“Does any innovation in the crypto ecosystem look promising to you?,” Goldman’s Allison Nathan asked Nouriel Roubini, during an interview for the latest installment of the bank’s “Top Of Mind” series.
“Not really,” he replied.
While Bitcoin adherents (and crypto proponents more generally) would surely find Roubini’s arguments unconvincing, I’d submit that his straightforward answers to Nathan’s questions were difficult to refute.
For those unfamiliar, the bank periodically publishes expansive takes on whatever the market’s topic du jour happens to be. They combine interviews with Goldman’s own employees and also with outside sources in an effort to provide a balanced and comprehensive assessment on whatever seems to be the most important question on market participants’ minds (hence “Top of Mind”).
In a testament to just how fickle markets really are, all it took was one day of abject turmoil in the cryptosphere (Wednesday) to make everyone forget about the inflation narrative, which is now yesterday’s news. I suppose you could say inflation’s time above the fold was “transitory.”
In any event, Nathan does her best to play devil’s advocate while conducting interviews, and many of the questions she posed to Roubini echo those debated in these pages over the past couple of years.
For example, she asked “What makes this moment for crypto any different than the early days of the internet?,” to which Roubini noted a vast disparity between the number of web users a decade on from the advent of the internet and the number of current active users for the most-traded cryptocurrencies. “After ten years of the internet, there was email, millions of useful websites and apps, and technologies like the TCP and HTML protocols with broader applications,” he went on to say, before claiming that three-quarters of decentralized apps are either games or “literally pyramid schemes of one sort or another.”
Asked if Bitcoin is a useful inflation hedge, Roubini stated the obvious — namely that if you want to attribute the most recent rally in Bitcoin to currency debasement fears, you’d likely be pressed to explain why gold and TIPS haven’t staged rallies of similar magnitude. The figure (below) is more for comedic value than anything else, but it does underscore the point.
You might suggest Roubini is begging the question. That is, if Bitcoin is increasingly seen as the preferred inflation hedge, then it makes sense that more money would go its way as inflation expectations build. But it would be ludicrous to suggest the black line in the figure is somehow commensurate with the level of inflation angst in advanced economies. If people were that worried about inflation, the fear would be manifesting in other ways, some of which would likely be quite dramatic at the consumer level.
Further, Roubini reiterated one of my favorite talking points: Scarcity, in itself, isn’t valuable. “It’s not difficult to create something with limited supply, and there’s no reason artificial scarcity is valuable in and of itself,” he said, before delivering a reality check of sorts:
Scarcity also doesn’t make something a reliable store of value. It took a hundred years for the value of the Dollar to fall by 90% in real terms. In 2018, it only took 12 months for thousands of cryptocurrencies to lose the same amount of value, and even Bitcoin fell by more than 80%. That’s currency debasement.
Ouch. Worse, he reminded market participants that far from being a reliable risk-off hedge, Bitcoin tends to be pro-cyclical. It crashed more than stocks during the pandemic panic, for example.
“In difficult times, crypto assets don’t go up; they go down,” Roubini remarked.
I’d also note that the causation can run both ways. Bitcoin can serve as a catalyst for risk-off moves. That’s especially true for tech and shares of companies which, in one way or another, have attempted to ride the wave. Tesla is the most famous example, but MicroStrategy has adopted a particularly aggressive approach.
Finally, Goldman’s Nathan asked, “Doesn’t the concept of decentralized ledgers and networks have value, though?”
There too, Roubini is skeptical. “I’ve honestly spent a lot of time looking at this because more and more people are saying that while maybe these aren’t currencies, blockchain technology could be revolutionary,” he said, before noting that,
Something truly based on blockchain technology should be public, decentralized, permissionless, and trustless. But looking at DLT and corporate blockchain experiments, almost all of them are private, centralized and permissioned—because a small group of people has the ability to validate transactions—and most are authenticated by a trusted institution. And even among these projects, few have actually worked. One study looking at 43 applications of blockchain technologies in the non-profit sphere for reasons such as banking the unbanked, giving IDs to refugees, and transferring remittances found that zero actually worked.
The most searing quote of all, though, came when Roubini noted that “the crypto ecosystem is not decentralized [as] an oligopoly of miners essentially controls about 70-80% of Bitcoin and Ether mining… and 99% of all crypto transactions occur on centralized exchanges.”
That latter point gets right back to another one of my most ardent critiques of this entire experiment. What is “Bitcoin” without the ability to convert it to fiat currency? What is it that you actually own? Who wants Bitcoin if it can’t be converted to dollars (or euros or yen or yuan or something else that can be used to settle trade deals or tax obligations)? Presumably nobody.