Crypto Inferno

An Interview with Nouriel Roubini

Bitcoin reached a peak of almost $20,000 sometime in late December of 2017, and then started to go down in January: from $18,000 to $16,000 to $14,000 to $12,000 to $10,000 to $8,000. It bottomed out around $3,500 and today it's not back. It's been floating between $3,300 and $3,800 depending on the week and the day.

So from the peak, bitcoin alone has lost between 80 percent to 85 percent of its value in about a year — and this is best case! If you look the other top 10 cryptocurrencies from the peak around the same time, the average non-bitcoin cryptocurrency has lost between 90 and 92 percent of its value. And almost all of the thousands of individual coins issued during the bubble of 2017 and early 2018 have lost between 95 percent and 99 percent of their value.

Of course, during this bubble the other thing that was happening was every other day somebody said, "Hey, bitcoin is going from $2,000 to $5,000 to $10,000 to $20,000. Let me create my own cryptocurrency to get in on the action." These were being created through initial coin offerings, ICO’s. They were totally illegal: a non-compliant security issued against all security laws. But guess what? About a couple thousand of them were issued between 2017 and early-mid 2018. There is a study that has shown that out of all these ICO's, 81 percent were literal Ponzi schemes. Another 11 percent either were dead or failed by 2018. So a grand total of 92 percent of them were either outright scams or failures. Of the remaining eight percent traded on exchanges, the average one has lost, as I said, between 95 percent to 99 percent of its value from the peak. If that's not a bubble, what is?

OR: Was there something specific that popped the bubble?

Roubini: In any typical bubble there is a tipping moment where the insider sellers run out of retail suckers who want to buy what they have on offer. The crypto whales are dumping their considerable holdings onto the suckers; for a while there are enough suckers that the price goes higher. When the suckers disappear, because there is a limited number of them, then as you sell more the price starts to fall. Since there was no fundamental demand or fundamental value behind all this, it's enough for bitcoin to go from $20,000 to $18,000 that people say, "Hey, I made money when I bought it at $16,000. Let me sell it."

OR: Is there any validity to the crypto concept? Do you see a scenario where a true cryptocurrency actually does emerge?

Roubini: No. There is nothing in the space that looks like a real business model that would lead to any kind of revenue or profit over time. Additionally, many people who still believe in cryptocurrency say crypto is at a phase comparable to the early years of the internet. Like the internet — they argue — it has booms and busts, but over time these things are going to be worth a lot because there'll be a massive number of goods and services for which they will be accepted as payment.

The comparison with the internet is totally flawed for a number of reasons. Reason number one is that in the decade after the beginning of the world wide web, global penetration in terms of users was truly exponential. By 2001, one billion people were using the internet. And with that exponential user growth came exponential transaction growth as well.

But take the decade since the launch of the bitcoin in 2008. By 2018, the total number of users worldwide — people who have a wallet for bitcoin or other crypto — has gone from zero to 60 to 70 million, not one billion. And out of those 60 or 70 million, probably two-thirds are dormant users who started accounts with a few hundred bucks and after the bubble burst are not even using them anymore. In 2018 the number of transactions across all cryptocurrencies collapsed by about 85 percent.

Three, in any new technology that is successful and that is not a bubble, there will be not only an exponential increase in users and in the number of transactions, but also a very sharp fall in transaction costs. Take internet or equity trading. Over the last 20 or 30 years there has been massive growth and a sharp fall in the cost of buying and selling shares or bid-ask spreads.

In the crypto space, if you look at the last year, transaction costs — as measured by the revenues of coin miners divided by the number of transactions — have gone up by a factor of five. Just the opposite of internet or equity trading.

So the comparison with the internet is just total, utter nonsense.

Remember also that the internet produced several killer apps. Email was a killer app. Websites were a killer app. There was also a common set of principles that everybody agreed on: HTTP and HTML, TCP/IP. There is nothing similar in the crypto space. Every blockchain is on an idiosyncratic route or a set of protocols incompatible with each other.

OR: Given that a lot of the heat in crypto came from Asia, do you see a regulation failure there?

Roubini: The regulation failure was honestly everywhere, not just in Asia but also in the United States. At the beginning this thing was too small, and nobody really cared. Then there was this attitude of some of the regulators (like the U.S. CFTC and the SEC) arguing that, “Yeah, there are a whole bunch of shady things happening, but this is an interesting new technology and we don't want to kill it. There is a bit of scamming going on, but let's wait and see. Of course, there is no systemic implication of this asset class.”

There was a real failure of regulation. By any standard, both the SEC and other legal experts have said these ICO's were essentially issuing non-compliant securities.