Question 6

Crashing Crypto: Is This Time Different?

By Paul Krugman New York Times May 17, 2022

Last week TerraUSD, a stablecoin a system that was supposed to perform a lot like a conventional bank account but was backed only by a cryptocurrency called Luna collapsed. Luna lost 97 percent of its value over the course of just 24 hours, apparentlydestroyingsome investors' life savings.

The event shook the crypto world in general, but the truth is that this world was looking pretty shaky even before the Terra disaster. Bitcoin, the original cryptocurrency, peaked last November and has sincedeclinedby more than 50 percent.

And other cryptocurrencies have performed far worse. Two cities Miami and New York have introducedtheir own cryptocurrencies, with enthusiastic support from their mayors. MiamiCoin is down more than 90 percent from its peak, and NewYorkCityCoin is down more than 80 percent.

By now, we've all heard of them, but what exactly are cryptocurrencies? Many people including, I fear, many people who have invested in them probably still don't fully understand them. Saying that they're digital assets doesn't really get at it. My bank account, which I mainly reach online, is also a digital asset, for all practical purposes.

In the past, cryptocurrencies kept going up by attracting an ever-growing range of investors. Crypto was once held by a small clique that often had the feel of a cult, motivated in part by a combination of libertarian ideology and fascination with the clever use of technology. Over time, rising crypto prices drew in large numbers of additional investors and some bigWall Street money.

And in the past year or so, crypto marketing has gone really mainstream, withendorsements from celebrities including Matt Damon, Kim Kardashian and Mike Tyson not to mention political figures like MayorEric Adamsof New York and the (unsuccessful) Republican Senate candidate Josh Mandel, who declared hisintentionto make Ohio "pro-God, pro-family, pro-Bitcoin." Given all this, it's hard to see who else there might be to recruit into crypto investing.

One disturbing aspect of this marketing push, by the way, is that those who bought cryptocurrencies relatively recently and have therefore lost a lot of money in the crypto crash probably consist disproportionately of the kind of people most likely to be influenced by celebrity endorsements. That is, they are probably poorer and less sophisticated than the average investor and badly positioned to handle the losses they've taken over the past few months.

Required - With reference to the article "Crashing Crypto: Is This Time Different?", answer the following:

Are the indicators of a financial crisis as described by economist Hyman Minsky apparent in the market for crypto-currencies as described in the article above? Explain your answer (10 marks)