Revisiting and Refuting “Nouriel Roubini: bitcoin is not a hedge against tail risk”
In February 2021, NYU professor of economics Nouriel Roubini published an article in the Financial Times bashing Bitcoin as a bubble with several issues prohibiting it from ever reaching value and relevancy. Though some of his arguments are valid, others have either been solved in the past two years or were arguably false at the time of publication. In this refutation, we will analyze some of Roubini’s claims and debate their legitimacy.
Immediately, Roubini states a common misconception about Bitcoin related to its energy usage. He states that Bitcoin has a “massive polluting energy-hogging production” and that a carbon tax would negate Bitcoin’s fundamental value. While it is true that Bitcoin uses a large amount of electricity, it only takes up 0.55% of the world’s overall electric supply. Additionally, it has been estimated that anywhere between 39–73% of the energy used to mine Bitcoin is green energy, which is naturally incentivized since it can be cheaper than other options. Ethereum, the second largest cryptocurrency aiming to be a global settlement and compute layer, uses a fraction of the energy required by PayPal. Moreover, the global financial industry uses more energy than Bitcoin. Bitcoin and other cryptocurrencies are attempting to significantly modify, if not replace, the current system, making them the more energy-efficient alternative.
His next argument is that Bitcoin and other cryptocurrencies are not “currencies” since nothing is priced in them, they are not a “scalable means of payment,” and they are “barely used by legitimate companies as payment for goods and services.” It is partially true that Bitcoin has no fundamental value, but some argue that the cost of electricity and mining hardware provides a floor for the price of Bitcoin: nobody will sell them for more than they cost to mine. The transaction fee model of Bitcoin also provides some level of value since the network itself facilitates the ability to send money to anyone, anywhere in the world, without going through an intermediary. Ethereum almost certainly has value, as it can be staked to secure the network, yielding ETH from transaction fees. While it is also true that the main Bitcoin network can only handle around five transactions per second, there have been several solutions built on top of Bitcoin to handle significantly more. The most prominent is the Lightning Network, which allows for thousands of transactions, all without fees, for participating parties. Ethereum has also been improving its scalability through Layer 2s, which can currently handle hundreds if not thousands of transactions per second, to reach 100,000 through future improvements.
It is certainly true that cryptocurrencies are not stable, as mentioned in the following argument. However, this is due to various factors, namely the relative nascency of the market compared to other assets and commodities. With such a small market capitalization compared to other industries, it is no wonder that cryptocurrencies experience greater volatility. As the market grows, regulations are enforced, and consumer sentiment changes, it is likely that cryptocurrencies will decline in volatility and come in line with other asset classes.
Arguing that cryptocurrencies have “no income, no utility, no payment, or other services” is also false. Take Ethereum, for example — as previously stated, it is used to pay fees related to smart contract transactions, which are paid to network stakers. It could arguably fall into a new asset class because of its utility and yield-generating potential. And the data and smart contracts on Ethereum have significant value and use — the decentralized finance industry alone is worth hundreds of billions of dollars. It is generating real yield for its participants.
In the second half of the article, Roubini asserts that crypto is not scalable, safe, or decentralized. Every one of these arguments is incorrect: cryptographic security, like the public-private keypairs that make up every cryptocurrency wallet, is quite literally the safest form of security available for information today. While it is true that losing a private key leads to the permanent loss of assets, this is a problem being solved by account abstraction, recently implemented in Ethereum in EIP-4337. Since the article’s release, much Bitcoin mining has migrated from China to the United States after China’s mining ban. However, I contend that this does not solve the issue of centralization with Bitcoin specifically. Ethereum, on the other hand, has a network of 500,000 validators and significantly less centralization. There is also no way for developers or founders of any cryptocurrency to reverse transactions after they are made. Finally, while the numbers are probably different now than when published, the statement that “99 percent of bitcoin trading occurs on centrali[z]ed exchanges, which may be hackable” is misleading. The entire premise of blockchains is to create trustless and permissionless financial tools, and hundreds of decentralized exchanges exist where trading can be done without giving up custody of assets. And while it is true that centralized exchanges could be hacked, that is true for any centralized website or financial system, including the ones that Roubini promotes.
The opinion piece from Nouriel Roubini, though clear in its intention, does not provide any compelling arguments against cryptocurrencies. Its attacks against cryptocurrency go either unfounded or have been solved since the article’s publication. This article serves as a reminder of the general misunderstanding held by the general public about cryptocurrency and how early the industry still is.
By Lincoln Murr