Economic guru David Stockman warns savvy investors not to be tricked into believing the current bitcoin craze will last.
"It's basically a class of really stupid speculators who have convinced themselves that trees grow to the sky," the former Reagan budget director recently told CNBC.
"It will burn out in a spectacular crash. All of these latter-day speculators will have their hands burned to a crisp, and they will learn the proper lesson," Stockman said.
Stockman won’t say where he thinks the prices of bitcoin and other digital currencies are headed.
"I have no idea. I mean it could double or triple from here or it could fall to zero. But the point is that it's not real money because real money for transactions has to be stable," said Stockman, who was the Director of the Office of Management and Budget (1981–1985) under President Ronald Reagan.
According to Stockman, the CBOE and CME decisions to add bitcoin futures to their exchanges don't give this emerging asset class legitimacy.
"Anytime Wall Street sees an opportunity to shear the sheep, and they see the sheep stampeding to the slaughter, they line up with some new gimmick to take advantage of the circumstances. That's all," said Stockman, who served as a Republican U.S. Representative from the state of Michigan (1977–1981).
"There is nothing that's being validated by the opening up of a futures market. It's just everybody trying to get on the train for the ride," he added.
Meanwhile, bitcoin is getting a boost from a report that billionaire Peter Thiel is making a big bet on cryptocurrency.
Founders Fund, the venture-capital firm co-founded by Thiel, has amassed hundreds of millions of dollars of bitcoin, the Wall Street Journal reported Tuesday, citing unnamed people familiar with the matter.
Bitcoin rose as much as 8.6 percent to $14,797, according to prices compiled on Bloomberg.
However, speculators raised net short position on bitcoin futures traded on Cboe Global Markets last week amid a selloff sparked by experts’ warnings of a bubble, according to data from the Commodity Futures Trading Commission released late Friday.
Net short bitcoin contracts rose to 1,801 in the week that began Dec. 26, from 1,507 short contracts the previous week, Reuters explained.
During the last two weeks of December, bitcoin in the spot market slumped nearly 28 percent, but still ended the year up about 1,300 percent.
Trading in bitcoin has tended to be volatile. In November, it tumbled almost 30 percent in four days from $7,888 to $5,555. In September, it fell 40 percent from $4,979 to $2,972.
ARK Invest, a New York-based asset manager which oversees exchange-traded funds focused on technology, said in a newsletter that investors had displayed “irrational behavior” with respect to bitcoin, including speculators going on margin to invest in the digital currency.
“Historically, these signs have marked the top, either cyclically or securely, for an asset class,” said ARK Invest.
Still, it said the launch of a futures market for bitcoin by CBOE and CME Group last month potentially heralded another era of financial innovation.
It said that if blockchin technology, an open ledger that has underpinned bitcoin, is as fundamental a breakthrough as the internet was when it was first launched, then institutions will start investing significantly alongside retail investors over the next six to nine months.
(Newsmax wire services contributed to this report).
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