Bitcoin’s ‘inevitable collapse’

🔸 Plus: Some boomer parents want to spend all their money and leave nothing for their kids 🔸 Prediction markets are taking bets on the LA wildfires 🔸

Feb 03, 2025

The markets, year-to-date

S&P 500: 6,040.53 ⬆️ 2.70%
FTSE 100: 8,673.96 ⬆️ 5.01%
Bitcoin: $101,985.90 ⬆️ 9.12%
GBP to USD: $1.2401 ⬇️ 0.93%
GBP to EUR: €1.1966 ⬇️ 1.05%
(As of Friday market close.)

A hedge fund warns that Bitcoin “could wreak havoc in ways we cannot yet anticipate”

Last week Moneyin2 told you how Bitcoin is slowly infiltrating traditional finance institutions, and how those institutions are increasingly recommending crypto despite the amount of risk and volatility it adds to your savings and investments.

There is nothing complicated about why they are doing this. Bitcoin has risen from $16,000 per coin in 2023 to $102,000 today. Investors — or gamblers as they ought to be called — have enjoyed great gains and that has created a lot of noise and a lot of demand. The institutions are simply responding to that demand.

U.S. President Trump — who has backed three of his own digital tokens — is now in the process of creating a national digital asset stockpile, which will likely further push up the price.

But last week Elliott Management (a hedge fund) sent a letter to its clients warning them to stay out of crypto. According to the Financial Times:

The $70bn-in-assets firm took aim at the US government’s apparent enthusiasm for assets that have soared in price but have “no substance”, and also at politicians who are supportive of cryptocurrencies that could eventually become a rival to the US dollar, according to an investor letter seen by the Financial Times.
The fund “has never seen a market like this”, wrote Elliott, referring to the speculative investor frenzy it believes is gripping financial markets. It pointed to the artificial intelligence boom and high equity market valuations as signs of investors “acting like a crowd of sports bettors”.
“Crypto is ground zero” for the speculative surge across markets, not only because of the size it has grown to but also because of its “perceived proximity to the White House”, it added. The “inevitable collapse” of the crypto bubble “could wreak havoc in ways we cannot yet anticipate”, it said.
… For any elected official to support “marginalising the dollar” was “profoundly dangerous”, wrote Elliott, highlighting the hundreds of millions of dollars spent helping politicians who were sympathetic to crypto get elected.

The Elliott letter is interesting because the fund’s founder, Paul Singer, is a supporter of Trump’s. He donated $56 million to Republicans in the last election cycle.

‘No substance’

The most important words in the Elliott critique are “no substance.” The difference between Bitcoin and any other kind of investment is that Bitcoin does not entitle its holders to an underlying asset. It’s literally just a token that represents nothing else.

If you own stocks, each share entitles you to a percentage ownership of the company. You get the right to vote on who gets appointed to the board. You get dividends — a share of the profits.
Similarly, with bonds, you are entitled to a stream of interest payments in addition to the guarantee that you will be paid back the face value. You can sue if the issuer defaults.
With gold, you literally own gold. It’s a useful material in electronics, surgical instruments, jewellery, and a million other purposes.
When you buy property, you get a place to live or rent to others, which generates income for you. Even if property prices go down, you still own a house or a flat or some land — there is a physical asset underlying your mortgage.
Even cash gives you rights. Banks will hold it and pay interest to you. You can use it to buy goods and services almost everywhere (unlike Bitcoin, which is almost never accepted as a form of payment). The value of cash may fluctuate with inflation but, crucially, it is the only asset you can use to pay your taxes.

None of these investment categories guarantees a profit. But they all guarantee something. Even if the value of your asset plummets, the actual asset continues to exist and may regain value in the future.

Bitcoin has none of these features

Despite its name, it is not even a “coin”. The crypto world has in recent years taken to referring to Bitcoin and other online currencies as “digital assets” — but that’s a misnomer. There is no asset underlying Bitcoin. It’s merely a token, a symbol, a piece of software code that reflects the relative supply and demand of people willing to buy or sell. At best, Bitcoin might be described as a contract — given that it can be traded. But even so, it’s a contract that’s only worth the paper it is written on. And it’s not written on paper.

‘Inevitable collapse’

OK, so Bitcoin is gambling. So what? A lot of people have clearly done very well “gambling” on crypto. Why shouldn’t you get in on the action? In the Elliott letter, the fund goes out on a limb to say that crypto faces an “inevitable collapse”. That’s a bold statement because although Bitcoin has been through multiple crises — its price has declined by more than 75% more than once — it has never completely collapsed.

How can Elliott be so sure this collapse is coming?

Two reasons. The first is, as stated, this is a marketplace in which there are no assets. That, by definition, is a bubble. At some point, the smart people will say “I’m not doing this anymore.” Buyers will disappear. Everyone else will lose their money.

The quantum computing threat

The second (not cited by Elliott) is quantum computing. Quantum computer chips are vastly more powerful than the traditional chips in your phone or laptop. And that will give them the ability to easily undo the cryptography that currently secures all blockchain tokens.

Google has a quantum chip in development named “Willow”:

Willow performed a standard benchmark computation in under five minutes that would take one of today’s fastest supercomputers 10 septillion (that is, 10^25) years — a number that vastly exceeds the age of the Universe.

With that power, hacking Bitcoin becomes a trivial task. Experts vary on how many years we have left before quantum computing comes online commercially. Some say it’s five years away. Others have said development will take another 20 or 30 years. (Creating quantum chips isn’t easy.) But they all agree that Bitcoin is dead as soon as these chips become available.

If the developers who maintain Bitcoin’s blockchain — the codebase on which Bitcoin sits — wanted to upgrade the system to make it strong enough to withstand a quantum hack, they would need to take the entire thing offline for between 76 and 305 days.

It is really difficult to see how a market with no assets, whose underlying cryptography becomes obsolete in a few years, will survive in the long term. At some point, reality will kick in.

The Moneyin2 Guide to Wealth

The Moneyin2 Guide to Wealth will get you the biggest return on your savings by maximising cash matches from your employer, free cash from the government, and shielding your investment gains from tax. It takes you step-by-step through the world of pensions, SIPPs, ISAs and ETFs — all in plain English.

And for dessert …

New trend: Boomer parents who want to spend all their money on themselves, leaving nothing for their kids.
Prediction markets like Polymarket and Kalshi are taking bets on the LA wildfires. That’s dank.
Three young bankers have died in the last year after allegedly working 100-plus hour weeks.
“Some Things I’m Never Going To Do”: An essay on wealth by Ben Carlson.