Topic: How Crypto Became the New Subprime (Read 158 times)

I'm 101% sure I've seen this discussion and the subprime comparison just a few months ago in a topic but I can't find it and I don't remember what's the name of the analyst that made it.

I wonder what made them compare it exactly to this crash, the subprime crisis was far more complicated it involved property, mortgages, loans, and the scale of those loans was insane compared to what we might have now in crypto, why would even the mother of all sell-off trigger a never-ending crash?

Rather than the subprime, I would say the Dot-com bubble fits far better with the shitcoin ecosystem turning to dust, that one killed all those companies that only made promises, rendering them useless as any overvalued project with no real application will suddenly end.
The one resemblance I see would be the NFT and the P2E models, the first companies collapsing in the mortgage crisis where the ones profiting directly from the sale of the mortgage, so they were a bit like the first players, needing a continuous inflow of new players to keep their volume and income steady, a flow which was almost completely cut by 2007.

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I've never agreed with anything Paul Krugman said. He has always been a company man doing right by the demographic he represents. With concerns of public interest a distant second. Posting this as a contrarian piece to make everyone aware of the oddball perspectives floating around out there.

While the headline reads: "how crypto became the new subprime". In the 3rd paragraph Krugman admits cryptocurrency isn't a large enough chunk of the economy to threaten the financial system. That's how far someone would need to read to realize Krugman's claims and views are inconsistent. And the legitimacy of his piece only declines from there.

Paul Krugman is like a slightly better version of Jamie Dimon back when Dimon condemned bitcoin and crypto. That was before JP Morgan entered the business of buying and selling BTC and Jamie Dimon was left to wonder why the banking institution of which he was CEO was doing business in the asset class he had condemned only months before.

I don't think anyone here on this forum will agree with Paul Krugman or support his claims. But perhaps it makes for interesting reading.

Normally, I was not very convinced by Krugman because I see his arguments as rather leftist.

So I partly agree with Krugman about this specific aspect, and I would also say: "premined shitcoins are the new subprime". But of course, he should have been more precise here, and not have included Bitcoin.

Bitcoin does not supposedly do away with the need for third parties, it actually does. All on chain transactions has been conducted without the need for banks or any other third party.

I don't think anyone here on this forum will agree with Paul Krugman or support his claims. But perhaps it makes for interesting reading.

Just tell me when authorities have been successful protecting investors from SCAMS, and even if it were tru, how many times they haven’t allowed investors into successful trades, protecting the market incumbent.

I don't think anyone here on this forum will agree with Paul Krugman or support his claims. But perhaps it makes for interesting reading.

What’s this crypto thing about? There are many ways to make digital payments, from Apple Pay and Google Pay to Venmo. Mainstream payment schemes, however, rely on a third party — usually your bank — to verify that you actually own the assets you’re transferring. Cryptocurrencies use complex coding to supposedly do away with the need for these third parties.

Skeptics wonder why this is necessary and argue that crypto ends up being an awkward, expensive way to do things you could have done more easily in other ways, which is why cryptocurrencies still have few legal applications 13 years after Bitcoin was introduced. The response, in my experience, tends to take the form of incomprehensible word salad.

So crypto has become a large asset class even though nobody can clearly explain what legitimate purpose it’s for.

And activities like Bitcoin mining, while environmentally destructive, are economically trivial compared with home-building, whose plunge played a large role in causing the Great Recession.

Now, maybe those of us who still can’t see what cryptocurrencies are good for other than money laundering and tax evasion are just missing the picture.

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.

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.

I don't think anyone here on this forum will agree with Paul Krugman or support his claims. But perhaps it makes for interesting reading.

If the stock market isn’t the economy — which it isn’t — then cryptocurrencies like Bitcoin really, really aren’t the economy. Still, crypto has become a pretty big asset class (and yielded huge capital gains to many buyers); by last fall the combined market value of cryptocurrencies had reached almost $3 trillion.

Since then, however, prices have crashed, wiping out around $1.3 trillion in market capitalization. As of Thursday morning, Bitcoin’s price was almost halfway down from its November peak. So who is being hurt by this crash, and what might it do to the economy?

Well, I’m seeing uncomfortable parallels with the subprime crisis of the 2000s. No, crypto doesn’t threaten the financial system — the numbers aren’t big enough to do that. But 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.

What’s this crypto thing about? There are many ways to make digital payments, from Apple Pay and Google Pay to Venmo. Mainstream payment schemes, however, rely on a third party — usually your bank — to verify that you actually own the assets you’re transferring. Cryptocurrencies use complex coding to supposedly do away with the need for these third parties.

Skeptics wonder why this is necessary and argue that crypto ends up being an awkward, expensive way to do things you could have done more easily in other ways, which is why cryptocurrencies still have few legal applications 13 years after Bitcoin was introduced. The response, in my experience, tends to take the form of incomprehensible word salad.

Recent developments in El Salvador, which adopted Bitcoin as legal tender a few months ago, seem to bolster the skeptics: Residents attempting to use the currency find themselves facing huge transaction fees. Still, crypto has been effectively marketed: It manages both to seem futuristic and to appeal to old-style goldbug fears that the government will inflate away your savings, and huge past gains have drawn in investors worried about missing out. So crypto has become a large asset class even though nobody can clearly explain what legitimate purpose it’s for.

But now crypto has crashed. Maybe it will recover and soar to new heights, as it has in the past. For now, however, prices are way down. Who are the losers?

As I said, there are disturbing echoes of the subprime crash 15 years ago.

Crypto is unlikely to cause an overall economic crisis. It’s a big world out there, and even $1.3 trillion in losses is only about six percent of U.S. gross domestic product, a hit that’s an order of magnitude smaller than the effects of falling home prices when the housing bubble burst. And activities like Bitcoin mining, while environmentally destructive, are economically trivial compared with home-building, whose plunge played a large role in causing the Great Recession.

Still, some people are being hurt. Who are they?

Investors in crypto seem to be different from investors in other risky assets, like stocks, who consist disproportionately of affluent, college-educated whites. According to a survey by the research organization NORC, 44 percent of crypto investors are nonwhite, and 55 percent don’t have a college degree. This matches up with anecdotal evidence that crypto investing has become remarkably popular among minority groups and the working class.

NORC says that this is great, that “cryptocurrencies are opening up investing opportunities for more diverse investors.” But I remember the days when subprime mortgage lending was similarly celebrated — when it was hailed as a way to open up the benefits of homeownership to previously excluded groups.

It turned out, however, that many borrowers didn’t understand what they were getting into. Ned Gramlich, a Federal Reserve official who famously warned in vain about the growing financial dangers, asked, “Why are the most risky loan products sold to the least sophisticated borrowers?” He then declared, “The question answers itself.” Homeownership dropped sharply once the bubble burst.

And cryptocurrencies, with their huge price fluctuations seemingly unrelated to fundamentals, are about as risky as an asset class can get.

Now, maybe those of us who still can’t see what cryptocurrencies are good for other than money laundering and tax evasion are just missing the picture. Maybe the rising valuation (although not use) of Bitcoin and its rivals represents something more than a bubble, in which people buy an asset simply because other people have made money off that asset in the past. And it’s OK for investors to bet against the skeptics.

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.

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.

https://www.nytimes.com/2022/01/27/opinion/cryptocurrency-subprime-vulnerable.html