Paul Krugman Says Bitcoin Resembles Subprime Mortgages. Is He Right?

Paul Krugman is a Nobel Prize-winning economist with a huge microphone. The former MIT and Princeton professor has used his regular column in The New York Times to advocate for free trade, clean energy, and financial regulations.

Oh, and he doesn’t like Bitcoin—or cryptocurrency in general.

That’s evident from his latest op-ed, in which he compares crypto markets to subprime mortgages.

For those who weren’t paying attention during—or were too young to remember—the 2008 financial crisis, subprime mortgages helped kick everything off. In a nutshell, lenders gave complicated loans to people who couldn’t afford to pay them over the long term. Most of these mortgages had low initial interest rates that ballooned over time, the rationale being that homeowners could refinance with better terms when they had more equity. After all, home prices only ever went up, right?

But home prices stopped going up and many American homeowners defaulted on their loans. Compounding matters was the fact that Wall Street had turned these subprime mortgages into investment vehicles, and seemingly everyone had exposure to them. The dominos began to fall on the U.S. and global economy.

While Krugman contends that crypto markets aren’t large enough to cause a global crisis, he does think the same groups of people targeted by lenders in the leadup to 2008 are being preyed upon today.

The Times columnist cites a NORC survey that found 44% of crypto investors aren’t white and more than half lack a college degree. He goes on to state that investors in Bitcoin and other cryptocurrencies “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,” while making clear he doesn’t think they are. Moreover, he thinks the crypto industry’s paeans to the democratization of investing are similar to the arguments made by those peddling risky mortgages.

Reed College philosophy professor Troy Cross took issue with Krugman’s argument that certain people should be protected from the markets—and themselves. “The gist of Krugman’s latest missive: only the rich (mostly white) are smart and capable enough to invest in crypto. Make it illegal for anyone else,” he tweeted.

Alex Gladstein, chief strategist at the Human Rights Foundation and a prominent Bitcoin supporter, signalled the crypto community’s uneasy relationship with traditional news media, calling the column “peak [New York Times].”

And yet Krugman does have a few valid points, regardless of the tenor of his argument.

Cryptocurrency is a risk asset due to price fluctuations. The price doesn’t always go up; it can go down. And down big, as Decrypt covered recently. The current price of Bitcoin ($36,900) is more than 46% lower than the all-time high set fewer than three months ago, according to data from CoinMarketCap. As recently as January, 30% of BTC in circulation were underwater, meaning their owners paid higher than what the coins are currently worth. In short, although crypto’s market cap has tended to rise over the long term, the price can and does fall, just as with stocks, commodities, and real estate.

He’s also right that some people don’t have the funds to invest in or trade crypto, at least not at the levels they’re doing. “Rekt” isn’t just a word to toss around for the LOLs—liquidations, price drops, and DeFi hacks do really ruin people’s finances when their money is all tied up in digital assets. (For the record, some think cash is also risky. “What about the US dollar crash via inflation?” Gemini co-founder Tyler Winklevoss wrote in response to Krugman. “Bitcoin fixes this.”)

But Krugman is also comparing apples to oranges. Subprime mortgages were particularly risky because of ballooning interest payments. Unless you’re well into leveraged trading, you don’t typically need to keep buying crypto to keep the assets you have. You don’t have to chase good money with bad.

More importantly, Krugman’s argument partially caves in on itself because it implies that homeowners were the only ones taking the risky bets during the subprime mortgage crisis. But lenders were also making a big bet on a risk asset, real estate. And so were thousands of other companies with their hands in the cookie jar. Wall Street investment bank Bear Stearns, which issued mortgage-backed securities, collapsed precisely because of this.

Irresponsible investing isn’t the exclusive bastion of people with little money.