How Crypto Became the New Subprime

cigaretteman

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By Paul Krugman
Opinion Columnist

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.
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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.

 

HawkRCID

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I mean I regret not getting into it 12 years ago when some buddies were talking about it and saying we should build a mining farm system….

But I have always thought it was a bit of smoke and mirrors
 

cigaretteman

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ChrisVarick

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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.
This seems to be the basis of his weak argument. It is pretty easily explained. Very few you people in the 16-24 age range, many not yet degreed, do not have a Schwab account. They do have venmo and cash app which allows them to convert fiat into crypto. So you have a higher % of crypto ownership in the demographic.
 

eb05

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Those mining farms already use more energy than some entire nations.


Bitcoin has been found to consume far less than other systems: half that of the gold mining industry and less than one fifth of bank branches and ATMs.

https://hassmccook.medium.com/comparing-bitcoins-environmental-impact-f56b18014f64
 
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desihawk

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"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..."

this question may be nonsense but had to ask -- when cryptocurency vaporizes, is it vaporizing some of the USD pumped into the economy via QE?
 

ChrisVarick

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"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..."

this question may be nonsense but had to ask -- when cryptocurency vaporizes, is it vaporizing some of the USD pumped into the economy via QE?
I don't think crypto will vaporize. If it did much of the money would come from stimulus checks and young adults that had extra money to invest because they had the student loan holiday.
 

Jimmy McGill

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I told my friends in Denver that they didn't know what they were doing when they invested heavily. They mocked me when I wouldn't invest. I may be a dumbass, but I'm smarter than ESQ and Scientist friend on this issue. Garbage money is no money.
 

LetsGoHawks83

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I told my friends in Denver that they didn't know what they were doing when they invested heavily. They mocked me when I wouldn't invest. I may be a dumbass, but I'm smarter than ESQ and Scientist friend on this issue. Garbage money is no money.

The tech of Crypto is rock solid and only getting better. More efficient tech that doesn't rely on mining.

The issue is the massive speculation and wild swings in value. That results in minimal usage for actual purchases.... I mean would you go to the store and spend $3 on a gallon of milk, if you knew that $3 might be worth $9 the next day? Or would the store want to accept $3 that might be worth 50 cents in a week?

It's turned into a battle to pick the correct handful of Crypto currencies that will be the "standard".
 
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DianaPowell

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Cryptocurrency is not capable of causing an economic crisis. It is. It is not yet strong and has not entered the economy so tightly. Yes, many large companies use and invest in cryptocurrencies, as do many ordinary people. But it will take a long time until the whole world will use cryptocurrency as a single payment instrument, like the dollar or the euro. However, it seems that everything is moving towards this, and this is good. Every day new crypto coins appear. There are already a huge number and variety of them. You can see it on this page. I also do not stand aside. I actively study the crypto world and try to invest in it.
 
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bostavan

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Cryptocurrency functions on a blockchain platform, which makes it an entirely new type of asset. Blockchain in technical terms is a chain of registries distributed in a network. A chain of chain blocks, each block of which stores information (records) about a certain number of transactions. That is, it is a database with the possibility of open verification. Each block consists of encrypted information about all previous blocks, the key of the last previous block, the key of the present block and records of the last transactions made. To attach the created block to the blockchain, the consent of the https://www.asktraders.com/broker/crypto-broker/ members of the chain, the miners, is required. Once a block is attached to the chain, no changes can be made.
 
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millah_22

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Doesn't something like a small percentage (like 10%) own nearly 90% of the currency? Doesn't really seem like something I want to buy into.
 

BrunoMars420

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Doesn't something like a small percentage (like 10%) own nearly 90% of the currency? Doesn't really seem like something I want to buy into.
Would need a link for that. But let’s say it does, what’s the difference between that and this?


“While the richest 10% of adults in the world own 85% of global household wealth, the bottom half collectively owns barely 1%.”
 
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seminole97

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It manages both to seem futuristic and to appeal to old-style goldbug fears that the government will inflate away your savings.

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.
Wouldn’t be the first time.

“By 2005, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s” Paul Krugman, 1998.

“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
Paul Krugman, 2002
 
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millah_22

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Would need a link for that. But let’s say it does, what’s the difference between that and this?


“While the richest 10% of adults in the world own 85% of global household wealth, the bottom half collectively owns barely 1%.”

better give me all your US dollars then

The obvious difference is the federal reserve and US dollar was created hundreds of years before we were born, so it was our only option and is the current standard.

Also, in this scenario why would I give you my US dollars @eb05 ? Get your own.
 

eb05

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The obvious difference is the federal reserve and US dollar was created hundreds of years before we were born, so it was our only option and is the current standard.

Also, in this scenario why would I give you my US dollars @eb05 ? Get your own.

counterpoint, the landline was the standard 25 years ago. things change
 

seminole97

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The obvious difference is the federal reserve and US dollar was created hundreds of years before we were born
flat,750x,075,f-pad,750x1000,f8f8f8.jpg
 
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seminole97

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Doesn't something like a small percentage (like 10%) own nearly 90% of the currency? Doesn't really seem like something I want to buy into.
Maybe confusing it with stocks?

The wealthiest Americans now own almost all of the stock market — 89% to be exact. The top 10% of Americans now hold 89% of corporate equities and mutual-fund shares, a record high. The top 1% alone hold over half the stocks owned by households, according to the Federal Reserve. -Oct 19, 2021
 

TC Nole OX

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According to blockchain analysis firm Chainalysis, Venezuela ranks seventh in the Global Cryptocurrency Adoption Index 2021 thanks in large part to peer-to-peer (P2P) trading activity.

A noticeable trend in 2021 was the growing number of people and businesses in Venezuela accepting cryptocurrencies as a form of payment to circumvent the hyperinflation and devaluation of the national currency, the bolivar — a trend that has plagued the South American nation for the last few years.

In some of the main cities of the country such as the capital Caracas and Puerto La Cruz, it is increasingly normal to see people or merchants using cryptocurrencies as a form of payment.

The appearance and adoption of crypto payment platforms such as Binance Pay, Reserve or even Valiú have accelerated the adoption of a more digital economy based on cryptocurrencies without the need for users to have extensive knowledge of the subject.

Notable businesses accepting cryptocurrencies in Venezuela include the Simón Bolívar International Airport, supermarket chain Bio Mercados, several casinos and even the largest cable TV operator in the country. Fast food chain Church's Chicken also began paying bonuses to its employees in Dash (DASH).

People in poor countries are playing crypto play to earn games and so much so that local businesses are accepting the tokens. It has become an "economic salvation" for some.

Play-to-earn game craze

For the last four months of 2021, 10 of the 50 most visited web pages in Venezuela were related to cryptocurrencies, among which were a notable amount related to popular NFT games like Axie Infinity and Plants vs Undead.

Play-to-earn and NFT games caused a furor in Venezuela among both experienced crypto users and newcomers to the asset class. The games have encouraged crypto adoption, primarily thanks to players’ ability to generate dividends.

For many Venezuelan families, this has turned out to be a type of economic salvation given the low salaries. In fact, Venezuela boasts the second-most active user base by country in Axie Infinity behind the Philippines.

The game was so popular that many businesses began to accept Axie Infinity’s Smooth Love Potion (SLP) token. Binance enabled P2P exchange of SLP in its application, and even a candidate for governor of the ruling party in the recent regional elections promised to deliver Axie Infinity scholarships if he won.

 

tarheelbybirth

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Wouldn’t be the first time.
I'm not talking about the tech. I've already said there is a future for crypto - or more accurately, for blockchain. But what's floating out there now is no different than any other (useless?) limited asset that gets caught up in a buying frenzy. I would have liked to buy in at $100/coin and sold at $60K but I could say the same about any bubble including Beanies. The question still remains unanswered...when will bitcoin be good for anything beyond buying it, holding it, and selling it...and hoping that the price climbs while it's mine? When can it be used for something beyond speculation? When will it be widely accepted as currency and not actually banned in multiple countries?
 

TC Nole OX

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The question still remains unanswered...when will bitcoin be good for anything beyond buying it, holding it, and selling it...and hoping that the price climbs while it's mine? When can it be used for something beyond speculation? When will it be widely accepted as currency and not actually banned in multiple countries?

Bitcoin is more portable than gold and real estate as one Saudi explained to Anthony Scaramucci recently


K9NGuQE.jpg
 
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seminole97

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. The question still remains unanswered...when will bitcoin be good for anything beyond buying it, holding it, and selling it...and hoping that the price climbs while it's mine?
You’re essentially asking, ‘when will a medium of exchange be good for something besides being a medium of exchange’?

Why would expect something else from it?

When can it be used for something beyond speculation? When will it be widely accepted as currency and not actually banned in multiple countries?
People speculate on fiat currencies as well, and there are fiat currencies banned in certain locales.

Way back in 2019 the forefront of MMT in action banned several fiat currencies:

Monday’s government decree values the RTGS at par with the Zimbabwe dollar and mandates it be used as the country’s sole legal tender for local transactions with immediate effect.

“The British pound, United States dollar, South African rand, Botswana pula and any other foreign currency whatsoever shall no longer be legal tender alongside the Zimbabwe dollar in any transactions in Zimbabwe,” read the decree.
 

seminole97

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So bitcoin is useful because it fits in his ass. Good to know.
It’s not even necessary to do that. He could save the key somewhere remotely and doesn’t need to carry a physical object to be able to access.

And if the government decides after the fact they don’t like the protest you supported, the government can’t lock you out of your bitcoin the way they can lock you out of your bank account.

Not as important in our country, but there are shitholes where you have to be concerned that the government will arbitrarily rob you, so the security the block chain offers has value you have yet to recognize.

Point of this discussion is simply to highlight those things.
 
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tarheelbybirth

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You’re essentially asking, ‘when will a medium of exchange be good for something besides being a medium of exchange’?

Why would expect something else from it?
To be able to exchange it for something besides itself? Merchants won't take it and consumers won't spend it. Too much risk, right? Buy groceries for the eqivalent of $50 in bitcoin and next week that bitcoin is worth $75 0r $100. The opposite, of course, is true with retailers. Charge $50 in bitcoin for something and tonight that coin is worth $40. Is there something wrong with that analysis?
 

seminole97

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To be able to exchange it for something besides itself? Merchants won't take it and consumers won't spend it. Too much risk, right? Buy groceries for the eqivalent of $50 in bitcoin and next week that bitcoin is worth $75 0r $100. The opposite, of course, is true with retailers. Charge $50 in bitcoin for something and tonight that coin is worth $40. Is there something wrong with that analysis?
I attribute the volatility seen at this predominantly to the nascent nature of the medium.
I’d tell anybody suggesting preserving purchasing power in bitcoin to be willing to accept short term volatility.
With regard to savings I tend to think year over year, not day over day.

The trajectory remains clear, and why is clear when you consider that a growing economy of goods and services relative to a fixed monetary pool will result in the purchasing power per unit in that monetary pool to increase.

The push/pull of demand for savings/consumption is ever present. Do you forgo consumption on the expectation your rewards for saving will outweigh the rewards you get from consumption?
We all do. But some people want a boat more than a higher cash balance, or some stocks, etc.

Next question is simply, where do you expect the value per unit (purchasing power) of the USD to go over the next year, five years, 20 years, and your lifetime? Do you expect the trend you’ve witnessed thus far in your life to arrest and revert?

I have no rational expectation the government will stop debasing the USD.
Do you? If so, what do you base that expectation on?
 
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TC Nole OX

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bostavan

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PAUL KRUGMAN writes in his article that cryptocurrency is a relatively new phenomenon associated with risk and is not yet seriously recognized at the level of state economies. However, El Salvador is rightly cited as an example, where the government decided to buy bitcoins for a certain amount and make it the official currency. So far, no one else wants to follow the same example, especially after the recent cryptocrisis, which showed the instability of cryptocurrency. So, although cryptocurrency has dim prospects now, there is hope that it will still bear fruit. Nothing prevents you from buying a small amount of coins and just holding them. I recommend trying https://www.xerof.com/ . Best cryptocurrency intermediary, in my opinion, for a beginner. Quick registration and tech support will help you start trading right away. Best of luck!