Thursday, January 13, 2022

Quote of the Day (Paul Krugman, on Fear and Cryptocurrencies)

“Bitcoin and its rivals now have a combined market valuation of more than $1 trillion. What do investors think they’re buying?

“One answer is protection against the perennial fear that governments will inflate away all your wealth — as a recent Bloomberg article put it, some billionaires are buying crypto in case money ‘goes to hell.’ Indeed, there have been 57 hyperinflations in the world that we know about. However, they all took place amid political and social chaos; do you really think that in such an environment you’d be able to get online and cash in your Bitcoins?”—Opinion columnist and Nobel Economics laureate Paul Krugman, “Crusading for God, Family and Bitcoin,” The New York Times, Jan. 11, 2022

What’s with Bitcoin and its brethren cryptocurrencies, anyway? (I use “brethren” advisedly; considerable testosterone is being expended in the pell-mell push to adopt this relatively new type of financial exchange.)

Some would argue that this is an excellent financial innovation and that there’s nothing to worry about. But I wonder how much this is turning into not a financial innovation, but a financial fad. As of this month, there were more than 8,000 cryptocurrencies in existence, according to an article in

How much does the average investor know about cryptocurrencies, aside from the fact that they’re supposed to be The Next Big Thing? Are all of these on the level?

By the time this gets sorted out, I’m afraid that many people are going to lose their shirts. For a foretaste of what this will be like, look no further than the class-action lawsuit against Kim Kardashian, Floyd Mayweather, and Paul Pierce for their alleged involvement in a “pump and dump” scheme involving EthereumMax, a cryptocurrency that is a “speculative digital token created by a mysterious group of cryptocurrency developers.”

Don’t go looking for guidance from the federal government on this, either. Aside from the fact that partisan gridlock is preventing much of anything getting done these days on Capitol Hill, let alone financial regulation, Gahyun Helen You’s recent article in Foreign Policy Magazine makes for scary bedtime reading when it notes, “The ability of these digital currencies to undermine control of the monetary system and thus erode sanctions power presents a particular risk to the United States. Absent decisive action, the U.S. market may instead be governed by foreign frameworks.”

In 1720, the “South Sea Bubble” sparked what is often considered the world’s first stock-market crash. Even Sir Isaac Newton, the cranky scientific genius who, as England’s Master of the Mint, helped to curb much of the nation’s rampant counterfeiting, got caught up in the bubble. If a smart guy like that could get taken in, what are the odds of you and me not becoming suckers with our version of this scam today?

We’re about to learn if we’ve learned anything at all about financial speculation over the last three centuries—or if future economic histories are going to talk about “The Bitcoin Bubble.”

(The image accompanying this post, showing Paul Krugman at the Brooklyn Book Festival, was taken Sept. 12, 2010, by Shankbone.)

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