Nobel Prize-winning economist Paul Krugman sees parallels between the crypto market and the subprime loan crash. “There is growing evidence that the risk of crypto is falling disproportionately on people who do not know what they are getting into and are ill-positioned to deal with the disadvantages,” he stressed.
Nobel laureate Paul Krugman warns against cryptocurrency as a subprime loan
Nobel laureate Paul Krugman warned of investing in cryptocurrency in an opinion piece he wrote in the New York Times, published Thursday. Krugman won the Swedish Riksbank̵[ads1]7;s prize in economic sciences in memory of Alfred Nobel in 2008 “for his analysis of trading patterns and localization of economic activity”, the Nobel Prize’s website shows.
The Nobel laureate began by acknowledging that “crypto has become a fairly large asset class,” noting that the market value of all cryptocurrencies reached nearly $ 3 trillion last fall. He added that the prices of cryptocurrencies have crashed, “wiping out around $ 1.3 trillion in market value.”
However, Krugman believes that “crypto does not threaten the financial system,” citing that “the numbers are not large enough to do so.”
Nevertheless, the economist warned that “there is a disturbing echo of the subprime crash 15 years ago,” and elaborates:
I see unpleasant parallels with the subprime crisis of the 2000s… There is growing evidence that the risk of crypto falls disproportionately on people who do not know what they are getting into and are ill-positioned to deal with the disadvantages.
Krugman explained that “Investors in crypto seem to be different from investors in other risky assets, such as stocks, which are disproportionately made up of wealthy, college-educated whites.” He cited a survey from the research organization NORC, which stated that 44% of crypto investors are non-white and 55% do not have a college degree.
While NORC says that “cryptocurrencies open up investment opportunities for more diverse investors,” Krugman pointed out that “subprime mortgages were celebrated in the same way … it was hailed as a way to open up the benefits of home ownership to previously excluded groups.”
Krugman continued: “Cryptocurrencies, with their enormous price fluctuations that are apparently unrelated to fundamentals, are about as risky as an asset class can be.”
He noted that skeptics say that cryptocurrencies are only good for “money laundering and tax evasion”, with some warnings that bitcoin is a bubble, and said that “it is OK for investors to bet against the skeptics”.
However, the Nobel laureate warned: “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 is not what is happening. And if you ask me, regulators have made the same mistake they did on subprime: They failed to protect the public from financial products no one understood, and many vulnerable families may end up paying the price.
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