With their combined market value reaching nearly $3 trillion towards the end of 2021, cryptos have certainly matured into a more mainstream asset class in recent years. And even with its ups-and-downs – or its potential comeback of the 2018 crypto winter – they’ve yielded hefty capital gains to a slew of buyers over time.
Nobel Prize-winning economist Paul Krugman, however, lately drew some “uncomfortable parallels” of cryptos with the subprime mortgage crisis of the 2000s, via his opinion piece on the New York Times this Thursday.
The long-time crypto skeptic had given us a heads-up a day before this release on Twitter as well, saying that he’s “doing some background homework on the crypto crash” for the same.
Doing some background homework on the crypto crash, and parallels to subprime 15 years ago. Yes, I know the HODLers see it as a buying opportunity, and they could be right — not doing price predictions, just trying to think this through 1/— Paul Krugman (@paulkrugman) January 26, 2022
What’s It About?
While drawing a comparison with the US subprime crash, one that brought the whole housing market to its knees and triggered the 2007-2008 global financial crisis, the economist has concluded that the crypto world isn’t big enough to threaten the financial system at present. “The numbers aren’t big enough to do that,” he wrote.
CNBC summarises the subprime mortgage meltdown as follows: it was essentially the result of banks making loans out to people of higher risk, at a time when interest rates were low and house prices were soaring. Once the market became saturated, homeowners found themselves in negative equity unable to repay their loans, resulting in hefty losses for lenders.
Some Of The Similarities
Like in the 2007-08 financial crisis, Krugman reports the existence of “growing evidence” that crypto investors are getting sold on speculative financial products without full comprehension of the risks involved, for the brunt of these risks fall disproportionately on those without a grasp on what they’re in for, and are “poorly positioned to handle the downside.”
Another similarity, he claims, is in the way that cryptocurrencies are widely acclaimed as a great method to diversify investments today, just as house owners celebrated the benefits of mortgage lending back then. Citing Ned Gramlich’s warnings of eventual financial dangers (posed in vain), which raised a similar question to what crypto skeptics do to date, he hinted at the plausibility of cryptos dropping sharply if its bubble bursts in the future, just as the “homeownership” bubble did.
“Cryptocurrencies, with their huge price fluctuations seemingly unrelated to fundamentals, are about as risky as an asset class can get.”
Paul Krugman believes that regulators are unable to protect people from making investments they don’t understand and can’t cover for, just like the 2000s crisis, as he asserts that it’s alright to invest in crypto given that you’re “well equipped to make that judgment and financially secure enough to bear the losses,” in case the skeptics turn out to be correct, that is.
Bitcoin Is Evil – A 2013 Production
Krugman’s dubiety to crypto dates all the way back to 2013 when he published a critical NYT op-ed entitled “Bitcoin is Evil.” As Coindesk notes, he declared that bitcoin has no legitimate uses and no intrinsic value in the same.