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Nouriel Roubini, an economist known as "Dr. Doom" for his bearish views, said bitcoin is not a hedge against inflation and investors are "feeding the bubble" in an interview with Yahoo Finance on Monday.
"If people were really worried about inflation they would diversify in a wide range of assets that are historical good hedges against inflation. That's not happening," Roubini said.
"People say bitcoin's a store of value against tail risk, but in February, March of last year when US stocks went down, say 35%, bitcoin was not a hedge, it went down by 50%" the economist added. "The reality is that no one knows what the value of this pseudo-asset is."
Roubini has long been a critic of digital currencies, but after bitcoin hit a $1 trillion market cap last week the NYU professor has renewed his bearish calls.
Roubini said he sees the digital currency as a volatile "pseudo-asset" and argued much of the price movement "is driven not by worries about inflation or debasement of fiat currencies," but rather by "massive manipulation."
The economist said that there are a number of schemes used by digital currency whales to push the price of bitcoin higher. In particular, he highlighted the stable coin tether as an example.
Roubini said tether is "produced out of nowhere with we don't know which kind of backing and every other day there is another billion dollars of it that goes to buying bitcoin."
"We know there are a whole bunch of legal investigations by the DOJ, CFTC, the attorney general's office in New York, they are looking into what's going on," the economist added.
JPMorgan strategists including Josh Younger and Joyce Chang, also warned investors about tether in a note to clients last Thursday, per Bloomberg.
The analysts said Tether Limited is "engaged in a classic liquidity transformation along the lines of traditional commercial banks, but is not subject to the same strict supervisory and disclosure regime, and certainly does not have anything like deposit insurance."
They also warned problems with Tether could lead to liquidity issues in the crypto market and that Tether Limited has "famously not produced an audit."
Tether Limited announced a settlement with the New York AG for $18.6 million on Tuesday. The firm was accused of hiding $850 million in losses and has been under scrutiny to see whether it has sufficient cash reserves to back up all tether tokens in circulation, per CNBC.
Tether responded to questions about its business in a statement saying, "contrary to online speculation, after two and half years there was no finding that Tether ever issued tethers without backing, or to manipulate crypto prices."
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