As speculative fever for digital currencies surges this year, investors may want to heed the warnings of the most successful investors of our generation.
The biggest names in investing — including Druckenmiller, Dalio, Chanos, Gundlach and Klarman — are all now criticizing bitcoin, saying the pre-eminent cryptocurrency has critical flaws.
Billionaire Stanley Druckenmiller told CNBC Tuesday he is skeptical bitcoin can be a viable digital currency.
"What I do know about bitcoin is, the concept it could ever be a medium of exchange has been eliminated because you can't do transactions, particularly retail transactions, with this kind of volatility," he said.
Druckenmiller is chairman and chief executive officer of the Duquesne Family Office. His hedge-fund track record is unparalleled, generating annualized returns of 30 percent during his investment career.
In similar fashion, Bridgewater Associates founder Ray Dalio, whose firm manages $160 billion, in September questioned bitcoin's ability to be a unit of exchange.
"Bitcoin today, you can't make much transactions in it. You can't spend it very easily," Dalio said. "It's not an effective storehold of wealth because it has volatility to it, unlike gold. … It's a shame, it could be a currency. It could work conceptually, but the amount of speculation that is going on and the lack of transactions [hurts it]."
Bitcoin year to date
Bitcoin is up more than 2,000 percent in the last year and now trades above $17,000. Bitcoin futures trading launched this week on the Cboe exchange, gaining more than 19 percent Monday in the first full day of trading.
There are now 1,358 cryptocurrencies in existence, according to CoinMarketCap. Other digital currencies such as ethereum are better designed for programmable "smart contracts" and have quicker transaction times versus bitcoin.
Bitcoin's scalability is another issue. There is technical limitation on how many transactions can be processed at the same time. Partly as a result, widespread use of the cryptocurrency for payments has not occurred yet.
So cryptocurrency investors must honestly ask themselves, is bitcoin really changing the world through blockchain technology innovation or is it mainly speculative asset? It's the latter.
Kynikos Associates short-seller Jim Chanos, lauded for his prescient negative calls on Enron and Tyco, compared bitcoin to previous fads.
Bitcoin "is a speculative mania. It's Beanie Babies," he said at a Schechter event in Detroit, Michigan, on Wednesday, referring to the toy craze during the 1990s.
DoubleLine Capital CEO Jeffrey Gundlach criticized the lack of analytical rigor in the recent "nice round number" $1,000,000 price targets for the bitcoin, which is reminiscent of previous speculative blow-offs.
"I have no interest in this type of maniacal type of trading market," he said on CNBC Wednesday.
Hedge-fund manager Seth Klarman, the value-investing giant who often draws comparisons to Warren Buffett, wrote in his classic book "Margin of Safety" an illuminating parable warning against speculation:
"There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, 'You don't understand. These are not eating sardines, they are trading sardines.'
Like sardine traders, many financial-market participants are attracted to speculation, never bothering to taste the sardines they are trading. ... trading in and of itself can be exciting and, as long as the market is rising, lucrative. But essentially it is speculating, not investing. You may find a buyer at a higher price — a greater fool — or you may not, in which case you yourself are the greater fool."
When asked for comment for this column on whether bitcoin is a "trading sardine," Klarman replied: "Yes."