How Crypto Became the New Subprime

Bitcoin Info > A Critique of  Paul Krugman’s NYTimes article

Comments by Tim Langeman

Opinion Columnist


Tim’s Note:

Paul Krugman is very smart, but ..

  • he has a poor record of understanding technology,
  • his political ideology blinds him to the risk of government debasement, and
  • he doesn’t appear to have put much effort into learning about Bitcoin.

Here is his comment about the internet in 1998.

By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.

Summary: thoughts on Krugman’s article:

  • I agree that there is a lot of hype in crypto, but I do not think the 2008 housing bubble is a good metaphor.  It is true that they both involve a broader access to finance by minorities, but I don’t think many people are buying crypto with debt and stand to lose their homes.  Krugman has put virtually no effort into quantifying how much money minorities and working class have put into crypto to see if it is comparable to the subprime bubble.
  • I would compare it to the dot-com era when people were buying equity (not debt).  Using this metaphor many of the thousands of niche “currencies” will go to zero, just like many of the dot-com stocks.  Where I disagree with this line of thinking, is that it often depicts the dot-com era companies as a mere fad.  Some were just “me-too” companites, but some significant companies like Amazon, Google, and eBay were born in the dot-com era.  If you go back and look at what many of these dot-com companies were working on, many of their ideas have been validated, though many of the individual companies did not survive.
  • I also do agree with Krugman that many people have invested in Bitcoin without understanding the level of volatility, but if he is really concerned about people not understanding the level of volatility, then the government could require Crypto exchanges warn investors about volatility in a visible way (other than fine print).
  • He conflates Bitcoin with the thousands of “cryptocurrencies”.  This may be because his space is limited, but there are important differences that he overlooks.
  • My largest concern with Krugman is that he is overly dismissive about the possibility that governments will debase their currencies.   One of the biggest reasons why people value Bitcoin is because it is not owned by a government (which they distrust) and it has a credible governance system to avoid debasement. Krugman only spends half a sentence on this idea — dismissing it with the label “goldbugs”.  Krugman’s political ideology makes him want to believe in a responsible and effective government that can provide social welfare programs and progressive monetary policy.  I know in the past he has referenced Japan as a country that has successfully used quantitative easing and avoided inflation, but I think the US and Japan are very different countries.1  I think he minimizes real concerns about the American government in its present state and the risks that this poses to individual Americans’ finances.  Canada is less politically dysfunctional, but the level of debt (and housing bubble), along with the fact that it is not the global reserve currency make it more likely to default (sooner) than the US.2
    • I see two ways of default: hard vs soft
      • soft: the government gradually debases the currency, perhaps over 10 years, so that the outstanding debt is a smaller portion of GDP.
      • hard: a financial crisis results in a quick drop in values

For my specific reaction to Krugman’s points, click on the footnote icons : → 3


Krugman’s article begins:

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 45 — the numbers aren’t big enough to do that. But there’s growing evidence 6 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.7

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. 8 Cryptocurrencies use complex coding to supposedly do away with the need for these third parties.9

Skeptics wonder why this is necessary and argue that crypto ends up being an awkward, expensive10 way to do things you could have done more easily in other ways11, which is why cryptocurrencies still have few legal applications 12 13 years after Bitcoin was introduced.13 The response, in my experience, tends to take the form of incomprehensible word salad.14

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.1516 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,17   and huge past gains have drawn in investors worried about missing out.18  So crypto has become a large asset class even though nobody can clearly explain what legitimate purpose it’s for.19

But now crypto has crashed. Maybe it will recover and soar to new heights, as it has in the past.20 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.21 22 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 destructive23, 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.24 25 26  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.27

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 28 — when it was hailed as a way to open up the benefits of homeownership to previously excluded groups. 29

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?” 30 He then declared, “The question answers itself.” Home ownership dropped sharply once the bubble burst.

And cryptocurrencies, with their huge price fluctuations seemingly unrelated to fundamentals31, 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 laundering32 33 and tax evasion34 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.35

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.36 37


  1.   Japan has a very high savings rate and most government debt is owned by Japanese citizens.  Japan also has much larger foreign investments than foreigners have in Japan.   The US is the complete opposite.

  2. Canadian bond trader Greg Foss says that Credit Default Swaps suggest that Canada’s debt is 4 times riskier than US debt, even though its credit rating suggests Canadian debt is safer.

  3. This is a sample footnote.  Some footnotes below may contain videos.

  4. Bitcoin’s public ledger actually offers the potential to make the financial system more resilient to crisis because all the main transactions are recorded in a public ledger, rather than in individual companys’ proprietary systems.

  5. Another advantage of Bitcoin over the legacy system is that those who make risky leveraged bets are forced to post collateral and are liquidated when their position goes to zero.  By contrast, in 2008, those with leverage were not automatically liquidated because positions were dependent on many counter parties and hard to assess.  There was a real risk in 2008 that the record-keeping system could fail and institutions would not be able to determine who owed what.

  6. The terms “growing evidence” are weasel words that make the claim sound much stronger than it is.  If he actually had “growing evidence” of crypo losses that fall disproportionately amongst uneducated and poor minorities comparable to the subprime mortage he should link to it.

  7. This is also a big risk in the stock market, which any American can day-trade in, buying stock one day to sell it the next.  Jim Cramer has an entire show on CNBC promoting this to the hoi polloi.

  8. Krugman doesn’t understand why it is so important that the internet is open and neutral.  In the early days, you could create an account on AOL, Prodigy, or CompuserverThese companies followed the “Walled Garden” Strategy and controlled what you could and couldn’t see and it is my impression that they were incompatible with each other.  The current iteration of players (Apple, Google, and Venmo) are incompatible with each other and financial services developed in other parts of the world.  What the internet offered was a neutral, open, and compatible way to create a worldwide network.  Similarly, we need a neutral, open system for money.  Bitcoin is that system — An “Internet for Money.”  It is not owned by any company, which is important, and it is not controlled by any one government.  The US wants to control the digital money system, and they will have their place, but I think it is important that the system be neutral.

  9. Krugman tires to scare readers with the words “complex coding” and “supposedly”, but the main point is really about whether you want well-paid Wall Street and Tech Giants to profit from their own proprrietary digital money system: In comparison to Bitcoin, Wall Street companies and Tech Giants, will also use “complex coding” and will definitely profit from their role as third parties.

  10. Bitcoin is getting easier to use and it is cheaper to use the Lightning network than credit cards.  For large payments, Bitcoin is also cheaper and faster than a wire transfer.

  11. The world wide web was inititally harder to use than Compuserve or AOL, but the internet is more valuable because it is open and neutral.  Eventually, the open and neutral system will surpass the closed, proprietary system and become easier to use.

  12. There were not many applications for personal computers when they started.  Krugman himself doubted the utility of the internet in 1998, ~ two decades after personal computers were developed.

  13. I wrote a summary of 16 things Bitcoin is good for. (Many of these things are positive to the world but not elites)

  14. When Bill Gates went on David Letterman to talk about the internet, Letterman found it incomprehensible.

  15. Nearly all Salvadorans’s payments can take place for nearly free on the Lightning Network.  They do not need to make super-secure million dollar payments, just as most Americans do not need to pay $25 for a wire transfer.

  16. Note: I don’t see columnist railing against the large fees issued by American banks who extract $15 billion a year on overdraft fees, as well as ATM fees that average almost $1000 over a decade and Credit Card interest rates averaging 14.5%.

    The thing that frustrates me is that all the corruption in the existing system are ignored while skeptics distort the new alternatives and their potential.  Often the news reports are colored by the interests of incumbents

  17. Is it really so unreasonable to fear that the government will debase the currency?  With debt at such a high level, gradual debasement is seen as the least bad option.

  18. I agree, “missing out” is a common investment problem.  Stock traders can lose money from this type of loss as well.

    1. Krugman is almost entirely dismissive of the problem of government debasement.
    2. I’ve listed 16 things Bitcoin is good for.
    3. In El Salvador, Bitcoin enables migrants to send money home for nearly free, avoiding the hassel of travel and high fees charged by Western Union.

  19. Bitcoin is sometimes compared to the tulip bubble which rose and crashed within the span of roughly a year and a half.  The tulip price never returned to its former highs.  Amazon suffered at least 4 drops of over 50%, including one 94 percent crash. This sort of high volatility often accompanies high growth. Also consider that Amazon didn’t have governments and powerful financial institutions attacking it and spreading misinformation.

    The key test is whether Bitcoin bounces back, as it has 8 times and, as Amazon has at least 4 times, while tulips did not.

  20. So in other words it is not like the Subprime crash.  The only way you can compare the two is that both involved money and people who were not college educated whites.  And if you look more closely at the demographics, you’ll see that the Crypto demographics that Krugman cites have fewer minorities and more educated people than the general population (which could prompt him to launch another attack for the opposite reasons).

  21. Bitcoin is also more transparent than the traditional finance system and when you buy it you are getting the equivalent of “equity” in the Bitcoin network, rather than debt, like the 2008 mortgage crisis.  That means that you can only lose money that you have and your house is not on the line.

  22. This environmental FUD is a favorite way that financial elites try to scare progressives away from Bitcoin.  Both the traditional finance system and the gold industry use twice the energy of Bitcoin.   The fact that Krugman keeps reciting this piece of FUD shows that he hasn’t done his research to be aware of all the counter-arguments.  One could also argue that cruise ships and Christmas lights are “destructive to the environment” but they get a pass from many of the opinion-makers because they don’t threaten elite power.

    (By the way, Bitcoin’s energy use is about the same as the Cruise industry.)

  23. One could argue that the Gamestop and other stock buyers (Robinhood) are a more diverse group than the traditional stock investor. Notice the similarity between Gamestop and Crypto is that both benefitted from government stimulus checks.

  24. Investors in crypto are actually somewhat better educated than the general population.  They are relatively representative of the general population, though with somewhat less minority representation than the general population.

  25. By comparison, who are the people who lose most to inflation?  Are they middle and working class, as well as those in developing countries?

  26. If you actually examine his own stats, crypto use is less popular among minorities and working class groups than educated white groups.

    His main point is that only wealthy people should be “gambling” in assets that he thinks have no intrinsic value.  I agree that crypto purchases can be a form of gambling that the government has no problem with as long as the state gets its cut through state lotteries and other gambling revenue.

  27. The difference is that Bitcoin was not developed with the goal of tricking buyers into signing contracts that were intentionally deceptive.  Bitcoin was developed as “open source” money and the source code was given away for free.  It is also not debt — it is not a loan so you won’t loose more than you put in and lose your house.

    The similarity between the two groups is that both subprime and crypto buyers were responding to Federal Reserve actions.  In the subprime bubble, the Fed lowered interest rates artificially low, and with Crypto the Fed lost the confidence of many through its handling of the 2008 crisis and “printed money” during Covid

  28. I agree that many people are hunting for the “next big thing”, just as they did during the dot-com boom.  They shun the more established implementations because they want to win it big.  Is this is the same phenomenon that happens with the Lottery where the poor are the biggest gamblers, as well as sports betting?  In the case of lotteries and sport gambling, the establishment is not petitioning against risk taking because the government and wealthy interests get their cut.

  29. Bitcoin is not a “loan product” and I’m not aware that it is specifically marketed at the least sophisticated buyers.  Bitcoin is owned by a demographic that is roughly representative of the population, albeit younger and with higher education and income (and lower representation amoung minorities).  I agree that crypto ownership is more problematic.

  30. Bitcoin is still young and faces risks and threats that big established companies like Google do not.  It is subject to attack from governments — last year, China banned it, sending its price plummiting.  Then Elon Musk trashed it’s environmental footprint on Twitter (possibly at the request of Blackrock CEO Larry Fink who some say may have wanted to buy in at a lower price).  Now there is general fear in the market with Ukraine, the stock market, and interest rates.

  31. This is more FUD. Krugman clearly hasn’t spent much time researching the area.  The former Acting CIA Directory released a report that showed that the level of money laundering is significantly lower than the traditional banking system.  Money laundering with Bitcoin is foolish because all the on-chain transactions are publicly logged and stored forever.

  32. This is a big double standard.  The big banks are regularly found to have — facilitated money laundering to the tune of $300 billion/year .  Little is done and they only get a slap on the wrist.

    Bitcoin has a significantly lower rate of money laundering than the major American banks and this rate is likely to decline because American regulators have full access to the transaction log, unlike the legacy banking system.

  33. The real offenders for tax evasion do not want to record their transactions on a public ledger.  They hide them offshore in tax havens.  This is something large corporations like Apple and Google also participate in.  The real story is that the powerful financial players are pushing to protect their positions by calling out Bitcoin for the sins they themselves are vastly more guilty.

  34. Krugman is acting like people have invested with borrowed money (subprime market) and stand to lose their house.  He hasn’t done anything to analyze how much money these poor, uneducated, and minority investors have invested and the role stimulus checks played in pumping up both stocks and crypto.  He also hasn’t distinguished between Bitcoin and memecoins like Dogecoin.  I agree that if someone is financially insecure and has invested all their money in Dogecoin, then that’s a problem.  Perhaps he is simply limited by space constraints, but it seems like he invested little effort into this column just to get easy audience “engagement.”

  35. If you take away the term “crypto” and replace it with “stock market“, would he propose preventing minorities and the non-college educated from investing in the stock market?

  36. The other big difference between the subprime market and “crypto” is that Bitcoin is a vote of no confidence (or at least a hedge against) the US financial system.  For the government to regulate Bitcoin is a conflict of interest akin to a police department handling it own complaints of systemic racism, corruption, and abuse.