Nouriel Roubini is a professor of economics at New York University’s Stern School of Business. He is the CEO of Roubini Macro Consulting LLC, a global macroeconomic consulting firm. Below, he discusses his skepticism about the value of cryptocurrencies and their ability to revolutionize the financial system.
Allison Nathan is an analyst at Goldman Sachs
Allison Nathan: Why do you think Bitcoin and other cryptocurrencies are in a bubble?
Nouriel Roubini:First of all, calling them currencies is a poor choice of words. A currency must have four characteristics: it must be a unit of account, a means of payment, a stable store of value, and act as a single unit of value. Bitcoin and most other cryptocurrencies have none of these characteristics. It’s not a unit of account; nothing is priced in bitcoin. It’s not a scalable payment method; the Bitcoin network can only complete 7 transactions per second, while the VISA network can complete 65,000 transactions per second. It’s not a stable store of value for goods and services; even conferences I’ve attended in the cryptocurrency space don’t accept bitcoin payments because price fluctuations could wipe out their profit margins overnight. The cryptocurrency world does not provide a single unit of account in which prices of different items can be named, as there are thousands of tokens and therefore limited price transparency. Even in primitive times there was a more sophisticated system that used shells as a single unit of denomination to compare the prices of different commodities.
Bitcoin and other cryptocurrencies are not assets either. Assets have some cash flow or utility that can be used to determine their underlying value. Stocks provide dividends that can be discounted to arrive at a valuation. Bonds provide coupons, loans provide interest, and real estate provides rent or housing services. Commodities like oil and copper can be used directly in different ways. Gold is used in industry, jewelry, and has historically been a stable store of value against various tail risks including inflation, currency devaluation, financial crises, and political and geopolitical risks. Bitcoin and other cryptocurrencies have no income or utility, so there is no way to reach fundamental value. A bubble occurs when the price of something is much higher than its fundamental value. But we can’t even determine the fundamental value of these cryptocurrencies, yet their prices have risen dramatically. In that sense, this looks like a bubble to me.
Allison Nathan: If there is a bubble, why would more institutions be interested in participating in cryptocurrencies? Would this help stabilize and certify the market?
Nouriel Roubini:It’s worthwhile to promote trading activity, escrow services, etc. because of the high volume of transactions. But do institutional investors really want to get more involved? Maybe some will, but I don’t think it will become mainstream. There is a view that because only a small percentage of institutional money is currently invested in bitcoin relative to gold, the price of bitcoin could spike as a result of asset reallocation from gold. But I doubt that institutions want a 15% drop in asset exposure overnight. There is also a risk that real assets backed by
backed investments will eventually replace bitcoin as an alternative value storage vehicle. Bitcoin may one day disappear, but not gold. The idea of corporate treasurers investing in crypto assets is completely insane. No serious company would do this because treasury accounts must be invested in stable assets with minimal risk, even if they have very low returns. Any treasurer who invests in something that drops 15% in value overnight would be fired. Sure, Elon Musk can do that because he’s the boss, even though he’s since given up on Bitcoin to some extent due to environmental concerns. But very few people are in that position.
Allison Nathan: But didn’t gold have periods of high volatility before it matured as an institutional asset?
Nouriel Roubini: While gold has experienced periods of volatility, a range of economic fundamentals typically drive price volatility. Gold rises with inflation and inflation expectations because it is an inflation hedge, and when the Fed tightens monetary policy and interest rates rise, gold falls, not only in nominal terms but in real terms, for the same reasons. Gold is inversely proportional to the value of the dollar because a weaker dollar leads to higher costs and prices of commodity production, including gold. When there are serious political or geopolitical risks or financial crises, the value of gold rises because it is a safe safe-haven asset, as are the Swiss franc, the Japanese yen and U.S. Treasuries. A whole set of variables can be used to determine the demand for gold relative to the supply of gold, which makes it possible to establish a fundamental price. In contrast, the price of bitcoin and other cryptos has no consistent relationship to economic fundamentals, which explains their volatility or suggests that it will eventually fade.
Allison Nathan: But given that Bitcoin doesn’t run the risk of currency devaluation, couldn’t it be used as an inflation hedge like gold?
Nouriel Roubini: Admittedly, inflation and inflation expectations have risen, the dollar has started to weaken, and the break-even point in the U.S. is now well above 2%. But while the price of gold and other inflation hedges reflect these changes to some extent, at its peak, the price of bitcoin rose more than 10 times from a low of $5,000 to more than $60,000 in a year. This cannot be explained by concerns about currency devaluation, because if there were really such strong concerns, other assets such as gold and TIPS would probably rally even more. Therefore, the rise in bitcoin and other crypto prices must be caused by other factors.
Does Bitcoin offer protection against devaluation? At least in the cryptocurrency world, it can’t because cryptographic rules dictate an increase in supply and limit the total supply to 21 million. But just because something is scarce doesn’t mean it has fundamental value. It’s not hard to create something that has a limited supply, and there’s no reason why creating artificial scarcity is valuable.
With the exception of Bitcoin, the supply of most cryptocurrencies is determined by a group of giant whales and insiders based on random rules that can be used to temporarily increase the supply. Given the proliferation in the number of token types, their supply is actually growing at a much faster rate than any central bank balance sheet. Nor does scarcity make something a reliable store of value. It took a hundred years for the dollar to actually depreciate by 90%. in 2018, thousands of cryptocurrencies lost as much value in just 12 months, and even bitcoin fell by more than 80%. That’s devaluation.
Bitcoin isn’t even a reliable hedge against risky events, let alone inflationary shocks. It’s actually highly pro-cyclical. At the peak of the new crown pneumonia shock in early 2020, the U.S. stock market fell about 35%, but bitcoin plunged about 50%. The other top 10 cryptocurrencies fell even more. Crypto assets did not rise during the hard times; they also fell sharply. If investors want an inflation hedge, a wide variety of assets have proven to be good inflation hedges for decades, including commodities and their stocks, gold, TIPS, inflation-adjusted bonds, and other forms of inflation-indexed bonds. I do worry that monetizing deficits may ultimately lead to fiscal advantage and higher inflation. But I don’t recommend using Bitcoin or other cryptocurrencies to protect against that risk.
Allison Nathan: Emerging technologies are often unstable in the adoption phase. What makes this cryptocurrency different from the early days of the Internet?
Nouriel Roubini: In the decade or so since Bitcoin was introduced, it has been far less transformative than the Internet was in the same period. In ten years, the World Wide Web has had about a billion users. While it is difficult to know the total number of cryptocurrency users right now, the most traded cryptocurrencies may have as many as 100 million active users. Cryptocurrency transactions are growing more slowly than the Internet, transaction costs remain high, and mining remains a high percentage of total transactions. After a decade of Internet development, email, millions of useful websites and applications, and technologies with broader applications like TCP and HTML protocols have emerged. In the case of cryptocurrencies, there are so-called “decentralized applications”, but 75% of decentralized applications are games like crypto-cats or pyramids or Ponzi schemes. The other 25% are “DEXs”, decentralized exchanges, which currently have little to no trading or liquidity. So the comparison to the internet doesn’t sound real.
Allison Nathan: However, isn’t there value in the concept of decentralized ledgers and networks?
Nouriel Roubini: I’m not sure it exists, but the fact is that the crypto ecosystem is not decentralized. Mining oligarchs essentially control about 70-80% of bitcoin and ethereum mining. These mines are located in places like China, Russia and Belarus, which are strategic adversaries of the U.S. and have different rule of law. This is why the U.S. National Security Council is starting to worry about the risks that could pose to the U.S. 99% of crypto transactions occur on centralized exchanges. Many cryptocurrencies also have a centralized core group of developers who are the police, judge and jury whenever there is an update or conflict on the blockchain. In these cases, the rules that were assumed to be fixed have changed. So the blockchain is not set in stone.
There is evidence that the ownership of crypto wealth is also highly concentrated. According to CoinMarketCap, less than 0.5% of addresses own about 85% of all bitcoins. There is also evidence that whales holding large amounts of bitcoin and other cryptocurrencies actively manipulate prices. Thousands of news articles in chat rooms detail active manipulation in the form of pulling up and shipping, spoofing, wash trading, front running, etc. This behavior is even worse than small-cap stocks, suggesting a high likelihood that regulators will eventually implement a crackdown.
Allison Nathan: What innovations in the crypto ecosystem hold promise for you?
Nouriel Roubini: Not really. In the next decade, there will be radical financial innovations that span multiple dimensions and disrupt the traditional financial system. But this has nothing to do with cryptocurrencies. It will be a revolution in fintech that drives this innovation thanks to the combination of artificial intelligence, machine learning and the use of the Internet of Things to collect big data. fintech is already transforming payment systems, lending, credit allocation, insurance, asset management and parts of the capital markets. In the context of payment systems, billions of transactions are made every day using Alipay and WeChat payments in China, M-Pesa in Kenya and most sub-Saharan African countries, and Venmo, PayPal and Square in the U.S. These are great companies, scalable, secure, and are disrupting financial services. They are not based on decentralized finance and have nothing to do with crypto or blockchain.
Truthfully, I’ve spent a lot of time researching this because more and more people are saying that while these may not be currencies, the technology of blockchain could be revolutionary. Now there are buzzwords like “enterprise distributed ledger technology (DLT)” or “enterprise blockchain,” but I call most of these projects BINO’s – “blockchain in name only”. Something truly based on blockchain technology should be open, decentralized, unlicensed and de-trusted. But look at DLT and blockchain companies’ experiments, almost all of which are private, centralized and permissioned – because a small group of people have the ability to verify transactions – and most are verified by a trusted institution.
Even among these projects, few are actually useful. One study looked at 43 applications of blockchain technology in the nonprofit sector for reasons ranging from banking services for the unbanked to issuing ID cards to refugees and remittances, and found that none of them were actually effective. The fundamental problem with this entire field is that it assumes that technology can create trust. But that’s an impossible task. Solving the challenge of authenticating ownership or quality requires due diligence and testing. Why should I trust a DLT network that says my tomatoes are organic? I believe Whole Foods is actually testing the chemical composition of the tomatoes. The idea that technology can solve the trust problem is delusional. Therefore, I am very skeptical that blockchain, DLT and cryptocurrencies will be the revolutionary technology their proponents think they are.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/goldman-sachs-report-interview-with-dr-doom-roubini-cryptocurrencies-a-new-asset-class/
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