Andreas T.
Oct 13, 2018 · 18 min read

Professor Nouriel Roubini rightfully claimed that most of the replies he got for his paper were angry posts without rational answers.

This will be an effort to present some rational counter arguments to Nouriel Roubini’s paper (https://www.banking.senate.gov/imo/media/doc/Roubini%20Testimony%2010-11-18.pdf). I will leave many paragraphs unquoted, paragraphs with which either I totally agree or are related/repeat things to my answers to quoted paragraphs.

> … It is clear by now that Bitcoin and other cryptocurrencies represent the mother of all bubbles …

a) This is untrue, the 2008 subprime mortgage bubble and consequent crisis was of way bigger financial proportions and its consequences still plague many countries. Way more billions were lost in that period than during this crypto-bubble. I will not provide citations, as you by yourself know very well the numbers. They were in the hundred of billions of USD. Even during the .com bubble more capital was wiped out than in the latest crypto-currencies bubble. Hence, your assessment is incorrect.

b) A bubble is not necessarily “evil”, despite the fact that the majority of people may think so. Most people tend to equate a bubble with a “ponzi scheme” or fraud and scam, but alas that is not the case. A bubble is merely another name for exponential growth. There are plenty of examples including human population growth, internet usage growth and so on and so forth, where a bubble is not only perfectly acceptable, but very much cheered for. By the way, bitcoin’s own growth has mostly taken place through bubbles, the previous one was the 2013 one (up to 1150 then down to 170 in early 2015). Most bubbles tend to have a following correction period (.com bubble) and some bubbles go back to zero (tulip mania) when they are based on hot air.

> Since the peak of the bubble late last year Bitcoin has fallen by about 70% in value(depending on the week). And that is generous. Other leading crypto-currencies such as Ether, EOS, Litecoin, XRP have fallen by over 80% (or more depending on the week)

Very true but also not unseen, as the same happened during the .com bubble where NASDAQ-100 had dropped to 1,114, down 78% from its peak and $5 trillion USD were lost in market cap. If this is a crypt-apocalypse, then what was that ? I’m not using tu quoque here, I’m merely saying that just because something is facing a huge downturn doesn’t necessarily mean it’s completely bogus and a scam. I definitely stand behind you that most ICOs and most alt-coins are definitely garbage and fraud, but my point is “most” not “all”.

> … And since its price has been so unstable or volatile almost no merchant will ever use it as a means of payment: the profit margin of any merchant can be wiped out in a matter of minutes …

This would be true only if merchants kept their bitcoins. There are already services that convert them at the moment of transaction so that the merchant will be given fiat and not bitcoins. Also, current volatility does not imply future one.

> Until now, Bitcoin’s only real use has been to facilitate illegal activities such as drug transactions, tax evasion, avoidance of capital controls, or money laundering. Not surprisingly, G20 member states are now working together to regulate cryptocurrencies and eliminate the anonymity they supposedly afford, by requiring that all income-or capital-gains-generating transactions be reported. Even the US Treasury Secretary Steve Mnuchin has publicly stated that we cannot allow crypto-currencies to become the next Swiss bank account.

That sounds much like an argument coming from the Silk-Road era and I definitely agree that that was the main use case back then. I’m also for regulations and I don’t mean only KYC/AML, but strict regulations about exchanges, a space where shady tactics take place, not only the ones you mentioned but also exchanges counter-trading their customers and having their own prop desks.

By the way, the fact that Steve Mnuchin thinks crypto-currencies can become the next Swiss bank account, comes as direct counter-argument to your opinion that they are not a store of value. Both positions cannot be true.

Also, whether something is a store of value or not (like gold), is not something that is decided by a mathematical formula or a single person, but rather is an emerging behaviour that happens slowly in the matter of years by people, who for various reasons start using said asset as a store of value. The reasons may initially be “wrong” or “illogical”, it does not matter.

> Since the invention of money thousands of years ago, there has never been a monetary system with hundreds of different currencies operating alongside one another. The entire point of money is that it allows parties to transact without having to barter. But for money to have value, and to generate economies of scale, only so many currencies can operate at the same time.

In ancient times most city-state had their own currencies and slowly but surely as eons passed by things changed and we are now comfortably sitting at one single currency for most of the European Continent. It’s called evolution, survival of the fittest. If indeed crypto-currencies can be used as money (none knows that yet as the experiment is on-going) we are still in very early phase where we have many proposed solutions but in the future things will be consolidated to one or very few cryptocurrencies globally. The same situation goes on for fiat money right now globally, we have tens, if not hundreds, of currencies. Eventually, probably most of them will be lost.

> Cryptocurrencies have no intrinsic value, whereas fiat currencies certainly do, because they can be used to pay taxes. Fiat currencies are legal tender and can be used and are used to buy any good or service; and they can be used to pay for tax liabilities. They are also protected from value debasement by central banks committed to price stability

Before fiat was legal tender, none could pay taxes with it either. Just because crypto-currencies are not yet legal tender, doesn’t mean they won’t be. By the way, Arizona has voted for exactly that http://fortune.com/2018/02/10/arizona-bitcoin-taxes/

Your second point is not entirely true, they are only protected from sudden extreme debasement, a dollar fifty years ago used to buy more bread than a dollar in 2018. That’s like holding a frog in a continuously warming up water, up to the point that the frog boils, it may not understand that it is happening, but it is.

> Fiat money also is not created out of thin air: these liabilities of a central bank such as the Fed are backed by the Fed asset

This is certainly untrue: It’s called fractional reserve system. Banks do print money out of thin air and create debt as such. Then there’s Quantitative Easing, a fancy name for printing money (not wealth) out of thin air and involuntary wealth transfer.

> As it happens, Bitcoin’s supposed advantage is also its Achilles’s heel, because even if it actually did have a steady-state supply of 21 million units, that would disqualify it as a viable currency. Unless the supply of a currency tracks potential nominal GDP, prices will undergo deflation. That means if a steady-state supply of Bitcoin really did gradually replace a fiat currency, the price index of all goods and services would continuously fall. By extension, any nominal debt contract denominated in Bitcoin would rise in real value over time

This is an excellent point (among others that you made, including but not limited to: scammers, ICOs, price manipulation etc.). One could argue that Bitcoin could become a nearly constant-price (stable-coin) store of value commodity, just like gold and thus it won’t need to be scalable to the point of five-six figure transactions per second. Other crypto-currencies with built-in inflationary mechanisms and faster ones (=more centralized) could act as money.

> Worse, cryptocurrencies in general are based on a false premise. According to its promoters, Bitcoin has a steady-state supply of 21 million units, so it cannot be debased like fiat currencies. But that claim is clearly fraudulent, considering that it has already forked off into several branches and spin-offs: Bitcoin Cash and Bitcoin Gold.

This is clearly untrue. While everyone can fork (copy) bitcoin’s code and database (blockchain) that doesn’t mean that the fork’s value is the same, nor does it mean that bitcoin’s supply doubled. It’s just that a new alt-coin was created whose value is priced by the market. Did Bitcoin’s price halved with each of those forks ? No, au contraire, it did increase despite the forks.

Other than Bitcoin’s forks there have been thousands of me-too crypto-currencies and tokens. Did these cause an inflation in Bitcoin? No? Your analogy is clearly wrong because it’s not that new Bitcoins were created out of nowhere, nor is it that actual Bitcoins were copied. It is just that other people wanted to create a competing product seeing Bitcoin’s value and they wanted to steal a percentage of the pie. But these new currencies are definitely not Bitcoin and do not affect it, in the same sense that Monopoly money does not debase USD and neither does enlarge the supply of USD. In the same sense casino tokens do not increase the supply of USD.

> And the biggest scam of all is the case of “stable coins” –starting with Tether –that claimed to be pegged one to one to the US dollar but are not fully collateralized by an equal backing of true US dollars. Bitfinex-behind the scammy Tether –has persistently refused to be properly audited and its creation of fiat Tether has been systematically used to prop up manipulate upward the price of Bitcoin and other crypto-currencies according to a recent academic paper.

Totally agreed on everything you say about Tether and more. However I’d like to mention that Bitcoin != Tether. Yes, Tether may have driven the price of Bitcoin way up with unscrupulous means, but that definitely does not equate it with Bitcoin.

> Financial crises occurred well before fiat currencies and central banking; and are now less virulent thanks to central banks and fiat money.

None in their right mind can say that financial crises occur due to central banking and fiat money. But one can definitely argue that hyperinflation which is usually a symptom [or cause in some cases] of financial crises, is definitely enabled by fiat money. There are world-wide at least 10 very notable episodes of hyperinflation in the 20th century, caused by central banks and fiat money. Because it’s not like ordinary people can print money out of thin air, it’s the central banks that do.

> … And since its mining is now massively centralized — as an oligopoly of miners now control its mining — its security is at risk. …

Indeed, but said oligopolies have a vested interest in not causing 51% attacks on Bitcoin, because if they do it will harm their business as well, since Bitcoin’s price would go to 0. It’s actually a Mutually Assured Destruction, which has been proven to work and has actually saved our planet from World War III.

> …Supporters of crypto argue that it would not be in the interest of an oligopoly of miners to start a 51% as it would destroy their source of income/fees. But leaving aside that such an attack would allow them to steal the underlying assets…

Again, if such a thing happened, said asset would not anymore be valued in the billions, they would have destroyed its value and thus stolen nothing.

> Instead, blockchains and cryptocurrencies not only are not scalable and are massively centralized; they are also massively not secure.

Again, you’re comparing oranges to apples. Bitcoin != cryptocurrencies. Most cryptocurrencies are not secure due to their very low hashrate and that’s one of the reasons why their value is so low. But Bitcoin is not ALL cryptocurrencies, it’s just one of them and it just so happens to have the largest hashrate of them all.

> When I use traditional financial systems based on fiat currencies there are many levels and layers of security. First I rely on institutions with a reputation and credibility built over time; there is also deposit insurance that guarantees the value of my deposits; there is the lender of last resort role of central bank to avoid runs on solvent but illiquid banks; sometimes even there is even the bailout of systemically important too-big-to-fail (TBTF) institutions with provisos to control this TBTF moral hazard. More importantly, a depositor or credit card holder is made whole with little effort when fraudulent transaction occur and someone tries to steal your money or make a fraudulent charge on your credit card.

How many of these reputable and credible institutions have been involved in gray-water or black-water operations? How many of these institutions have played a role in sub-prime mortgaging, in money laundering in the billions. How many of these institutions have bankrupted and robbed people of their wealth ? How many of these institutions have been part of shady SWAPs with countries in order to hide said countries real debt? How many of these reputable institutions arbitrarily decided to cut people’s savings by let’s say 15%?

Also, would the role of the lender of last resort be even needed if there was no fractional reserve system? Genuine question here, not a rhetorical one.

Maybe at some point we should start thinking of letting these TBTF institutions fail. Artificially not letting them fail is the complete opposite of meritocracy, the complete opposite of the spirit of free market, the complete opposite of a core capitalistic notion, that of “let everyone compete on EQUAL TERMS and may the best be at the top”.

Said institutions only care about stolen money or fraudulent transactions if they happen over a credit card, not out of kindness to customers, but because it’s THEIR money that was stolen. They don’t provide the same safety net if such fraudulent actions happen over a debit card, that is when it’s MY money.

> Society pays a small fee –in a number of ways –to ensure such safety but depositors and credit card holders are happy to pay such a modest fee in exchange for transaction security.

Small — is a very subjective adjective, I personally don’t think that rates between 4 and 14 percent are small, or modest that is.

Why shouldn’t there be some competition here? Are you against competition? Isn’t that what capitalism is for? Why do you care if some competition is thrown to the field? Why are you advocating for an oligopoly (financial institutions), in the same paper where you state that oligopolies are not a good thing?

> And the breaches of security are massive and escalating. It is now clear that while Bitcoin has not been hacked yet the centralized exchanges that hold the cryptocurrencies of millions of depositors can be and have been hacked on a regular scale.

This is plain fear mongering. There are many exchanges which have not been hacked, Coinbase is just an example. Some exchanges are also covered by FDIC insurance, Gemini and Coinbase come to mind.

I do advocate for stricter exchanges regulations, not only regulations against price manipulation but also regulation for money insurance. Here’s an idea: make FDIC insurance — or the equivalent for other jurisdictions (EU, Japan, SK) — mandatory for all exchanges.

As a general note, I find it disconcerting the fact that you are unfairly comparing financial institutions that have been around for centuries, with something that was just born. Can you tell me please, how often were banks robbed a century or two ago ? How often were banks robbed in the era of the Wild West ? So, you’re comparing a mature system with another which has only less than ten years of life. If you lived in the era of Wild West, would you say that banks are a failed system because they got robbed frequently?

> … Blockchain’s ideology is politically born out of the same mentality as libertarian right wing conspiracies or extreme left anarchism: all governments, central banks, moneys, institutions, banks, corporations, entities with reputation and credibility build over centuries are evil centralized concentrations of power that literally need to be destroyed. …

… This extreme right wing ideology of crypto has been studied in detail in the academic book by David Golumbia “The Politics of Bitcoin: Software As Right Wing Extremism”….

It is very true that there are people in crypto-sphere who are far right wing, against state and government etc. That is not the case for all, or even the majority. Do you have statistics that show that such people are the majority in crypto-sphere? Such people exist everywhere. Just because some people believe such things, doesn’t mean all do.

One recent tweet of yours: > Ideology of crypto is right wing white supremacist “black helicopters” paranoia & conspiracy about centralized evil governments, central banks, banks, jews, corporations, trusted institutions that need to be destroyed &replaced by libertarian decentralization. Fascist at core! ( https://twitter.com/Nouriel/status/1050875620048146432 )

This is a shameful post. You’re being deeply manipulative and McCarthyistic here and you are also red-herring. I am pro central government, I am against fascism, I am against white supremacism and I am definitely pro Jews. I am not paranoid (hopefully). The exact same things go for hundreds of thousands of people you’re unfairly trying to paint in such negative colours here. Shame.

I would also like to comment on something else. In this paper and in your recent tweets you sound extremely angry about the crypto-sphere and everything surrounding it. Why ? People who are secure in their belief of being right, don’t feel the need to make angry comments about said beliefs. You do sound like some certain religious people who cry out “you’re offending my religion” when others criticize said religion.

> … A recent study by a scholar at Princeton University is aptly titled “The Looming Threat of China: An Analysis of Chinese Influence on Bitcoin”… In this paper, we explore how China threatens the security, stability, and viability of Bitcoin through its dominant position in the Bitcoin ecosystem, political and economic control over domestic activity, and control over its domestic Internet infrastructure. We explore the relationship between China and Bitcoin, document China’s motivation to undermine Bitcoin…

Is there any evidence, are there any facts that prove that China is doing what you or that book claims, or is this claim the 21st century version of Soviet fear mongering?

If indeed China wanted to manipulate Bitcoin and use it as a (geo)political or financial leverage, outright banning it seems like an odd way of achieving that goal. In fact what China is saying is: “We don’t want our citizens buying cryptocurrencies”.

I was actually dumbfounded by these “arguments” because I was expecting to hear something in the lines of “Look at China, a country that has taken things seriously and having foreseen the dangers I’m describing, it is actually doing what I’m advocating for in all of my paper”. And if you wanted to be honest with yourself and your beliefs instead of trying to cause fear to the decision makers, you’d actually have used China as an example of what should have been done in the US.

I would also love to hear your opinion on whether or not is it dangerous and to what extent, the fact that most Western industry has moved to China. Whether or not China can use it or is using it as a leverage. Are you — just like in the case of Bitcoin — against it ? Or you don’t mind because “globalism and all”?

> Fourth, wealth in crypto-land is more concentrated than in North Korea where the inequality Gini coefficient is 0.86 (it is 0.41 in the quite unequal US): the Gini coefficient for Bitcoin is an astonishing 0.88.

For starters, I’d like to say that I would also prefer that there was a greater distribution of Bitcoin that it currently is, but claiming that number (0.88) may not hold much water, if any. That 0.88 Gini coefficient in your paper cites and links to this article https://www.businessinsider.com/bitcoin-inequality-2014-1

This article was written in January 2014. How would you grade a student of yours (where the criterion for said grading would be the merit of the claim, not the manipulative aspect of it), had he/she made a claim based on way too outdated data? You do know that in the case of cryptocurrencies 4,5 years is a lot of time, right? Hell, even in real world economies 4,5 years is a lot of time, In 2014 the US economy was in a way better shape than during the crisis that started in 2008.

> Crypto is not the internet nor will ever be… The WWW went live in 1991 and by 2000 –nine years later -it already had 738 million users; and by 2015 the number of users was 3.5 billion…

Just because something doesn’t have the growth rate of the internet, doesn’t mean it’s bogus. What was the growth rate of automobiles in the beginning ?

> ICOs are not compliant securities when they aren’t outright scams …

Totally agreed.

> Massive manipulation: pump n dump, spoofing, wash trading, front running, exchanges conflicts of interest, tether scam

Totally agreed, more and stricter regulations are needed.

> No Killer App in Crypto/Blockchain After A Decade: Only Ponzi Schemes

Commodities and money are not an app, they cannot be turned into an app. Yes, there are many Ponzi schemes, but not everything is. Regulations and survival of the fittest will clear the field.

> The energy consumption of crypto is an environmental disaster

A bit overdramatic but a correct point. According to this link (source by Morgan Stanley) https://www.marketwatch.com/story/in-one-chart-heres-how-much-it-costs-to-mine-bitcoin-in-your-state-2017-12-15 it’s about as 2 million US homes. But that’s not as much as Canada I think.

But I think that something needs to be done about it, I must say though that I don’t know if it can, but people should definitely work on that.

> Blockchain is most overhyped technology ever, no better than a glorified spreadsheet or database

Blockchain is indeed overhyped, there are people (scammers, shills, pseudo-journalists) who try to present it as the end-all be-all solution to everything. It is not, it has a few applications and it remains to be seen whether or not it is indeed a superior solution.

It definitely is not a glorified spreadsheet or just a database. It is just a ledger, even simpler than Excel, but one with an added feature: It solves a certain problem (the 3 byzantine generals): https://en.wikipedia.org/wiki/Byzantine_fault_tolerance

Again whether this solution is useful and in which areas it remains to be seen.

> Another false assumption is that blockchain represents something akin to a new universal protocol, like TCP-IP or HTML were for the Internet. Such claims imply that this or that blockchain–among thousands that are incompatible with each other -will serve as the basis for most of the world’s transactions and communications in the future. Again, this makes little sense when one considers how blockchains actually work. For one thing, blockchains themselves rely on protocols like TCP-IP, so it isn’t clear how they would ever serve as a replacement…

You’re absolutely right, but your point is moot. None in their right mind will seriously claim that blockchain is like TCP-IP. Only people like the sheep in the “Animal Farm” would claim such an idiotic thing. So, trying to prove wrong something that sheeple said, is like stealing from a kid: pointless and doesn’t add value to your general arguments.

> Crypto is corrupt eco-system full of charlatans, con-men, self-interested insiders and scammers. But I have NO conflict of interest…Unlike all self-interested crypto insiders and scammers who talk and spin their book 24/7 and use a media/press eco-system of pseudo-journalists to spin their endless fake news I have zero position and financial interest in this entire space. I have zero long or short position in any coin or crypto-currency and any blockchain business venture. And even my support of non-blockchain fin-tech is not driven from any direct or indirect financial interest; I have zero exposure to fin-tech ventures….

This is a very interesting argument. Indeed there are many charlatans, con-men and self-interested insiders and scammers in the crypto-sphere. However the fact that you claim that you don’t have any conflict of interest has zero, or I dare say possible negative value.

Zero value, because in this rational world, we value arguments based on their merit and not based on whether someone is well-intentioned or not. It doesn’t matter WHO says something. It matters WHAT they say, how is it evidenced or proved and what rational thought process they present. A murderer can say a truth, a priest can say a lie.

Possible negative value, because first of all, none knows that you don’t have any conflict of interest and secondly because you felt the need to declare it so. Why ? Conflict of interest doesn’t necessarily mean that you may be shorting crypto-currencies. Conflict of interest could also mean one is paid by unknown parties to say things. Conflict of interest could also mean one is trying to boost his image and promote himself. And the fact that you present as conflict of interest only the direct kinds of, makes me suspicious. Claiming your intentions are good is a red flag in my book. Someone who doesn’t have a conflict of interest, does not feel that he has to declare it. But maybe that’s just how I think.

— -

I’m not saying that cryptocurrencies are the panacea, I’m not even saying that they are a solution, none (including those for and those against them) knows if they are, that remains to be seen. Cryptocurrencies merely are an ongoing grass-root (though I don’t like the word because it has some wrong connotations for some US readers) experiment currently running in a Wild West situation (yes I’m hinting for more regulations).

And you know something funny? Some of the ideas and experiments that most (at the time) experts disagreed with, were the ones that moved things forwards by leaps and bounds. Most such experiments fail, but the few that succeed are the ones that make revolutionary (as opposed to evolutionary — nothing related to 1917 I’m afraid) progress.

Arguing that cryptocurrencies/Bitcoin will fail and that it’s just a scam in a lawless environment is exactly the same train of thought of someone living in London in the late 1700s and arguing that the 13 gone-rogue colonies are a scam, a fraudulent entity enabled by a bunch of adventurers and criminals in a lawless land and that they are doomed to fail.

Andreas T.

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Science, Philosophy, Technology, AI.