'Headed for oblivion': Economist Paul Krugman warns of 'collapse of crypto institutions' after FTX debacle
Right-wing libertarians and socially conservative MAGA Republicans disagree about many things, but one thing they do have in common is an affection for cryptocurrencies. It isn’t hard to find people on the right who are unapologetically bullish on cryptocurrencies.
But one person who doesn’t share their enthusiasm is liberal economist and New York Times columnist Paul Krugman. In his November 17 column, Krugman lays out some reasons why he believes there is a “strong case” that the cryptocurrency industry is “headed for oblivion.”
“Crypto reached its peak of public prominence last year, when Matt Damon’s ‘Fortune favors the brave’ commercial — sponsored by the Singapore-based exchange Crypto.com — first aired,” Krugman explains. “At the time, Bitcoin, the most famous cryptocurrency, was selling for more than $60,000. Bitcoin is now trading below $17,000. So, people who bought after watching the Damon ad have lost more than 70 percent of their investment. In fact, since most people who bought Bitcoin did so when its price was high, most investors in the currency — around three-quarters of them, according to a new analysis by the Bank for International Settlements — have lost money so far.”
Krugman notes that “falling prices” don’t necessarily “mean that cryptocurrencies are doomed,” pointing out that “people who bought stock in” Facebook’s parent company Meta “at its peak last year have lost around as much as investors in Bitcoin have.” But when cryptocurrency exchanges themselves are in trouble, Krugman warns, it is a bad sign.
“More telling than prices has been the collapse of crypto institutions,” Krugman observes. “Most recently, FTX, one of the biggest crypto exchanges, filed for bankruptcy — and it appears that the people running it simply made off with billions of depositors’ money, probably using the funds in a failed effort to prop up Alameda Research, its sister firm. The question we should ask is why institutions like FTX or Terra, the so-called stablecoin issuer that collapsed in May, were created in the first place.”
Krugman adds that after the financial crash of September 2008, cryptocurrencies were hailed as a safe alternative to traditional “financial institutions.”
“After 14 years, however, cryptocurrencies have made almost no inroads into the traditional role of money,” Krugman argues. “They’re too awkward to use for ordinary transactions. Their values are too unstable. In fact, relatively few investors can even be bothered to hold their crypto keys themselves — too much risk of losing them by, say, putting them on a hard drive that ends up in a landfill. Instead, cryptocurrencies are largely purchased through exchanges like Coinbase and, yes, FTX, which take your money and hold crypto tokens in your name. These exchanges are — wait for it — financial institutions, whose ability to attract investors depends on — wait for it again — those investors’ trust. In other words, the crypto ecosystem has basically evolved into exactly what it was supposed to replace: a system of financial intermediaries whose ability to operate depends on their perceived trustworthiness.”
One person who has been very bullish on Bitcoin is billionaire Twitter co-founder Jack Dorsey, who founded the Bitcoin Academy with hip-hop superstar Jay Z. But following the FTX debacle, Dorsey is, according to The Street, encouraging caution where the cryptocurrency industry is concerned.
On November 16, Dorsey forwarded a tweet by fellow Bitcoin promoter Neil Jacobs — who wrote, “SBF can’t be trusted. Vitalik can’t be trusted. CZ can’t be trusted. No one can be trusted. That’s why we bitcoin.” And Dorsey, in response, posted, “No one.” It was also on November 16 that Dorsey, seemingly referring to FTX, posted, “Nobody knows anything” — and Twitter’s new owner Elon Musk gave a cryptic response, tweeting, “Magic knows all.”
The Street’s Luc Olinga reports, “The FTX debacle has cast suspicion on the entire crypto industry, which is suffering from a lack of transparency. CZ and other figures like Brian Armstrong, CEO of Coinbase (COIN) Get Free Report, billionaire Michael Saylor and others are trying to distance themselves from SBF, but it will probably take a long time to undo the damage done.”
Krugman concludes his November 17 Times column by noting the need for greater government regulation of cryptocurrencies.
“If the government finally moves in to regulate crypto firms, which would, among other things, prevent them from promising impossible-to-deliver returns, it’s hard to see what advantage these firms would have over ordinary banks,” Krugman writes. “Even if the value of Bitcoin doesn’t go to zero, which it still might, there’s a strong case that the crypto industry, which loomed so large just a few months ago, is headed for oblivion.”
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