Nobel Prize-winning economist Paul Krugman warns that the volatility in the cryptocurrency market bears a disturbing similarity to the U.S. subprime mortgage crisis that once caused the housing market to collapse and triggered the 2008 financial crisis.
Paul Krugman wrote in an opinion piece for the New York Times, “There are disturbing echoes of the subprime crash 15 years ago.”
The subprime crisis was caused by financial institutions lending to people who harbored high risk. At the time, interest rates were low and real estate prices skyrocketed, as they do today. When the real estate market finally saturated, homeowners were unable to repay their debts and lenders suffered heavy losses.
Krugman argues that crypto investors were now like the homebuyers who bought speculative assets back in the day without really understanding the risks.
“Many borrowers didn’t understand what they were getting into, and cryptocurrencies, with their huge price fluctuations seemingly unrelated to fundamentals, are about as risky as an asset class can get,” Krugman pointed out.
However, he sees no risk for the economy. The market capitalization of cryptocurrencies is simply not large enough, as the cryptocurrency market capitalization is estimated at $1.7 trillion.