Home Alternative Investments Crypto Can’t Hedge Inflation Risk, NYU Professor Warns

Crypto Can’t Hedge Inflation Risk, NYU Professor Warns

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New York University Stern School of Business Professor of Economics Nouriel Roubini cautioned investors not to view cryptocurrency as an effective hedge against inflation (and questioned whether bitcoin and other cryptocurrencies were currencies at all) during a discussion at this year’s WealthManagement EDGE conference.

“In the case of bitcoin or any other essentially cryptocoin asset, the basis for the fundamental value and the basis for the capital gain is not there, it’s vaporware; it’s not backed by anything,” he said during a discussion with Blue Ocean Global Wealth CEO Marguerita Cheng. “They’re not currencies, they’re not even assets, they’re highly volatile, they’re speculative and they’re subject to manipulation of one sort or another.”

Roubini’s one-on-one with Cheng was one of the first events during the week-long conference, being held in-person at The Diplomat Beach Resort in Hollywood, Fla. During their conversation, Roubini (who is also the head of Roubini Macro Associates) surveyed inflation’s continued strain on the economy, predicting we’d see a “hard landing” out of the inflationary period via a recession rather than a soft landing avoiding one.

Roubini detailed an array of geopolitical stressors on these possibilities, including how much central banks would be willing to tighten monetary policy and whether Russia’s war with Ukraine becomes more protracted. But much of the discussion was an extended critique of cryptocurrency, with Roubini describing himself as a skeptic. Roubini noted crypto’s sobering recent market performance, with bitcoin falling below $26,000 earlier in May for the first time in 16 months. 

Roubini said his skepticism was based on several factors, including that scams and money manipulation were far too prevalent among crypto options. He also stressed that hedging with crypto wouldn’t suffice in an inflationary environment, remarking that as inflation worries have risen, Bitcoin, Ethereum and other cryptocurrencies’ values were collapsing by more than half. Roubini also believed cryptocurrencies were far too heavily correlated with risky assets.

Even a description of cryptocurrency as a currency was a “misnomer,” according to Roubini, who argued that nobody was pricing goods or services in Bitcoin and Ethereum, among others. Crypto’s scalability remained an issue, with Roubini claiming bitcoin can only process five transactions per second. Those accepting it as a means of payment also are taking an undue risk, he argued.

“Suppose you had a profit margin of 10 to 15%,” he said. “Overnight, bitcoin can fall by 10 to 15%. Your margin is going to be essentially wiped out, so you’re taking a huge market risk.”

Though Roubini noted some supporters consider cryptocurrencies as assets as opposed to currencies, he remained skeptical. In his view, assets offer benefits for its holders; stocks offer dividends, bonds offer coupons, real estate can generate rent, owning a home can provide housing and even gold, while not having income, has industrial uses, utility through creating jewelry, and has long acted as a store of value against inflation, financial crises and broader geopolitical risk. 

But cryptocurrencies lacked income, uses or utilities in contrast with more conventional assets, according to Roubini, in sharp relief with these other examples.

“So I would stay away from them,” he concluded.

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