Nobel laureate Paul Krugman sees ‘disturbing parallels' between crypto and subprime mortgage crisis

• Krugman sees risks of crypto are falling on those who do not know what they’re getting into and are less able to handle the downsides

• Bitcoin and other digital currencies have dropped sharply in recent weeks

Nobel Prize-winning economist Paul Krugman said he sees “uncomfortable parallels” between the volatile cryptocurrency market and the subprime mortgage crisis of the late 2000s.

In an opinion piece for The New York Times, published on Thursday, Krugman said, “there are disturbing echoes of the subprime crash 15 years ago,” which brought the U.S. housing market to its knees and triggered the 2007-2008 global financial crisis.

Citing the recent slide that wiped out over $1 trillion from the crypto market, Krugman wrote, “Who is being hurt by this crash, and what might it do to the economy?

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Krugman, a long-time crypto skeptic, last year, in a string of tweets, mocked cryptocurrency believers, who think Bitcoin, which has neither legitimate uses nor any intrinsic value, is a “technologically sophisticated way to protect yourself from the inevitable collapse of fiat money.”

Risks in crypto

The subprime crisis began when the U.S. banks started giving out loans to higher-risk people when the interest rates were low and house prices were soaring.

As the market became saturated, homeowners found themselves in negative equity, defaulting on loans, resulting in hefty losses for lenders.

Krugman expressed his concerns that crypto investors don’t truly understand the risks involved and are exposed to speculative financial products like the 2007 crisis.

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“Many borrowers didn’t understand what they were getting into,” he wrote. “And cryptocurrencies, with their huge price fluctuations seemingly unrelated to fundamentals, are about as risky as an asset class can get.”

“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.”

Crypto market bloodbath

The broader crypto market has witnessed a free fall since starting of this year. Around $350 billion has been wiped off from the market over the last weekend alone.

The bear digital coin market lost around $1.60 trillion, after peaking at close to $3 trillion in mid-November.

The world’s largest crypto by market cap, Bitcoin is currently traded at $37,000, down 46% from its November record high of nearly $69,000.

Picture Credit: Coindesk