When Nouriel Roubini talks, it’s worth a listen. Not known for his optimism, the well-known American economist bears the moniker ‘Dr Doom’. CFA Institute spoke to him about the prospects for global growth (see Part I). In Part II, we focus on cryptocurrencies.
CFA Institute: Bitcoin and cryptocurrencies grew out of distrust for central bankers. You recently expressed strong views on this subject.
Nouriel Roubini (NR): Well, I’ve studied so many historical bubbles. I wrote a whole book, Crisis Economics, on bubbles and their busts. I know one when I see one. And, of course, knowing when there is a real bubble - it’s a long and complicated story. But to me, the whole crypto space is one of assets that are not really money. They’re not really a currency. They’re not a scalable means of payment. They’re not as stable in terms of store of value.
And what happened, especially in 2017 when the price of bitcoin went from $2,000 all the way to $20,000 by the end of the year, to me had all the features of a bubble. Especially telling was that by the second half of 2017, there were millions of people who didn’t know anything about finance or portfolio investments, driven by ‘fear of missing out’, buying bitcoin and all these other s**tcoins.
To me, it looked like an exponential, parabolic bubble. That’s why I became very vocal towards the end of 2017. And guess what? That bubble started to burst because there was no real fundamental value on these assets. Then even bitcoin, since the peak, has lost almost 85% of its value. And that’s the best one because thousands of these s**tcoins were created as scams and have lost almost all of their value.
The top 10 cryptocurrencies, excluding bitcoin, the average loss of value since the peak has been between 92% and 93%.
This was, to me, the mother and the father of all bubbles. And like every bubble, it went out of control and then went bust, and I was confident enough I was right that this was a bubble. I did the US Senate banking testimony [in October 2018] with a 40-page paper calling cryptocurrency out for what it is, and I was very vocal on Twitter against this army of people who were totally delusional. Pleased to say I got this bubble right.
CFA Institute: I looked at the three most popular tweets in your Twitter feed expecting they would focus on your work on economic crises. But your hottest posts relate to cryptocurrencies. There’s a lot of passion in this space. Does that give you any pause?
NR: Well, I engage on Twitter and I also have attended many of these crypto or blockchain conferences. I met some of these individuals, and I must say I’ve never seen in my life people who on one side are so arrogant in their views, who are total zealots and fanatics about this new asset class, while at the same time completely and totally ignorant of basic economics, finance, money, banking, central banking, monetary policy.
They want to reinvent everything about money, but most of them are absolutely totally clueless. The ratio between arrogant and ignorant is astounding - I have never seen such a gap in my life. These are fanatics. Some of them, like criminals, zealots, scammers, carnival barkers, insiders who are just talking their book 24/7.
There is an element of excess in every bubble, but the typical bubble is an outgrowth of some technological evolution that maybe changes the world for the better. The internet was in a bubble in the late 1990s, but it was a real thing but valuations of many internet-related stocks were sky-high. Prices crashed and dot-coms went bust, but the internet kept on growing. Billions of people used it, and it has changed the world. Cryptocurrency as a technology has absolutely no basis for success, and the mother of all bubbles is now bust.
Twitter and in-person interactions with the fans of cryptocurrencies made me stronger and more secure in my belief.
CFA Institute: Was there one specific cryptocurrency mania episode that stands out?
NR: In the fall of 2017 when the bubble was in full swing, literally anybody I knew, even random people, would stop me and say: ‘Are you going to be part of the crypto movement? Should I buy bitcoin?’. This was a typical late bubble behaviour when some unsophisticated investors who are total suckers hear about the bubble, they don’t even know what it is. That’s normal. Fear of missing out (FOMO). And they jump on the bandwagon having no clue, and the insiders took complete advantage of these suckers at prices of $20,000 per bitcoin and similar junk. Millions of people lost their shirts buying at the peak only to lose 80% to 90% of their investment in the next 12 months.
When you see these sucker investors - in this case I call them the retail suckers - get into this FOMO frenzy, then you know this bubble is about to burst. So I saw it coming, even in terms of the timing of it.
The saving grace of cryptocurrencies is that, unlike other bubbles that exploded and led to some sort of a systemic crisis, this asset class was relatively small. Unfortunately, lots of suckers lost their shirts, but it doesn’t have any systemic implications.
To read the first part of our interview with Dr Roubini, click here.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.