Nobel Laureate Paul Krugman Likens Crypto Market to Subprime Mortgage Crash — Warns Regulators Are Making the Same Mistake

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 stressed.

Nobel laureate Paul Krugman warned about cryptocurrency investing in an opinion piece he authored in the New York Times, published Thursday. Krugman won 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 website shows.

The Nobel Prize winner began by acknowledging that “crypto has become a pretty big asset class,” noting that the market value of all cryptocurrencies reached almost $3 trillion last fall. He added that the prices 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 crisis of the 2000s … 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.

Krugman explained 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 research organization NORC, stating that 44% of crypto investors are nonwhite and 55% don’t have a college degree.

While NORC says that “cryptocurrencies are opening up investing opportunities for more diverse investors,” Krugman pointed out 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 only good for “money laundering and tax evasion,” with some warning that bitcoin is a bubble, he said 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 happening. And if you ask me, regulators have made the same mistake they made on subprime: They failed to protect the public against financial products nobody understood, and many vulnerable families may end up paying the price.

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