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What are subprime mortgages and why do they use them to alert cryptocurrencies

The cryptocurrency value falls –almost 50% in the last six months in the case of Bitcoin–. However, many investors, despite alerts issued by experts and by the European Central Bank itself (ECB), continue to bet on them based on the belief that they will come back. In such a context more and more the comparison of this market is heardas it collects The Economist, with that of subprime mortgages that triggered the 2008 crisis.

The value of Bitcoin, the main cryptocurrency, has plummeted in recent months.  (Photo: Getty Images)

The value of Bitcoin, the main cryptocurrency, has plummeted in recent months. (Photo: Getty Images)

As published this Wednesday The Economist, the cryptocurrency market – which is not regulated – has shot up its volume so much that it already doubles that of the aforementioned mortgages. The data provided by the ECB is of a value of about 2.2 billion euros of the first compared to 1.2 billion euros of the second. In statements collected by the aforementioned newspaper, Fabio Panetta, member of the Executive Committee of the ECB, explains that cryptocurrencies are a speculative instrument due to its volatility.

The problem being alerted to is that a bubble has been created around cryptocurrencies that sooner or later will end up exploding. Panneta warns that “we should not repeat the same mistakes by waiting for the bubble to burst and only then realizing how pervasive cryptocurrency risk has become in the financial system. Although some may hope to be smarter and get out on time, many will be trapped.”

A notice that coincides with the one collected in The sixth by Eduard Rosicart, professor at OBS Business School, who points out that “it is a type of value that can rise, can fall, can collapse and nobody guarantees that those figures will rise again.” The fall is taking place. Depending on the string, the value of the Bitcoin It was 58,000 euros on November 8, 2021. Now it is around 30,000 euros. However, the volatility that the ECB, which has described this market as the “Wild West”, does not deter investors.

And the mention of subprime mortgages is repeated every time more in different media when comparing what is happening now with what happened more than a decade ago and how it ended then. But what were subprime mortgages? As the newspaper explains Expansionto this type of mortgages also known as ‘junk mortgages’ and were on the rise in the years prior to 2008. Basically it is a type of loan for the purchase of a house considered to be of high risk and that is granted to a person who, under normal conditions, would not be given. For example: unemployed or workers with low income.

During the real estate bubble countless mortgages of this type were granted, which implied a higher interest rate. Later, the banks concentrated these high-risk loans with a high probability of default in packages with which he traded in the market turning them into toxic assets. The non-payment of mortgages grew until it reached a point where the entire market was stressed and lacking in liquidity until the entire framework created around subprime mortgages came to light. It happened in 2007 and is considered the trigger for the subsequent economic crisis, whose turning point was the bankruptcy of Lehman Brothers, one of the largest investment banks.

This comparison of the crypto market and subprime mortgages is not new. A few weeks ago, at the end of January, the Nobel laureate in Economics in 2008 and popularizer Paul Krugman wrote a column New York Times in this way. With a more than eloquent headline, How crypto became the new subprimeexplained the parallelism between both markets.

In his opinion article, he explained that one of the similarities between the two is that they are “financial products that nobody understands” and that in the end those who “could end up paying the price”, as happened in 2007, could be the most vulnerable. He warned of the parallels and that “there are disturbing echoes with the subprime crisis of 15 years ago”.

Even so, he also pointed out that he did not see a risk for the world economy at the subprime level: “No, cryptocurrencies do not threaten the financial system: the numbers are not big enough to do so. But there is growing evidence that the risks of cryptocurrencies fall disproportionately on people who do not know what they are getting into and who are ill-positioned to handle the downside.”

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