Economist Paul Krugman says Only Rich-Educated White People Be Allowed to Invest in Crypto.


Nobel-prize winning economist Paul Krugman wrote an op-ed article in the New York Times entitled “How Crypto Became the New Subprime.” He begin his opinion with “if the stock market isn’t the economy—which it isn’t—then cryptocurrencies like Bitcoin really, really aren’t the economy.” Cryptocurrencies at least as of last year had a market cap value of almost $3 trillion; therefore, crypto Krugman admits, “has become a pretty big asset class.” Krugman also admits that the crytpo market has “yielded huge capital gains to many buyers.”

Admittedly since the Fall of 2021 cryptocurrency market has definitely taken a nose dive eliminating about $1.3 trillion in market capitalization. Crypto is a high-volatility asset, which means it’s subject to severe price fluctuations.


Krugman says that this severe price fluctuation is reminiscent of the “subprime crisis of the 2000s.” Basically, Krugman compares the crypto market with subprime mortgages. Krugman admits that “crytpo doesn’t threaten the financial system—the numbers aren’t big enough to do that.”


Krugman’ s main position, however, is that there is increasing evidence that the “risks of crypto are falling disproportionately on people who don’t know what they are getting into and are poorly position to handle the downside.”

What does this argument imply? To really understand my concern in Krugman’s position, you have to understand the meaning of accredited investor.


Under the SEC rules that were set in 1982, only “accredited investors” could invest in private securities sales. An accredited investor was considered an individual or company that passed certain income and wealth tests to qualify.


Specifically, to be an accredited investor as an individual under the old SEC rules, you needed to have an annual income of $200,000 annually or $300,000 for joint income or have a net worth in excess of $1 million that excluded within that calculation your primary residence. Now if you take those numbers and add inflation to date that would calculate to be around $530,000 annually for the income test and $2.65 million for the net worth test.

Private securities are like common and preferred stock of a company being sold in a private placement to a small group of individuals or companies before that company’s stock is open to the general public for purchase on public trading sites like the Nasdaq or S&P 500.


Investing in private securities is where significant wealth can be made especially once that company is publicly traded and the balloon of investment can expand to allow more people to purchase the securities.


But private security investing is highly risky because you could invest in a company that never trades publicly or that flops after debuting on the public markets. For example, Uber was private security before it was traded in the public markets. And many accredited individuals who were able to invest in Uber before it went public became very very wealthy after Uber went public. Uber debuted on the public stock market at $45 per share, but many of its accredited investors probably purchased Uber during private placement before it went public at $1.00 or less per share. Uber stock price today is around $35.00 a share.

Let’s really understand this Uber example. If you were an accredited investor pre-initial public offering of Uber, you could have purchased Uber at $1.00 per share in a private placement. Regular folks who were not accredited investors under the old SEC definition could not purchase a share of Uber in a private placement until it debuted on public market at $45.00 per share.


Despite Uber currently trading at $35.00 per share, most accredited investors still made and is making significant investment returns off of Uber. But most regular folks who purchased Uber after the IPO suffered a loss on their investment. This is a perfect example of the old adage in action, “the rich gets richer while the poor gets poorer” and Krugman is basically implying that it should stay that way.

In 2020, the SEC updated the definition of “accredited investors.” “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication. ”


This change in definitions allows investors “to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth.“


Bitcoin was first sold in 2009, which was prior to the change in the definition of accredited investor. Also, Bitcoin is arguably not a security so it was not subject to Regulation D of the SEC rules on accredited investors. Therefore, anyone whether you were accredited investor or not could buy Bitcoin if you wanted to.


Crypto like Bitcoin is different than your more popular digital payments systems. You can use Apple Pay, PayPal, Google Pay or Venmo to make digital payments and you can rely on Apple, PayPal, Google, or Venmo to verify that you actually own the funds you are transferring.

And if one of these companies questions the transaction, these third-party intermediaries can withhold your funds and prevent the transaction from going through. Currently, there is a pending class-action lawsuit against PayPal for racketeering because it would freeze customer funds for no reason.


I know this is true about PayPal because it has happened to me and many people I know who don’t like using PayPal for that reason.


Krugman is concerned that the cryptocurrency market is “complex coding” intending to “do away with the need” of these third-party intermediaries. These same intermediaries that can freeze your funds for no reason.


But Krugman’s main concern about crytpo is the “people” crypto is hurting with its high volatility in price. Is Krugman really concerned about these “people.”


Krugman says, investors in crytpo seem to be different from investors in other risky assets, like stocks, who consist disproportionately of affluent, college-educated whites.” NORC, a research organization, reported that 44 percent of crypto investors are nonwhite and 55% of crypto investors do not have a college degree. This statistic concerns Krugman. This statistic, Krugman indicates “matches up with anecdotal evidence that crytpo investing has become remarkably popular among minority groups and the working class.”


How dare minority groups take a risk to create a rich minority? How dare the working class take a risk to be rich enough to exit the working class status? How dare anyone other than the white-educated American take the risk to live the luxury on the American dream?

Krugman is concerned that the crytpo market is being celebrated as opening up investment opportunities for minority groups and non-educated whites similar to the way the subprime mortgages were being celebrated as a way to open up home buying opportunities to people who were previously excluded.



The question we need to be asking is why is anyone excluded from any opportunity this America has to offer?


In 2008 during the financial crisis, subprime mortgages were at the center of attention. Lenders gave complicated loans to individuals who couldn’t afford to pay them. These mortgages were not necessarily complicated. Simply put: you get a mortgage at a low Interest rate regardless of credit score.


After 2 years in the low interest rate, a higher fluctuating interest rates would apply. The rationale behind subprime mortgages is that it allowed people traditionally excluded from the home buying market to get loans at a low price and later refinance the loans once the home price increases.

The thought was that home prices always increase. This thought is basically true, but the problem for most borrowers was the 2-year expiration period of the original low interest rate. After the 2 year period, the interest rate on these subprime mortgages increased significantly and fluctuated; therefore, this meant that you could never know what your monthly mortgage would be.


So if you purchased your home with a subprime mortgage, you better had (a) improved your credit rating in two years to refinance for a better rate or (b) your home value better had increased by 20% enough to do a refinance despite your credit rating. Simple truth: most people if they could have kept paying the mortgage at the interest rate they signed up for would still be in their houses today.


Home prices stopped going up in 2008 and this meant many homeowners could not refinance their loans and had to default on their loans and lose their homes.


Compounding this issue, sophisticated individuals on Wall Street took these subprime mortgages and packaged them into investment vehicles and sold them on the market. Everyone was exposed in this scheme and the dominos began to fall. Some of the biggest investment firms went out of business.


Krugman further argues that cryptocurrencies are only good for money laundering and tax evasion. But he acknowledges that maybe the rising valuation of Bitcoin and cryptocurrencies represents something other than a bubble that expands “in which people buy an asset simply because other people have made money off that asset in the past.” Isn’t that how all great investments grow? Didn’t you start investing because others invested in the past and made money? Isn’t that the investment game? Keep the bubble expanding!


Krugman further argues that “it’s OK for investors to bet against the skeptics [of crypto]. 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.” And who exactly are these well-equipped individuals Krugman?


Tony Cross, a professor at Reed College, took issue with Krugman’s argument when he tweeted, “The gist of Krugman’s latest missive: only the rich (mostly white) are smart and capable enough to invest in crypto. Make it illegal for anyone else. But….Krugman himself is a rich, white, Nobel laureate who missed a $3t asset class while plebs around the world front ran him.”


Thank you Professor Cross I could not have said it better.


High volatility means the price of the asset goes high and low in extremes. Because of this volatility, you can make a lot of money off of very little investment, but you can also lose a lot of money. The poor can become very rich in the crypto market as long as you can stomach the risk.


This risk Krugman believes should only legally be allowed to be taken by those sophisticated enough to understand the risk and surely according to Krugman the 44% of non-white crypto investors and the 55% non-college educated crypto investors are not smart or sophisticated enough to understand the risk. SMDH!

What are you afraid of Krugman? Are you concerned that there maybe a subtle wealth redistribution that you can sense occurring in your bones but can’t stop?


Ase’ Ase’


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