Cryptocurrency has largely been a topic of debate since its inception. On one hand, it has been praised as the future of money, a decentralized, secure way of making transactions without the need for intermediaries. On the other hand, critics have pointed out its susceptibility to use in money laundering and financing terrorism. Nobel-Prize-winning economist Paul Krugman recently came out with some strong criticism of cryptocurrency, calling it mostly useless and overvalued. Here are his reasons.
Crypto is volatile and not widely adopted
Although cryptocurrencies like Bitcoin were designed to meet consumer payment needs, a recent report from the Federal Reserve reveals that they have not been widely adopted. He believes that crypto's volatility and lack of stability make it difficult to use for everyday transactions.
Crypto can also be difficult to navigate, and consumers can experience loss, theft, and fraud. Crypto is primarily used as more of a niche asset for speculators and investors.
Crypto is overvalued
According to Krugman, crypto is currently overvalued, meaning that many cryptocurrencies are priced higher than their actual worth or economic value. Krugman's primary argument is the lack of intrinsic value in cryptocurrencies.
He believes that unlike traditional assets like gold or real estate, which have inherent value, cryptocurrency's value is entirely subjective and driven only by market sentiment. Krugman even goes as far as calling crypto a “Ponzi scheme.” He suggests the value of cryptocurrencies is largely fueled by inflated hype and reckless speculation. As a result, the value of crypto continues to be volatile and unstable.
Krugman also focuses on the prevalence of criminal activity in the crypto space, such as money laundering and financing terrorism. He argues that the anonymity of crypto transactions makes it easier for criminals to carry out illegal activities and that crypto poses a threat to the stability of the financial system.
Crypto is unregulated
When it comes to legitimate crypto transactions, stablecoins are a popular choice. These coins are backed by a promise to redeem them for traditional dollars. However, it's important to note that stablecoin issuers essentially operate as unregulated banks. They lack the protection and guarantees provided by conventional banks.
In fact, the stablecoin sector has already experienced significant failures resulting in coin holders losing their entire investment.
How to safely invest in crypto
While there have been stories of individuals who have made a lot of money through cryptocurrency trading, as Krugman notes, there have also been many who have lost significant sums of money.
If you decide to invest in any digital currency, it's important to do your homework, ensuring that you understand the technology behind it, as well as the market conditions that could affect its value. It's also crucial to have a clear understanding of your risk tolerance and investment goals.
One key factor to consider is which type of cryptocurrency to invest in — there are numerous options available, each with its own unique benefits and risks. In addition, it's important to research the various exchanges and storage wallets available, and to only use reputable and secure platforms.
If your stance on cryptocurrency aligns with Krugman's, there are many other alternative investment options available. You can consider investing in real estate, commodities, or even private equity, provided you have sufficient funds. However, if you are still intrigued by digital currencies, non-fungible tokens (NFTs) may pique your interest. Despite the potential risks involved, NFTs represent unique, inimitable digital assets that can hold considerable value.
Paul Krugman has been critical of crypto since its beginnings. The lack of intrinsic value, criminal use, and limited adoption are all valid concerns that need to be addressed for crypto to reach its full potential. However as with any emerging technology, it is important to remain informed and open-minded about the possibilities that lie ahead.
Originally published on Fool.com