Crypto Winter: Ice Age or Great Thaw?


By: Garrett Baldwin


On Wednesday, three heavyweights in the cryptocurrency debate at the SALT Conference in Las Vegas.

Noted Bitcoin bull Michael Novogratz, Ethereum co-Founder Joseph Lupin, and NYU Economics professor Dr. Nouriel Roubini discussed a variety of topics in the cryptocurrency and blockchain sectors.

Moderator Rana Yared, a managing director at Goldman Sachs, framed the debate on four topics: Cryptocurrencies as a store of value and a method of payment; challenges associated with the adoption of cryptocurrencies; the impact of digital currencies on monetary policy; the applicability of distributed ledger technologies away from the cryptocurrencies themselves.

Here are the key highlights of the discussion.


The Legitimacy of Cryptocurrency as a Store of Value

The conversation quickly centered on the price of Bitcoin and its sharp decline from record levels since 2017.

Novogratz had previously projected that Bitcoin would hit a market capitalization of $8 trillion in 20 years, a level that would see the price of the cryptocurrency hit $350,000 per unit.

The Galaxy Digital chief began the conversation with a quick recap of bubbles in technology and markets and dismissed concerns about Bitcoin’s downturn from nearly $20,000.

Despite criticism about Bitcoin, he noted that the world’s largest cryptocurrency has a $100 billion market cap.

“It is a store of value,” Novogratz said. “Bitcoin already won. It is now seen by people all around the world as legitimate to place to preserve their value. Not necessary as a currency but as a proxy to gold.”

But NYU professor Dr. Nouriel Roubini quickly challenged the idea that Bitcoin and cryptocurrencies, in general, have any a store of value.

Roubini has been a highly outspoken critic of the cryptocurrency space. Yared cited his October 2018 testimony to the U.S. Senate Committee on Banking where he referred to cryptocurrencies as “the mother of all scams and bubbles.”

Roubini recounted his testimony, in which he compared Bitcoin’s 2017 rise to other historical bubbles like Tulip Mania by looking at asset prices three years before the asset's sharp price increase.

“The Dot-Com bubble, the rise [in asset price] was 3x. South Sea Bubble 8 x, Tulip Mania and Mississippi Bubble rising price was 35x,” Roubini said. “In the case of Bitcoin, the rise was 60x.”

Roubini refuted Novogratz’s points on bubbles by noting that the assets and speculation tied to the South Sea Bubble, Tulip Mania, and Mississippi Bubbles went away.

Roubini noted that Bitcoin is down 70% since its peak. But he homed in on “Scamcoins,” [Editor’s note: He used a bit more colorful term] arguing that 81% of cryptocurrencies were scams, and another 11% were dead or failing. “Only 8% are trading on exchanges and have lost 90% of the value.”

Roubini also argued that the term cryptocurrency is a total misnomer. “To be a currency, you need to be a unit of account. None are a unit of account. It has to be a valuable and scalable means of payment.”

The professor argued that Bitcoin is not a stable store of value because the price can go up and down 20% in short periods of time. “If you’re a merchant and you accept Bitcoin for payment, in an hour, your profit margin can disappear because of a price change,” he said.

Roubini also raised concerns about manipulation on exchanges – including wash-trading, pump and dump trading, frontrunning. “This has no future as a currency,” he concluded.


Ethereum – the Industrial Coin?

While the comparisons between Bitcoin and Gold as a better store of value has been a major topic of discussion, the idea that a cryptocurrency can have an industrial use – like silver – is not a mainstream topic.

But Lubin, the co-Founder of Ethereum, noted that a lot of the data had changed over the last four years and that Blockchain has enabled the ability to build an infrastructure based on trust.

Lubin said that decentralized systems that are based on trust would take time to build. The Ethereum executive said his firm is building layers of the Ethereum ecosystem that bring scalability. This opened up a discussion on the notion that Ether is a coin that has an industrial use.

Lubin said that there are tens of thousands of available decentralized transactions per second on Ethereum right now.

By the end of the year, Lubin expects this figure to hit “hundreds of thousands” and that the industry is still very early in its infancy similar to the early years of the internet.

Rubin also noted that Ethereum could give users more control of their personal identities and data. "Decentralized identity allows us to control information like our financial and health information rather than having other institutions custody that information."

He argued that the shift toward decentralized systems would allow users to focus more on using this data to improve their health than having companies utilize them for other purposes, such as marketing or selling products and services.


The Impact on Monetary Policy

The conversation soon turned to the trend of governments launching cryptocurrencies and whether central banks need to have a monopoly on monetary policy.

Roubini argued there is a paradox on stable coins – that central banks are debasing their currencies yet every day new stable coins are linked to fiat currencies like the U.S. dollar.

The NYU professor also raised concerns about decentralized stablecoins like Tether that is not truly backed by fiat currencies. He predicted that more stablecoins would collapse in the future.

On the monetary policy side, Roubini noted that we operated in a world with a fractional reserve system where banks create deposits. In a hypothetical world where the Federal Reserve or the European Central Bank, he believed they could be a useful tool for governments.

“If and when central bank create currencies, they will not be based on decentralization. And they will be superior to bank deposits, digital payment systems like Venmo, and dominating other cryptocurrencies.”

On the effectiveness of cryptocurrencies and monetary policy. Roubini said that cryptocurrencies created by central banks would create more stability because the banks can go beyond the zero bound requirements and go more negative with interest rates in the event of severe economic events.

Roubini also challenged the idea that private Blockchain has a future and compared distributed ledger technologies to Google Docs.

With the final word, Novogratz topped the debate with a challenge to Roubini.

“Bitcoin is at $6,000 right now. If at Christmas time, the price is above $6,000 you have a wear a shirt that says “I love Bitcoin.” If the price is below that level, I’ll wear a shirt that says “Nouriel was right,” he said holding out his hand.

Roubini looked off stage, saying, “I don’t care about the price of Bitcoin. That doesn’t matter. It’s not a unit of account. It’s not a unit of value. It a means of payment. Nobody’s using it.”

“If nobody’s using it, [the price] would go down,” Novogratz challenged as the conversation concluded.