How crypto became the new sub-prime

While cryptocurrencies won’t threaten the financial system like the sub-prime crisis of the 2000s, the parallel is with risks falling disproportionately on people who don’t know what they are getting into.

- Paul Krugman

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 autumn the combined market value of cryptocurrencies had reached almost US$3 trillion (S$4.1 trillion).

Since then, however, prices have crashed, wiping out around US$1.3 trillion in market capitalisation. As at 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 sub-prime 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.