Economist Nouriel Roubini is known as “Dr. Doom” because he generally has a dim view of markets. But his opinion is still widely respected because his past calls have been prophetic.
In 2006, for instance, he warned that a housing bust was on the horizon and it would force the global financial system to freeze up. Two years later, the markets followed his forecast as if it were a script.
Now, Roubini is warning investors about Bitcoin and other cryptocurrencies.
Roubini argues that cryptos are built on a pile of sand. His argument has more to do with the technology than the markets.
Cryptos rely on a blockchain. The technology of the blockchain — a digital ledger used to publicly and securely record transactions — has been in use for almost 10 years.
In theory, the blockchain should be useful for transferring ownership of shares of stocks, bonds, real estate or anything.
In reality, none of these applications are in place, Roubini argues.
Roubini cites several problems with the technology. His primary concern is that it “lacks the kind of basic common and universal protocols that made the Internet universally accessible (TCP-IP, HTML, and so forth).”
Without these standards, he says, cryptos will remain a niche product.
He also believes the idea of “decentralized transactions with no intermediary authority amounts to an untested, Utopian pipedream.”
Trusted intermediaries are in place throughout the financial system for a reason and blockchains don’t provide trust, he says.
They are just a technology and for now, an untested technology that has not withstood an event like the global credit crisis of 2008 or the stock market crash of 1987, Roubini argues.
In the long run, however, even “Dr. Doom” is optimistic that the blockchain will mature.
“Blockchain creates an enormous chance to increase productivity in many companies and I think the technology to be something very good,” he said.
For now, though, he sees a speculative bubble in Bitcoin and cryptos in general because they don’t yet function as a store of value or provide a reliable method for transacting business.
Instead, he advises, “investing in fintech firms with actual business models, which are slogging away to revolutionize the financial-services industry. You won’t get rich overnight; but you’ll have made the smarter investment.”