Nobel Prize-winning economist Paul Krugman sees parallels between the crypto market and the subprime mortgage crash. “There’s growing evidence that the risks of crypto are falling disproportionately on people who don’t know what they are getting into and are poorly positioned to handle the downside,” he pressured.
Nobel Laureate Paul Krugman Warns About Crypto Crashing Like Subprime Mortgage
Nobel laureate Paul Krugman warned about cryptocurrency investing in an opinion piece he authored in the New York Times, printed Thursday. Krugman received the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2008 “for his analysis of trade patterns and location of economic activity,” the Nobel Prize web site reveals.
The Nobel Prize winner started by acknowledging that “crypto has become a pretty big asset class,” noting that the market worth of all cryptocurrencies reached nearly $3 trillion final fall. He added that the costs of cryptocurrencies have crashed, “wiping out around $1.3 trillion in market capitalization.”
However, Krugman believes that “crypto doesn’t threaten the financial system,” citing that “the numbers aren’t big enough to do that.”
Nonetheless, the economist warned that “There are disturbing echoes of the subprime crash 15 years ago,” elaborating:
I’m seeing uncomfortable parallels with the subprime disaster of the 2000s … There’s rising proof that the dangers of crypto are falling disproportionately on individuals who don’t know what they’re stepping into and are poorly positioned to deal with the draw back.
Krugman defined that “Investors in crypto seem to be different from investors in other risky assets, like stocks, who consist disproportionately of affluent, college-educated whites.” He cited a survey by the analysis group NORC, stating that 44% of crypto buyers are nonwhite and 55% don’t have a university diploma.
While NORC says that “cryptocurrencies are opening up investing opportunities for more diverse investors,” Krugman identified that “subprime mortgage lending was similarly celebrated … it was hailed as a way to open up the benefits of homeownership to previously excluded groups.”
Krugman continued: “cryptocurrencies, with their huge price fluctuations seemingly unrelated to fundamentals, are about as risky as an asset class can get.”
Noting that skeptics say cryptocurrencies are solely good for “money laundering and tax evasion,” with some warning that bitcoin is a bubble, he stated that “it’s OK for investors to bet against the skeptics.”
However, the Nobel laureate cautioned: “But these investors should be people who are both well equipped to make that judgment and financially secure enough to bear the losses if it turns out that the skeptics are right.” He concluded:
Unfortunately, that’s not what is going on. And when you ask me, regulators have made the similar mistake they made on subprime: They failed to defend the public in opposition to monetary merchandise no person understood, and lots of susceptible households could find yourself paying the worth.
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