Is Bitcoin becoming subprime?

It’s not been a good start to the year for cryptocurrencies, with Bitcoin halving in price from its November 2021 high to below $33,000 last month and barely moving since. Other crypto’s have suffered a similar fate, with second most traded Ethereum also losing half its “value” in recent months.

The powers-that-be are coming after Bitcoin in particular, with the IMF coming for El Salvador which had previously allowed its citizens to use Bitcoin for any transactions. From the BBC:

The IMF has warned President Nayib Bukele of the risks the cryptocurrency poses to the country, stressing that it would be difficult to get a loan from the institution.

The board’s directors have now “urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status”, according to a statement. They highlighted the “large risks associated with the use of Bitcoin on financial stability, financial integrity and consumer protection” and with issuing Bitcoin-backed bonds.

It’s not just sovereign nations that are having troubles with the allure of crypto’s, but the world’s carbon footprint. Bitcoin and other crypto mining is using vast amounts of electricity. From the Guardian:

The latest calculation from Cambridge University’s bitcoin electricity consumption index estimates that bitcoin mining consumes 133.63 terawatt hours a year of electricity – more than the entire countries of Ukraine and Norway. This figure keeps growing: bitcoin mining currently uses 66 times more electricity than in 2015.

And it’s not just the world, its stacks of individuals across many nations that are getting caught up in out and out fraudulant action, particularly when new tulips, I mean new coins are created. From Kotaku:

Paul “Ice Poseidon” Denino, a former Twitch star who now streams on YouTube after the Amazon-owned platform banned him in 2017, was caught in a flagrant crypto scheme in which he took some $500,000 from his fans…and kept most of it.  Ice Poseidon tricked his followers to invest in CxCoin, a platform the streamer founded for content creators to get cryptocurrency donations, then pulled the rug from everyone. He took that money ($500,000 in total), pocketed $300,000, and allegedly bought a Tesla.

With more than $1 trillion lost in this crash – so far – can it be fairly compared to the subprime crisis of 2008 and setup for financial disaster further down the road? Paul Krugman thinks so, penning an op-ed in the NYT recently:

Krugman does not believe that crypto is likely to cause a wider economic crisis, but he says that a crypto bear market would disproportionately affect the more vulnerable people in society, referencing research which finds that 55% of crypto investors do not have a college degree and anecdotal evidence that it is particularly popular among the working class.

He compares this to the way that subprime mortgages made home ownership a possibility among people for whom it was previously unlikely.

Indeed. With trillions lost in wages during the pandemic, crypto currencies and share trading have become powerful incentives for the working class to try to get ahead as house price inflation goes to the moon, exarcebating the gap between the have houses and the have-not houses.

More:

Gregory Price, economics professor at the University of New Orleans, noted that the collapse in subprime mortgages caused economic distress due to “deleveraging” as financial firms and households had to sell assets to cover losses from debt finance.

This caused a downward spiral in asset prices overall, putting recessionary pressures on the overall economy.

“Subprime mortgages could be used as collateral for other asset purchases as well, and this is not true for cryptocurrencies,” he said. “As far as I know, there are no formal markets for the debt-financing of cryptocurrency purchases. Thus, a collapse in cryptocurrency prices is not likely to have the same catastrophic effects as the collapse in subprime mortgages.”

Mychal Campos, head of investing at Betterment, said the subprime comparison is justified to a certain extent, noting that “some of the products that have emerged for decentralized finance (DeFi) blockchains give me the eerie deja vu of experiencing 2007-2008 all over again.”

“When you can lend and earn yields based on specific blockchain protocols in DeFi that are so far beyond what the actual interest rate market will offer at this point, you can’t help but feel that we’re in ‘tulip mania’ territory,” he said, referring to a period in the Dutch Golden Age when tulip prices soared.

He added that it should not be a surprise to anyone that crypto has “become part of the story in terms of the overall frothiness in the pricing of risky assets.”

Following ASIC’s crackdown on Bitcoin CFDs (now down to only 1:1 leverage), financing of cryptocurrency is literally coming from house deposit savings or home equity as was seen last year in Australia as the Bitcoin bubble hit fifth gear and those out-of-work from the pandemic tried to source other income beyond paltry government support.

While the stock of Bitcoin and other cryptocurrency “wealth” lost may not be enough in a single hit to affect financial markets, a further collapse could be a Minsky Moment that trips up overleveraged and overexposed “investors” into other systemic problem just as governments are trying to wrestle economies out of the pandemic.

 

 

 

 

 

Latest posts by Chris Becker (see all)

Comments

  1. There seems to be a fair amount of confusion among reddit crypto fans, triggered by the receipt of 1099s, about the taxable nature of selling and converting crypto variants:

    Coinbase says crypto conversions are taxable events and irs.gov confirms it.
    So if I bought $500 in Bitcoin then converted it to USDT for a $500 value then sold the USDT for $500 USD, I essentially gained NOTHING, but Coinbase is saying I have $500 in short term gains! Something doesn’t seem right here.

    • Even StevenMEMBER

      Skippy, not sure where you are getting your info from, but whilst ATO would consider conversion a taxable event, you only have to pay tax if you have a profit. No profit = no tax.

      In your example there would be no tax.

      • Its IRS and not ATO.

        Then again its clearly stated “Coinbase says crypto conversions are taxable events and irs.gov confirms it”

        • Even StevenMEMBER

          Skippy, i think you are misunderstanding what ‘taxable event’ means. It means it is a trigger for determination of WHETHER tax should be paid. Not that tax must be paid.

          • I do understand it …

            Coinbase doesn’t know your income and tax situation…they are just saying you are up $500, but use language in such a way to trigger positive associations to winning, but its only really telling you how much your account is worth, this is a type of “gamification” that folks bemoan…but I digress…

            Also understand the reason why conversions are taxable events is because its actually a Sale, then Purchase of another security…which obviously the Sale is a taxable event that triggers tax liability…

            Based on fact scenario, there were 2 taxable events BTC –(first event)—> USDT—-(second event)—> USD. While the Gain or Loss may be minuscule (less than .01 cents), nonetheless some G/L occurs, which is why the IRS still wants you to report it.

            So I can see a lot of dramas popping out the other side of legions of day trader crypto sorts and more …

          • Even StevenMEMBER

            I think we are in agreement then.

            Any frequent trading of assets is a PITA due to the accounting records that need to be maintained. I used to participate in dividend reinvestment plans (DRP) until i made a decision that the accounting admin burden from different parcels of shares with different cost bases over – in some cases – 20 years of holding, was more than the paltry discount i was getting.

        • taxable event means a crystallisation of a disposal of an asset.

          sale price less cost base equals a form of assessable capital gains – this margin is what you get on.

          soo 500 – 500 = 0

          zero times any tax rate still equals zero

  2. The Traveling Wilbur 🙉🙈🙊

    It’s becoming a risk proxy for equities. May as well invest in an S&P500/NASDAQ ETF ATM. Fewer snakes and almost as many ladders with considerably less risk of ever ‘approaching zero’.

      • Even StevenMEMBER

        Utterly untrue, Skippy. Share ownership grants plenty of rights. Voting rights, rights to disposal of shares, rights to not be diluted by inequitable new share issuance.

        Are there risks in share ownership? Sure. But it is a mature and highly regulated area of the invesment universe. There is no comparison to crypto which is Wild West.

        • Equities by law have zero rights to assets or income and first to be wiped out or did you miss the GFC.

          • Even StevenMEMBER

            Skippy, i well understand how shares work in a company’s capital structure. Have been investing in them both personally and professionally for 30+ years. Yes they have a claim to residual assets once all liabilities to other creditors have been met. That is why shares have historically rewarded shareholders with higher returns than investing in say, cash. Higher risk, higher reward.

            Talk of ‘no rights’ is excessively flippant.

          • You are right there Skip but there are rights that are enforceable in courts eg takeovers, fraud on minorities etc,

          • I speak of the rights to property and not the ancillary rights to loss of value. But then again with all your knowage and experaince you should know about things like this –

            “Abusing investors and abusing taxpayers: these two practices tend to go together, like peas in a pod. The principal goal of Private Equity firms is rarely value creation but instead wealth extraction: harvesting budding companies that aren’t doing a good enough job of fleecing taxpayers, investors, creditors, employees, pensionholders and others – then tightening the screws to extract what they can, leveraging up their cashflow to juice up the returns.”

            https://taxjustice.net/2014/05/27/private-equity-harnessing-secrecy-fleece-investors-taxpayers/

            So I think that its excessive to suggest equity is pure as the driven snow with transparency and safe as houses …

          • Equities by law have zero rights to assets or income and first to be wiped out or did you miss the GFC.

            Who has rights to the income if not the shareholder?

          • Even StevenMEMBER

            Skippy, i am indeed familiar with private equity and how they try to generate value.

            But private equity are themselves shareholders, which i think does not aid your argument. If you can point out to me in my comments where i said shares are safe as houses (or even gave the impression of that) i will eat humble pie.

            I rarely eat humble pie.

          • Go read a corporate charter rusty … it never says the corporation has a duty to shareholders –

            “If you review any of the numerous guides prepared for directors of corporations prepared by law firms and other experts, you won’t find a stipulation for them to maximize shareholder value on the list of things they are supposed to do. It’s not a legal requirement. And there is a good reason for that.

            Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation. From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation, not to shareholders in particular…Shareholders are at the very back of the line. They get their piece only after everyone else is satisfied. If you read between the lines of the duties of directors and officers, the implicit “don’t go bankrupt” duty clearly trumps concerns about shareholders…

            So how did this “the last shall come first” thinking become established? You can blame it all on economists, specifically Harvard Business School’s Michael Jensen. In other words, this idea did not come out of legal analysis, changes in regulation, or court decisions. It was simply an academic theory that went mainstream. And to add insult to injury, the version of the Jensen formula that became popular was its worst possible embodiment.” – snip

            https://www.nakedcapitalism.com/2014/01/myth-maximizing-shareholder-value.html

          • Even StevenMEMBER

            Skippy, directors have duties to the corporation because the corporation comprises (at a minimum) employees, creditors and shareholders.

            The duties of the director will need to balance the interests of these groups (‘the corporation’).

            If the shareholders don’t like what the board is doing, they vote the board off and elect a new board.

            Shareholders have a huge amount of power (conceptually) but often shareholders are many individuals, fragmented, have different interests and may not vote in a bloc. This reduces their effective power in many cases.

          • Even StevenMEMBER

            If you want a really rough indication skippy, based on my experience (I deal with company directors regularly) I’d suggest their duty could be assigned approx. 70% shareholders, 20% creditors and 10% employees. And of course they also have a variety of other obligations (tax office, regulatory authorities, community etc).

            Those proportions can change dramatically depending upon the situation the company finds itself in.

          • Sorry the shareholder issue is a manufactured meme and made manifold by stock buy backs after they were linked to remuneration.

            https://www.nakedcapitalism.com/2017/08/original-shareholder-value-article-milton-friedman-gm-build-clunky-cars.html

            And again.

            the degree to which the notion that corporations exist only to serve the interests of shareholders is accepted as dogma and recited uncritically by the business press. I’m old enough to remember when that was idea would have been considered extreme and reckless. Corporations are a legal structure and are subject to a number of government and contractual obligations and financial claims. Equity holders are the lowest level of financial claim. It’s one thing to make sure they are not cheated, misled, or abused, but quite another to take the position that the last should be first. – snip

            https://www.nakedcapitalism.com/2014/05/guess-who-is-responsible-for-the-corporations-exist-to-maximize-shareholder-value-myth.html

            Regardless or your personal opinion Steven

          • Steven again see above and I was in Corporate back in the 80s so I personal saw a lot of shifts, but personal is not the same as qualified BTW.

          • Go read a corporate charter rusty … it never says the corporation has a duty to shareholders –

            I would assert I’ve read more corporate docs than over 99% of the population.

            “If you review any of the numerous guides prepared for directors of corporations prepared by law firms and other experts, you won’t find a stipulation for them to maximize shareholder value on the list of things they are supposed to do. It’s not a legal requirement. And there is a good reason for that.

            That’s not the same thing, you’re conflating a number of things.

            There is one immutable right of the shareholder, and that it to vote on executive management.

            That in itself has the implicit right.

            i agree, it does not compel behaviour… however….

            Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation.

            Corporation, from the latin corpus, or body. A body, or collective of what skip? It is the collective interests of the shareholders.

            Again, I agree there is little to mandate a compulsion of behaviour, but implicitly as an executive you don’t work in the interests of the shareholder,, you’ll find it hard to keep your job.

            What I do suspect however, from that den of nutbaggery of naked capitalism with people with as little real world experience as you… you’re conflating how there is the clear observation of big corporations where institutional shareholders hold sway and small shareholders have executive management working in conflict with their interests….

            but that’s not the same thing, again you’re conflating thing because you don’t understand.

            From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation, not to shareholders in particular…Shareholders are at the very back of the line.They get their piece only after everyone else is satisfied. If you read between the lines of the duties of directors and officers, the implicit “don’t go bankrupt” duty clearly trumps concerns about shareholders…

            Um, the ‘don’t go bankrupt’ is the concern of the shareholder. They’re mutually aligned interests.

            So how did this “the last shall come first” thinking become established? You can blame it all on economists, specifically Harvard Business School’s Michael Jensen. In other words, this idea did not come out of legal analysis, changes in regulation, or court decisions. It was simply an academic theory that went mainstream. And to add insult to injury, the version of the Jensen formula that became popular was its worst possible embodiment.” – snip

            None of that makes sense.

            But again, who has the right to the income of the corporation if not for the shareholder?

          • the degree to which the notion that corporations exist only to serve the interests of shareholders is accepted as dogma and recited uncritically by the business press.

            No one has ever said the corporation exists to SOLELY serve the interests of the shareholder above and beyond all else.

            There’s a reason the term stakeholder was invented.

            But that does not counter “who has the right to the income of the corporation if not for the shareholder?” … OR … “Share ownership grants plenty of rights. Voting rights, rights to disposal of shares, rights to not be diluted by inequitable new share issuance.”

            I’m old enough to remember when that was idea would have been considered extreme and reckless. Corporations are a legal structure and are subject to a number of government and contractual obligations and financial claims. Equity holders are the lowest level of financial claim.

            Yes, everyone who understand the first principal of owning equity, knows this….

            But that does not counter “who has the right to the income of the corporation if not for the shareholder?” … OR … “Share ownership grants plenty of rights. Voting rights, rights to disposal of shares, rights to not be diluted by inequitable new share issuance.”

            It’s one thing to make sure they are not cheated, misled, or abused, but quite another to take the position that the last should be first.

            Shareholders are first (well second after government) when it comes to income

          • Were talking about equity rusty and not the broader term shareholders e.g. rights are not equal under the law.

          • No, the repsonses have been to your claims

            Equity = zero rights

            and

            Equities by law have zero rights to assets or income …..

            Which is patently false.

          • If you read what I offered you would see what you call rights are better described as expectations and not what occurs in the real world, unless you have a white shoe firm in your pocket.

          • If you understood the definition of ‘rights’, this conversation wouldn’t take place.

            So again, “who has the right to the income of the corporation if not for the shareholder?”

            I’m not saying “the shareholder has the right to have the yield guaranteed to never drop to zero”

            Who has the right to the income of the corporation if not for the shareholder?

          • Even StevenMEMBER

            Skippy, Naked Capitalism is wrong. Not all of it, but some parts. Just another reason why you shouldnt believe everything you read on the internet.

            I get that you like to debate things, and probably don’t like being wrong. Join the club.

            I have real world (lived) experience in these areas. If you were genuinely interested in educating yourself on this, i would have near limitless patience to discuss in detail. But i dont think you are being sincere and im not going to spend further time on this.

            There are in fact people who exist who know more than you in select areas. Please open your mind to them.

          • Your personal say so is not supported, contra everything I’ve popped under your nose and NC backed up what it was presenting.

            Rhetorical arguments with out support are not compelling in any way shape or form and those that think doubling down just highlight their biases e.g. self interests.

    • Someone ElseMEMBER

      Something, something…diamond hands…something…stonk.

      I am so hip with the kids on the interwebs.

  3. Digital tulips!! i can see the price of a bitcoin converging towards $5 by the year’s end… even then, at that point one could sensibly argue that it is over-valued!

  4. Lol @ using Paul Krugman to back up your rhetoric, the same man who predicted the internet would be less impactful than the fax machine.. not to mention his complete and utter ineptitude in his own field XD

  5. One trick ponyMEMBER

    Never bought into crypto and remain very firmly in the “it is/was a bubble” camp. However, for my friends that have – they have moved on and it’s all about NFTs. Of course I also think is NFT’s are a bubble which may or may not already be bursting.