In an editorial article published in the New York Times on Thursday, Nobel Prize-winning economist Paul Krugman cryptocurrency linked the recent cryptocurrency fall to the subprime mortgage crisis in the United States.
According to the economist, the crypto market crash has "uncomfortably resembled the subprime mortgage meltdown of the 2000s." According to the analyst, the crypto market has lost $1.3 trillion in value in recent weeks.
"No, cryptocurrency does not pose a danger to the financial system since the quantities involved are insufficient," he wrote. "However, there is mounting evidence that the dangers associated with the risk of cryptocurrency are falling disproportionately on those who don't understand what they are getting themselves into and who are ill-prepared to deal with the negative."
The subprime mortgage crisis began in 2007. It was the catalyst for the worldwide recession that followed. Unprecedented mortgage-lending practices caused a gigantic housing bubble that burst, resulting in a cascade of underwater mortgages, foreclosed homes, and widespread downgrades of mortgage-backed securities that the top lenders had marketed. As a result, many homeowners suffered foreclosure, while investors who purchased these soured mortgage bonds — including pension funds and retirement plans were stuck with the bill.
As Paul Krugman cryptocurrency points out, a similar dynamic is now at work in the risk of the cryptocurrency market, with investors being swept up in the enthusiasm at times without fully comprehending the dangers involved.
In contrast to stock investors, who are mostly white and college-educated, around 55 percent of crypto volatility traders do not have college degrees, with 44 percent being nonwhite, according to an economist quoting a poll by the research group NORC In a similar vein to 2007, when the least eligible borrowers were given the most complicated loan packages, it seems that the riskiest financial assets are being marketed to the least knowledgeable or most susceptible investors today.
Paul Krugman on cryptocurrency, who has previously said that bitcoin is a more evident bubble than housing was, expressed skepticism about a claim made by the National Organization for the Reform of Capitalism (NORC) that digital assets open the door to more diverse investors.
It was "back in the day" when subprime mortgage lending was similarly heralded as "a method to offer up homeownership advantages to previously excluded populations," he recalled in a letter to the editor. "However, it came out that many borrowers were completely unaware of what they were getting themselves into."
While the Nobel Laureate expressed his disbelief that crypto market crash would cause a serious economic disaster in the same manner that subprime mortgages did, Paul Krugman on cryptocurrency issued an unsettling warning:
In my opinion, the same error that regulators made concerning subprime has been repeated this time around: they failed to safeguard the public from financial instruments that they did not understand, and many vulnerable families may be on the hook as a result of crypto volatility.