand economic activity. But if more people use cryptocurrencies instead of dollars, or their national currency, countries will no longer have this powerful tool to fight economic downturns.

Second, cryptocurrencies are often used for illegal activities, like paying bribes or drug trafficking, he said. “Cryptocurrencies are a very good way of conducting criminal transactions and hiding them under anonymity,” he explained.

As for crypto-supporters’ claims that Bitcoin and other cryptocurrencies are used by law abiding people to transfer money — often to relatives overseas — without paying hefty bank wire transfer commissions, Maskin says that the same could be done with digital dollars, or digital euros, or any other existing national currency.

“I’m not opposed to the idea of an electronic currency,” he said. “I think that’s fine. But I think it should be government currency, not private currency.”

What about the argument, I asked Maskin, that if cryptocurrencies get the blessing of the incoming Trump administration as many expect, they will become a more mainstream, and thus safer, investment?

Maskin cited the FTX cryptocurrency exchange crash in 2022 as an example that the opposite may be true.

“FTX did not crash because of too much regulation,” he told me. “If there had been better regulation, that fraud could have been discovered earlier on. So I think the people who say that volatility will be reduced [under Trump] have it exactly backwards. I think we can expect more volatility.”

I know, none of these arguments will convince my friends who say the price of Bitcoin rose by more than 100% this year, and don’t want to miss what they expect to be a golden era for the crypto industry. Not even a reminder that Bitcoin prices collapsed by 72% in 2022 will stop them from joining the ongoing crypto craze.

I, for one, am staying out of it. If you are using cryptocurrencies to send money to your mother overseas without paying bank commissions, I understand that. And if you have some spare money to gamble, as if you were betting in a casino, I understand that, too.

But after talking to Maskin, I wouldn’t recommend to any friend that they put more than 1% of their savings into cryptocurrencies. If they are thinking of these currencies as a serious long-term investment, they are likely to get burned.