Smackdown: Roubini vs Bitcoin
How do Dr. Doom’s ongoing anti-Bitcoin comments hold up under scrutiny?
I spend A LOT of time on Twitter. Far too much if you ask my other half.
The reality is in a fast-moving, ever-changing environment like the world of crypto, my feed constantly fills up with new opinions, discussions, and news that’s very helpful for keeping on top of what’s going on. But it also means I often see the same clips, memes, and articles over and over again.
Recently, Professor Nouriel Roubini’s February interview on Bloomberg keeps finding its way onto my screen — just another appearance where he repeats his traditional “anti Bitcoin” position ad nauseam. After a few repeated screenings, I took it as a sign that it was something I had to comment on.
After all, this is a man who talked me out of buying Bitcoin back in 2014, which, as we now know, was almost certainly the worst financial decision I've ever made in terms of my own financial future.
But his arguments (at the time) seemed rational and considered, especially to me as a new person entering the space. He's been wrong for seven years since then, but is there any chance he could be correct in the long term?
Who is this “Roubini” anyway?
Professor Nouriel Roubini is an American Keynesian economist with an impressive background (including serving under Bill Clinton) and degrees from Harvard and the Italian Boccini University. Currently, he teaches at New York University’s Stern School of Business.
He is most famous for accurately predicting the credit crunch in 2008 and the fallout that would follow, something that added weight to his subsequent economic arguments.
But Roubini also despises Bitcoin, having variously described it as a Ponzi Scheme, bubble, and a manipulated asset with a passion that is unmatched by anyone else over the last decade.
So, since there’s no doubt that Roubini is smart, has credibility, credentials, and the ear of many influential people, should we be listening to him?
Or is he simply out of date?
“It doesn’t have any use, income or utility”
This is Roubini’s three-line mantra that he repeats whenever he gets the chance, although he usually splits it into three distinct sentences for impact. Logically speaking, therefore, this is a good place to start.
I find it difficult to argue that Bitcoin has no use or, if I’m totally honest, even see that side of the argument. Surely the fact that I have personally used it to buy groceries or gas would immediately disprove that statement? And I know for a fact I’m not the only one.
When we add in the fact that close to a billion people would have been provably better off buying Bitcoin at any price rather than keeping their wealth in their crumbling local currencies over the last 12 months, it’s even harder to argue that this doesn't bring an unprecedented added value to the human race. And what about personal wealth protection in times of war?
Not only that, but later in the same interview, Roubini then goes on to use the example of how easy it is to send vast sums of money across the globe out of control of any government as a reason why it should be stopped, thereby neatly (and I assume inadvertently) highlighting an actual use case for Bitcoin.
And, of course, we already know for certain it can’t be stopped in any case. That time has passed. Governments are now compelled to find a way to work with it, not against it.
Use case aside, the income statement is also curious. Most (if not all) people in the cryptocurrency space know that you can use decentralized finance systems — or simple “in wallet” savings accounts — to generate passive income from your assets and usually at much higher rates than traditional banking.
Further, these operations usually often offer better insurance and security than a typical consumer can obtain through government guarantees. You only get £80,000 per account in the UK, for example, but Nexo will guarantee up to $375m with a policy underwritten by Lloyds of London.
It seems odd that Roubini would not be aware of this and the fact he isn’t says one of two things; first, he chooses not to acknowledge it as it undermines his own case or, second, that he is simply unaware of it, meaning his comments are based on misinformation. Either one seriously reduces the credibility of the argument.
But even so, being wrong on a single point doesn't necessarily mean that the whole position should be thrown out.
He also makes the case that Bitcoin has no utility like, for example, gold, which can be used in any number of industries as well as a store of value.
On this aspect, he is technically correct, but it’s not quite as straightforward it may first appear.
First, a significant portion of gold’s value comes from speculative-driven activity as well as utility-driven activity. Estimates of the exact breakdown vary, but this article from Investopedia using data from the World Gold Council implies that at least 57% of the value of gold comes from utility rather than speculation based on consumption attributed to use vs speculation.
Other sources put this much, much lower and we can never be entirely sure, but let’s take that higher-end estimate of 57% as gospel for the moment.
So does that other 43% create more “value” than the 57%? Possibly. But if not, are we sure that things of value have to have an underlying utility to get that value in the first instance? Is it possible this is an old-fashioned concept that Bitcoin effectively disproves? Does the dollar really have utility outside of being a monetary unit?
And anyway, doesn’t the market collectively decide what actually does and doesn’t have value over time?
The myth of the transaction rate
Roubini loves to point out that Bitcoin is too slow to use for retail transactions, by demonstrating that Visa’s system can handle 24,000 Transactions Per Second (TPS) whereas Bitcoin can handle “only 5.”
In point of fact, Bitcoin can actually handle up to 7 TPS and has a theoretical “perfect world” limit of 27 according to this detailed report from MIT’s Evangelos Georgiadis. Even so, it’s a minor point of correction because it rarely reaches the lower numbers and it can’t reach the higher ones without very precise conditions. In any case, they are far too low to compete with Visa.
At least, that’s how it first appears.
When you first start learning about Bitcoin and discover just how slow it seems to be, you can't help but jump to the conclusion that it can never work as a global currency. It’s a manifestation of what I call the “cold coffee” problem. That is, if you were to use Bitcoin in its native form to buy a coffee, it would be cold by the time the payment was confirmed and you were allowed to take it away.
That’s hardly useful in the fast-paced society we’re all now used to. Visa, with its instant payment credentials, would win hands down every single time. But, like many things in our modern life, looks can be deceiving.
First, Bitcoin only appears to take longer. At the end of a confirmation period of say, 60 minutes, that transaction is finalized forever. As the recipient, you are guaranteed the funds and no one can ever change that. It is canon via the blockchain.
Visa’s payment may have gone through immediately, but remember this is really only a quick check with a central database to confirm that, on the balance of probabilities, you’re more likely than not to receive payment for that coffee.
In a few days’ time, that is.
Of course, even after it finally appears in your bank account, it can still be written back for a number of weeks after that for all sorts of legal reasons.
As a former owner of a chain of retail stores, I can attest that chargebacks really do happen, sometimes long after you have legitimately provided a service. The ugly reality is that it’s often cheaper to take the loss than it is to spend the administrative time investigating it. Credit card fraud is simply an accepted cost of doing business if you’re in retail.
So, even though we universally interpret that transaction being confirmed as absolute, only Bitcoin can actually provide confirm a payment with finality more quickly than any other payment system, with the possible exception of cash.
Well, except where the cash given has turned out to be fake, which is yet another problem Bitcoin solves by design. Retailers also expect to take a hit here as it’s impossible to catch it all.
Bitcoin, for the avoidance of doubt, can never be counterfeited.
But even in retail environments where transaction speeds are critical and a certain level of loss is an acceptable sacrifice, Bitcoin is increasingly becoming part of the solution and payment mix.
Visa’s CEO, Alfred Kelly Jr, appeared on CNN Business with Julia Chatterley recently, making his company’s position on cryptocurrency very clear. He wants Visa to be ready to deal with all currencies, including cryptocurrencies.
In fact, even since that interview, Visa put their money where their mouth is and announced the payments could now be settled with USDC, a stable coin powered by the Ethereum blockchain, settling in the same way as existing payments. It’s likely to be the first of many such announcements.
The very next day, PayPal confirmed that its U.S. customers would be able to spend their bitcoin at any of their millions of merchants via their platform’s checkouts, also as instantly as a credit card transaction.
Meanwhile, other “off-chain” solutions, the most famous of which is undoubtedly the Lightning Network, are at the advanced stages of development. These also provided robust settlement layers that are so fast they could actually beat payments by Visa.
The reasons for this are quite technical and beyond the scope of this article, but Bitcoin is best thought of as something that works in “layers.”
The native Bitcoin network is the “settlement” layer that holds the security and finality. Everything else are layers build over the top that provide speed by sorting transactions and sending only the final values to the blockchain to confirm.
So, while Roubini is correct that Bitcoin itself could never work fast enough as a global currency, the point is, it doesn’t need to. The layers built on top of it provide the missing functionality. And those layers are being built very quickly by multiple global players.
Roubini must be aware of this. Clearly, the fact that he chooses to omit this information during interviews points to another agenda.
“Bitcoin is manipulated & primarily used by criminals”
Roubini’s final main argument the old chestnut from years ago that still gets wheeled out from time to time by people who haven’t kept up to speed.
In the early days, fraudulent use as a percentage of overall Bitcoin activity was much higher because of two key factors. First, the network was dealing with a significantly lower volume (and value) of transactions, but also criminals didn’t understand Bitcoin any more than anyone else did. They thought it was entirely anonymous and untraceable.
Of course in reality, all transactions ever made are recorded both publicly and forever which is far from ideal if you want to hide your tracks. As a result, Bitcoin’s use as a preferred payment system for criminals has dropped off considerably.
Chainalysis’ 2021 report shows this perfectly. In 2019, criminal activity represented approximately 2.1% of all cryptocurrency transaction volume which equated to around $21.4 billion in terms of value. But by 2020, the criminal share of all cryptocurrency activity fell to just 0.34% or $10 billion in transaction volume.
And just for the record, the UN estimates that between 2% and 5% of global GDP ($1.6 to $4 trillion) annually is connected with money laundering and illicit activity. That means almost of all it is via good old-fashioned cash, whatever form that may take.
Finally, Roubini often offers other arguments about wash trading and manipulation within cryptocurrency markets and here he is correct. In that respect, they are just like any other market on the planet. In reality, there probably isn’t one that isn’t manipulated to some extent.
That’s humans for you.
The bottom line
So what IS going on here? Roubini is smart, damn smart, and it doesn’t seem likely that he is simply unaware of how far Bitcoin has come. It’s more that he’s choosing to be selective with arguments or presenting them in a misleading way, so is this something that will come back and haunt him later on?
It wouldn't be the first time this has happened to a noted economist when forecasting the economic impact of groundbreaking technology.
Back in 1995, Nobel Memorial Prize winner and Distinguished Professor of Economics Paul Krugman, made a prediction about the internet that has haunted him ever since:
By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s
It doesn’t matter that he made it in a lighthearted way or that he’s been forced to explain it ever since, it was such a great soundbite that it will be forever associated with his name.
Are we about to see the same association with Roubini’s famous three-line “use, income, utility” mantra? Could it be his 2021 fax machine moment? Or, in the end, will he prove us all wrong?
Only time will tell.
But until then, I know where I’ll be putting my money.
I mean, Bitcoin.
Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency.
Jason is also an analyst atQuantum Economics, specializing in Bitcoin and macro economics.
Disclaimer: Investing in any asset class is risky. The above should not be taken as financial advice, nor construed as so. Always do your own research before investing or consult with a professional financial planner.
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