New York Times columnist Paul Krugman wrote about crypto currency markets and investing in his column, How Crypto Became the New Subprime. Whether you are a crypto skeptic or advocate, the column draws an interesting comparison between the crypto craze today and the subprime mortgage crisis from a few years ago. Mr. Krugman points out, as data on Tradingview.com (Crypto Market Cap and DeFi Market Cap Charts — TradingView) shows, the market cap of cryptocurrencies reached $3 trillion in November 2021. He cites a survey that 55% of crypto investors do not have a college degree. This data point alone does not mean that the majority of crypto investors are unsophisticated, but an investor’s background can be an important factor when evaluating suitability.
According to Mr. Krugman, the promotion of crypto today looks at least somewhat like subprime lending a few years ago. Much like crypto is marketed as a way to expand the pool of people who invest, subprime lending was promoted as expanding the pool of potential homebuyers. The subprime mortgage bubble burst, leading to foreclosures, credit problems, and worse. In the bubble’s aftermath, it was clear that predatory lending was behind some of the subprime loans. Similarly, Mr. Krugman is skeptical that most crypto investors understand what they are buying and have the means to suffer losses.
Crypto markets are lightly regulated, if at all. And investors can be defrauded or taken advantage of in even regulated markets. We have seen investors, both large and small, who have suffered material losses after they were convinced to buy cryptocurrencies or trade even more complex financial products that relate to cryptocurrencies. Whether you agree with Mr. Krugman or not, his point that investors should understand what they are investing in is an important one.