As someone who has been in the cryptocurrency industry for six years, and who has dedicated my life to researching, investing, and evangelizing them, I am always astounded by the level of ignorance most people have towards: a) what a cryptocurrency is; b) what its uses are; and c) whether or not it/they is/are good investments. I’ve had to field numerous allegations of working in an industry full of money launderers (false), people who don’t work very hard (false), and people who just got lucky (false).

Unfortunately, Nobel Laureate Paul Krugman is no exception. Some of you may have seen Paul Krugman’s op-ed in the NYtimes that was published on January 27th about how crypto is the new subprime. I wanted to focus on dissecting the article itself as there are a number of deeply misleading remarks by Krugman that should be addressed, and to spend time giving my own anecdotal evidence about this business to counter most of his points.

Let’s begin with an analysis of what Krugman is saying (and why it’s wrong).

To answer his own rhetorical question – “What’s this crypto thing about?” - Krugman turns to payments (and then proceeds to denigrate payments as the use case for crypto). This in and of itself is wrong. There are various use cases for cryptocurrencies, and payments is but just one. We can discuss the efficacy of the payments use case a bit later, but I wonder what Mr. Krugman would say to those who are using the Reserve stablecoin to make payments for basic things like groceries in Venezuela and other Latin American countries where the currencies have encountered such bad inflation that many citizens have turned to alternate currencies. Don’t get me wrong, I don’t totally disagree with Krugman about the payments use case being shoddy in “stable” [whatever that means] countries like the United States. Yet as someone who used to live in China (and sell bitcoin there), I was happy to use cryptocurrency as a payments mechanism when capital controls inflicted onto my bank account would not allow me to dine at fancy restaurants where the cost of the meal may be several times what I was allowed to take out that day in renminbi from my bank. Nevermind the fact that when I was forced to leave the country due to COVID, my only hope of exchanging the rmb that I had in my Chinese bank was to use my former employer Eigen Capital’s OTC desk to swap it for BTC/stablecoin.

Let’s focus on the base inaccuracies in what Krugman says before delving into other use cases he must have forgotten (or ignored, or never bothered to learn). He says that one of the main differences between “mainstream payment schemes” and cryptocurrencies is that these mainstream schemes rely on a third party, like “your bank” to “verify” that you actually own the assets you’re transferring whereas cryptocurrencies use “complex coding” to do the same.

This is both true and false simultaneously.

First, cryptocurrencies do use “complex coding” to do away with third parties. Albeit whether or not we can call these lines of code “complex” is up for debate. In fact, it’s just one line of code that checks whether or not a trade in a decentralized protocol (I’m using AAVE here as an example) can occur based on the wallet’s balance:

function _calculateAvailableCollateralToLiquidate(

You can see these docs: https://etherscan.io/address/0x987115c38fd9fd2aa2c6f1718451d167c13a3186#code#F11#L147 https://docs.aave.com/risk/asset-risk/risk-parameters. Most code in cryptocurrency for very complex procedures is not very complex at all: the code for an atomic swap can run about fourteen lines long (if written in Golang – I know this because I’ve written that code) - for reference, this is insanely short for a computer program - and the Bitcoin whitepaper’s genesis block for bitcoin was seven lines of code in C. It feels as though Krugman is trying to position the lines of code that underpin most of these trades as some sort of mysterious AI/robot that others can’t see, which is false. All of the code that underpins these protocols is open source and available for those to read (see docs above or the image below).

In fact, lending in cryptocurrency markets (at least with regards to decentralized finance) is INFINITELY safer than other kinds of lending (in traditional markets) because it relies on a concept called overcollateralization. Before getting debt for your cryptocurrencies, you must usually put 125-250% up for collateral for the currency you’d like to receive. This is wildly controversial in crypto BECAUSE it is seen as less egalitarian and more inaccessible for others to get the same loans. (Imagine going to buy a house and needing 1.5x the assets, and then needing to put those up as collateral to receive it.)

Second, if you’re trading on centralized exchanges you have to have a bank verify that you own the assets you’re transferring because you need a way to get cash into the exchange to buy the cryptocurrency you’re buying. So Krugman is wrong to assume (or intonate, as we can’t be sure of his actual assumptions) that all cryptocurrency interactions don’t need a bank verification. How else would people be able to buy the cryptocurrencies in the first place?

It’s also wrong of Krugman to assume that having a bank as the verification method for payments is the best way to ensure that people won’t buy things they can’t afford. For example, credit cards, which use banks as the verification method for the user (alongside FICO scores to evaluate which interest rate to give people), have kept Americans in terrible debt: the average American has $16,425 in credit card debt and 40% have less than $400 in their savings account. College loans are another example of people being allowed to take out debt for something they don’t have the assets for: 30% of adults have some debt from attempting to go to college but never finishing. Nevermind the affordability crisis of homes and healthcare (how many people do you know have gone into debt to pay medical bills, or own a home they can’t afford?).

By asking “what’s this crypto thing about?” and answering with only payments as the answer is woefully ignorant. Not only are cryptocurrencies used as a payments rail, their biggest use cases are (usually) totally different (and myriad). According to Cathy Woods, decentralized finance scales more efficiently than traditional finance; stablecoins have fueled trading, lending, and payments; Decentralized Autonomous Organization have enabled novel forms of coordination and governance; NFTs are a new type of active entertainment; and Play-to-Earn is enabling new forms of labor. (Not to mention the new types of financial instruments that are being invented.)

A few paragraphs later, Krugman states that: “crypto ends up being an awkward, expensive way to do things you could have done more easily in other ways, which is why cryptocurrencies still have few legal applications 13 years after Bitcoin was introduced”. This is also false (perhaps not with regards to payments, if we were using Ethereum the gas fees would make it more expensive): the true reason cryptocurrencies have “few legal applications” is BECAUSE regulators have not built the legal infrastructure to properly regulate these types of currencies - when they are used as currencies and mediums of exchange (and in other use cases, but mainly those). While it’s certainly true that Venezuela has likely not made the use of stablecoins legal, there are merchants that happily accept Reserve in the country. In fact, stablecoins are now the biggest remittance tools (despite not being regulated), mostly in SE Asia, where - you guessed it - they remain unregulated.

After having been pressed for years and years (and years), the SEC has set forth barely any guidelines on tokenization and the general blockchain space, preferring instead to give the absolute lightest wrist slaps to those who did unregulated token sales (does anyone remember EOS’ minuscule $24 million USD fine for hosting the largest unregulated token sale in the history of token sales?). In the face of ambiguous regulation, amazing innovation will continue to occur regardless.

The most arrogant turn of the article occurs when Krugman says: “so crypto has become a large asset class even though nobody can clearly explain what legitimate purpose it’s for.”

Perhaps he has not read the dozens of books about cryptocurrencies that discuss its copious use cases (i.e. Andreas Antonopolous’ and Safidean Ammous’ books), investigated the boundless use cases of new companies in the space, listened to amazing interviews with great investors in the space, or become a client or crypto himself, but many people are explaining what its purpose is for. Unless Mr. Krugman is living under a rock (not possible, as I’ve seen evidence of his living room in Princeton in past interviews), he must totally misunderstand how the crypto world works or purposely not expose himself to it.

The more concerning part of Krugman’s op-ed are the racist (and ultimately prejudicial) undertones of what he’s saying about who are going to be “the biggest losers” in the crypto space. He believes that minorities and lower income individuals are going to be burnt by crypto in the way that they were during the housing crisis. His main evidence is a study he cites that says:

“According to researchers from NORC, the average cryptocurrency trader is under 40 (mean age is 38) and does not have a college degree (55 percent). Two-fifths of crypto traders are not white (44 percent), and 41 percent are women. Over one-third (35 percent) have household incomes under $60k annually.”

From this description, we can see that the average crypto trader looks a lot like….the Average American. For example, the average American does not have a college degree – only 37.5% above 25 years of age do. As I noted previously, nearly ⅓ of adults have debt from attempting to go to college but never finishing. Lastly, the study states that: “Over one-third (35 percent) have household incomes under $60k annually.” While most Americans are white (about 60% according to this Washington Post article, or precisely 57% according to the latest census taken in 2020 - which is controversial because it classifies Middle Eastern individuals as white), the average income for an American is under 60k.

Let’s go through this descriptor of the average crypto trader piece by piece to understand why Krugman’s alarm about who owns cryptocurrencies is unfounded.

First, assuming non-college educated investors cannot understand cryptocurrency is classist and elitist (at best). Some of the best traders I know dropped out of college because - wait for it - they were making too much money trading crypto.

I even have savvy friends that are avoiding sending their children to college at all (highly educated and very wealthy individuals). This past weekend, I dined with an investor friend at a crypto conference who confessed he is not sending his 18 year old to college next year, but instead to spend years learning how to code and working at his different friends’ hedge funds and PE firms. David Johnston, one of the greatest cryptocurrency investors of all time,  didn’t go to college. I sat with him this past weekend at the conference, so naturally a discussion of why occurred. “Because curriculum based learning doesn’t work.” Fair. In fact, in tech, it can be seen as a badge of honor to attend college but never finish. At a private dinner for cryptocurrency investors last week, a friend of mine (the great Adam Winnick) made a joke about how going to Harvard had become a double-edged sword: if you attended Harvard and hadn’t dropped out yet, people would start to ask why.

It’s true that the social capital that comes with education cannot be ignored, nor can the fact that social and financial capital are closely intertwined, creating another reason that social mobility is nearly impossible in this country. Education costs more than ever, and yet it remains a bastion for higher pay: people with undergraduate degrees make 60% more than their high school graduate counterparts and those with graduate degrees make 21% more than those with only undergraduate degrees. Salaries tend to be determined by age 25, which puts an undergraduate education — and the two years that follow — as the main demarcator for professional advancement. The twenties are where the most career and salary growth happen mostly due to a phenomenon called weak ties, in which your broader social network ends up shaping your future in unforeseeable ways . For the less privileged who have to take their coursework part-time to work while undergraduates, the negative effects on their career could be enormous. And it should be noted that the wealthier a young professional’s family, the more resources to put towards their career — it’s these graduates who go furthest. Mentors matter too, more than internships/relevant professional experience; and job placement can be traced to who you know: 70% of job offers go to someone who knew at least one employee at the company.

It’s true that college is important for social mobility. But is it important for the actual learning of relevant information to your career, and does it indicate IQ? Only 27% of people ever actually have a career in what they majored in. And many graduates can get by without being particularly intelligent. If college is worth anything, I think it’s worth it if only to meet other smart kids. [Thanks Zak Hap for introducing me to crypto!] But assuming that somebody that did not go to college cannot make investment decisions for themselves is absurd, because, like we mentioned previously, the average person in this country did not go to college. Unless Krugman thinks the average person shouldn’t be investing (and aggregating wealth for themselves in the process), which is classist and immoral, what he is positing doesn’t align with the data (and, quite frankly, makes no sense).

Second, the fact that many crypto traders aren’t white (44%) is not necessarily alarming (in fact, if you look at the spread for white Americans versus minorities in the aforementioned Washington Post article, it’s virtually identical give or take 12% percent, or a few percent, depending on how White is defined). How is he to know that these individuals are the ones that have lost (or will lose) money? Most of my friends who have made fortunes in crypto are minorities (myself included). As a woman who counts as a minority on the census, and who has never lost money trading or investing into cryptocurrencies, I take special offense to Krugman’s comments. I’ve built generational wealth for myself. And yes, I’m highly educated and have a high income. But I would never have been able to build the kind of wealth I’ve managed to build for myself - especially not in the time frame I’ve done so, either - in a traditional financial path. Why? Because I never would have gotten a job as a banker. Why? Because I didn’t have anyone at any bank to get me a job - despite being credentialed and highly educated [see the statistics above about how graduates really get their jobs]. (And if you’re going to ask me if I thought college was worth it - with the exception of my meeting Hap, no, I wouldn’t hire the vast majority of individuals I went to college with and most of what I learned did not prepare me to have a career in an industry that did not yet exist.)

My situation isn’t new. Minorities are outpacing non-minorities in many areas of life, including income (and educational levels, and other areas, but let’s focus on income). For example, Asian Americans now make more money than white Americans, and the top 5 specific ethnic groups in terms of income are as follows: Indian, Taiwanese, Australian, Filipino, and South African. Having been in this business for years, I’ve seen high-income white (mostly) men lose fortunes, and not just in the form of bad trades (don’t forget your keys, kids!). (And if there were a specific race that seems to have done better than others, from my own experience it would be East/South Asian Americans/non-Americans.)

Trying to say that minorities who lost their homes in 2008 because they were given loans they never should have been given by banks who did not do their due diligence are going to be the same people who lose money in crypto, or are going to be hurt just as badly as they were in 2008, is comparing apples to oranges. You can recover if you’ve put your 399 USD in life savings into a bad crypto trade, but buying a house with 3% down is going to be a problem when you lose your job and can’t pay the mortgage. You won’t have anywhere else to stay. (He alludes to this by explaining that crypto is a smaller asset class than mortgages, but it’s worth highlighting again.) The upside to owning a house is having a place to live, but the upside of having put 399 USD into bitcoin in 2012 is infinitely higher. Which would you choose to do if you could make the choice?

Third, the study states that 35% of crypto investors make less than 60k a year. I wonder why Krugman thinks this is an issue. The vast majority of millionaires in the United States never made more than 60k a year. Who is to say that those making less than 60k don’t have wealth or haven’t been able to aggregate it? My income statements from tax returns dated to a few years ago would look similar to your average millionaire next door. (Maybe we do live in an age where the Retired Janitors of Idaho could decide the shareholder vote better than our plutocratic executives can.) In fact, the people with bad credit tend to be high income earners. In his book “Millionaire Next Door”, Thomas J. Stanley goes into depth about how most people who make high incomes don’t capture the value from that wealth because they’re too busy spending all of it instead of investing it.

It’s also hard to track who actually owns these cryptoassets. Many crypto investors don’t report their gains and tons of crypto is stored in hard wallets that utilize cold storage such that nobody else can know their whereabouts or contents.

Krugman ends his article on a pessimistic, prejudicial note.

“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. Unfortunately, that’s not what is happening.”

A great foil to Krugman’s comments are those of Cathy Wood of ARK invest. In her latest update, she focused a lot on blockchain:

“All money and contracts could migrate to open-source protocols that enable and verify digital scarcity and proof-of-ownership. The financial ecosystem could be forced to reconfigure to take advantage of the capabilities these technologies afford, potentially leading to more transparency, fewer capital and regulatory controls, and significantly lower contract execution costs. More of everything could become money-like: fungible, liquid, quantifiable; every corporate entity and consumer will have to adapt corporate structures might be called into question, every sector could be impacted.”

I can’t wait to see how else the blockchain space impacts our world!