‘It’s a total speculative play on a bubble that is self-fulfilling’

Professor of Economics at New York University’s Stern School of Business and Roubini Macro Associates CEO Nouriel Roubini joins the Yahoo Finance Live panel to discuss the rise of bitcoin and cryptocurrencies.

Video Transcript

And we want to bring in Nouriel Roubini, Professor of Economics at NYU’s Stern School of Business. Also CEO of Roubini Macro Associates. We’re also joined by Yahoo Finance correspondent, Julia La Roche. Nouriel, it’s great to have you back on the program here.

Let’s start with bitcoin because the last time you were on with Adam and Julia, you were talking about bitcoin. And you were saying you were very skeptical of it, that it has no fundamental value. So I’m curious just to get your take on the massive rise that we’ve seen since then and why we’re seeing so many investors bet on bitcoin.

NOURIEL ROUBINI: Well, there’s a massive rise but there is a huge amount of volatility. And overnight, it fell more than 12% and now it’s down 7% for the day. And you have to ask yourself whether retail investors and institutional investors should be investing into something that is so risky. And something that is not a currency and is not even an asset.

I think it’s volatile. I think that some of the movement upward is driven not by worries about inflation or debasement of Fiat currencies because gold is not going up very much. Tapes are not going out very much. Why would just bitcoin be a hedge against inflation and debasement of Fiat currency? There must be something else.

Something else is there that is massive manipulation. We know there are pump and dump schemes, there are washed ratings, spoofing. There is front-running, even by exchanges. And there is this phenomenon of tither, a stable coin that is produced out of nowhere. We don’t know which kind of backing.

And every other day there’s a billion dollar VD shoot that goes to buying bitcoin. So I think there is massive price manipulation by a bunch of whales. And inside there’s the down manipulate in this market. And we know that a whole bunch of legal investigation by the DOJ, by the CFTC, by the Attorney General office in New York. They are looking into what’s going on. So I think it’s a very risky asset class.

JULIA LA ROCHE: Nouriel, it’s Julia La Roche. And you’re mentioning some of the whales who are in this space, and you believe it’s a risky asset class. And I think the last time we did speak, you said that, look, this thing has no place in an institutional investor’s portfolio or a retail investor’s portfolio, yet we’ve seen a lot of retail investors in this space.

We have seen a lot of big names, very well-established names, enter this space. So why not? Why not have just even just the tiniest little percentage allocation in bitcoin? What is the argument against just having some exposure?

NOURIEL ROUBINI: Well, there are some people that are risking their entire house on it. I mean, if you take Tesla, if you exclude the crazies that they get for gas emissions, it’s still a money-losing firm. And now they’re betting all their entire cash on bitcoin. If you want to become a bitcoin fund, be a bitcoin fund but not electric vehicle company.

Or MicroStrategy is a tech firm that was flat for 10 years. It didn’t go anywhere, pretty much. And now the CEO is betting the entire cash and borrowing a $600 billion on bitcoin. And so you’re not a technology company. There are people are doing lots of risky stuff.

The people are institutions. Everybody wants to trade this stuff. Everybody wants to be custodian, because regardless of whether it’s worth zero or 50, they want to make money out of the trading. It’s not as if Goldman Sachs or the custodians believe in this asset class. If you can get a cut out of the changes in the crypto space, so be it.

And institutions are weird. Scott Minerd from Guggenheim Partners one day says we’re going into bitcoin because zero go to 400,000. And the next month he says, no, it’s going to go down to 20,000. Just make up your mind.

The reality is that nobody knows what the value of this pseudo asset is. It doesn’t have any value because it doesn’t have any income, doesn’t have any use, doesn’t have any utility. So it’s a total speculative play on a bubble that is self-fulfilling. And now we are like in 2017, hundreds of thousands of retail suckers, that are having a form of fear of missing out, going into this asset class. And they’re going to buy at the peak like it happened in December of 2017, when bitcoin was 20,000. And it fell to 3,000 by the end of the next year.

So this is the same phenomenon. Just people moving in because of FOMO. Feeding the bubble, manipulation, and eventually the idea crashed. I mean, overnight–

But we also–

NOURIEL ROUBINI: It was 1% which asset class has that volatility.

Let me just keep this simple because a lot of us, we get moved by the big sway. Fortunately, I don’t have $50,000 to buy a bitcoin so I’m not at risk. But you could do a fractional. You can buy a fraction of it. Is there any purpose for bitcoin? I hear you dismissing it, but I think I’m missing something.

NOURIEL ROUBINI: Well, an asset, usually stocks, bonds, loans and real estate, they give you income. And therefore, there is a reason for the capital gain, if the dividends are not fully rebated, the profits. Other asset classes like real estate residential gives you housing services. Gold doesn’t have income but that’s used as an industry as utility as jewelry. And has been used for liquidity purposes, and has a store value for thousands of years.

So you’re asking yourself, what is the fundamental value of bitcoin. It doesn’t have any income, doesn’t have any uses in industry, doesn’t have any utility. You can’t have a gold chain of bitcoin. It doesn’t give you any pleasure, unlike gold and jewelry and other stuff. And therefore, doesn’t have any intrinsic fundamental value because it’s not even scalable. You can do only five transactions per second with bitcoin, while you can then make 24,000 transactions per second with a Visa network.

So it’s never going to be able to be even a means of payment. And it’s not a unit of account. There’s not a single [INAUDIBLE]. So people say the store of value against a risk. But when in February and March of last year, US stocks went down, say, 35%, bitcoin was not a hedge. It went down by 50% and other cryptocurrency went down by 60%.

And if it’s a hedge against inflation, what’s the fundamental value that needs it to be a hedge against inflation? And if people are so worried about inflation, why bitcoin goes from 5,000 to 50,000, while gold has been correcting downwards and break-evens are barely above 2%? And tapes are giving– your returns are still pretty mediocre. If people are really worried about inflation, they will diversify in a wide range of assets that are historical good hedges against inflation. That’s not happening.

So that might now be the reason why bitcoin is going higher. So it must be manipulation. There is nothing else that explains this movement.

Nouriel, stay right there because we want to take a quick break. But when we come back, we also want to talk to you about the economic recovery, the stimulus package that’s being negotiated down in DC right now. We’ll be right back in just two minutes.

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