Analysis: Dr Doom Needs to Take a Class
On Wednesday, Yahoo Finance Live aired an interview with famed economist and NYU professor Nouriel Roubini, affectionately known as “Dr Doom” in finance circles. Nouriel is an incredibly accomplished academic and economist, and by all accounts a brilliant man. He is best known for generally warning that the whole financial system is about to come crashing down, and, while he has been wrong about that most of the time, occasionally he has been spot on. These days, his most widely known position is that cryptocurrencies are a farce.
There are plenty of arguments to make against crypto, as well as many compelling arguments in favor. However, during Wednesday’s interview with Yahoo Finance’s Julia La Roche, Roubini did more to expose his pure bias and perhaps his lack of understanding of basic market function (all markets, not just crypto) than he did to advance his idea that no one should trust BTC.
Roubini’s thesis during this interview was that BTC prices are being manipulated, and therefore, everyone should steer clear of it. As evidence for this thesis, he presented a University of Texas study that showed that issuance of the stable coin Tether increased with high correlation during BTC market selloffs. He then made the leap that the tail was wagging the dog, and that the company behind Tether, by issuing or redeeming Tether coins, was controlling the price of BTC.
If Roubini knew even just a little bit about crypto exchanges, and a little bit more about all financial markets, he would know that this is an entirely backwards argument. Allow me to explain:
We are used to looking at trades as buys and sells, and our frame of reference is always in USD. This is useful and easy to think about. But, for a moment, try to allow yourself to change your frame of reference. Let’s think about trading AAPL, which is currently about $130/share. If instead of using USD as my base currency, let me think about the trade in terms of AAPL, as if AAPL shares were the asset that you would measure value by instead of dollars. I could approach the trade as saying “I want to buy 13,000 green pieces of paper with George Washington on them. How much will that cost?” and the seller would say “That will cost you 100 shares”. If I make that trade, I buy 13,000 USD, and I pay 100 shares for it. The person on the other side of the trade sells me $13,000 and increases his inventory of AAPL shares. Sounds weird, but think about it, and you will see that functionally that is all any trade is, and changing the frame of reference does not alter the economics of the trade.
This is even easier to see when we talk about currencies. Let’s say I want to convert USD into Euros. Euros are about 1.20/$ currently, so if I want to buy 1,000 Euros I will have to pay $1,200. This is no different than a trade in which I am buying a share of stock or a crypto coin. But you can easily see this from the perspective of the person in Germany who is taking the other side of this trade. As far as they are concerned, they are buying dollars, and they are paying 0.83 Euro per dollar. Both parties see themselves as buying and the other person as selling, because they are both using their own currency as their frame of reference. Yet the trade gets executed all the same.
Now that we have that settled, we can move on to Tether, which is a stable coin backed by USD fiat currency. Tether operates like many ETFs, where there is a creation and redemption method. If you want Tether, you give USD to the administrator, and they give you Tether coins. They then hold that USD in escrow. If you have Tether and you want to change it back to USD, you hand them your coins, and they essentially retire those coins and hand you dollars from the escrow account. Now, there are currently a lot of questions around if the company that is operating this is actually allowed to do it. I will leave that discussion for another time and place, as I am not an expert here, and regulations are still being formulated. The important part for this discussion is that Tether in fact acts as a crypto version of the US dollar.
All markets everywhere trade in pairs, as we discussed earlier. We’re just used to the pair being the dollar, so we don’t even think of it. In the US, most crypto trading is done with USD as the pair as well, but that isn’t necessarily the case everywhere. Especially in non-US markets, BTC is most actively traded with Tether or USDC (another stablecoin backed by US dollars) instead of actual fiat dollars. What this means, is that every time someone sells BTC on a global crypto exchange, they are explicitly buying Tether at the same time. The person taking the other side of that trade is buying BTC, and delivering Tether. This means that when sellers start to flood the BTC market, it implicitly creates a need for more Tether. Retail traders who were holding BTC before are now flushing BTC out of their accounts and filling those accounts up with Tether.
Market makers on the other side of these trades need to keep their inventory of Tether high enough so that they can continue to make markets and keep doing business. So they go to the Tether administrator and deposit actual US dollars with them so that they can restock on Tether, transfer it to the crypto exchange, and continue making markets.
So, we can see that, given the way that crypto markets are structured, the fact that there will be spikes in issuance of Tether during BTC market selloffs is both obvious and entirely necessary for these markets to function as intended. It is clear and basic math or physics to see that BTC price movement is what dictates the creation or redemption of Tether, and not the other way around. Roubini’s argument that the correlation between the two shows that Tether coin creation or redemption is manipulating the price of BTC is quite simply nonsense.
Roubini’s argument here is akin to saying that the money in your bank account is manipulating the items that show up at your door being delivered from online retailers. As if some phantom mastermind was controlling your savings account, and their manipulation was what caused that new pair of shoes to appear in your closet. It couldn’t possibly be caused by the fact that you decided to order them yourself. Roubini is a smart guy; he knows better. He should stick to the real arguments and leave this nonsense behind.
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