Cryptocurrencies depend too much on the “great fool theory”: the former Fed chairman

  • The five-term chairman of the Fed Reserve System’s Board of Governors shared insights on Crypto, NFTs, and the US economy.
  • The FTX contagion would not spread to other sectors.
  • Recession may be the most likely outcome right now.

Federal Reserve Chairman Alan Greenspan has openly shared his views on Crypto, saying it is “too dependent on the ‘great fool theory’ to be a desirable investment.” He also argued that the collapse of FTX does not mean that the entire cryptocurrency industry is a failure. Also, this FTX contagion is unlikely to spread to other industries. In a Q&A posted by Advisors Capital Management this week, Alan shared his thoughts on the FTX crash, the cryptocurrency and the US economy.

“Great Fool Theory”

He claims: “There will always be a “biggest fool” in the market who will be willing to pay a price based on a higher valuation for an already overvalued stock.”

From 1987 to 2006, Alan served five terms as Chairman of the Board of Governors of the Federal Reserve System. Nominated by four different US presidents, he joined Capital Management in September 2016 as an economic adviser to the asset management firm.

When Alan was asked about his views on the FTX meltdown and the possible spillover effect to other industries, he said: “I don’t expect the fallout from FTX to spread beyond the cryptocurrency/NFT space.”

His response was after considering that the crash was pure fraud and the entire cryptocurrency industry with all features should not be blamed.

Even after spending a huge budget marketing crypto companies, the data still says it’s fairly concentrated in a small subset of investors. This means that widespread adoption is still a possibility for the industry.

When looking back at the bursting of the housing and dot-com bubbles, it becomes clearer that credit-fueled asset bubbles create much more contagion when they deflate as the crypto/NFT arena has yet to see a significant amount of leverage finance dedicated to it. There is a limited chance that it will spread to other sectors or industries.

Sharing his views on the US economy and the Federal Reserve’s fight against inflation. Emphasizing whether a recession is needed to bring down inflation, as suggested by some experts, he said: “A recession seems to be the most likely outcome right now.

Though he doesn’t believe the Fed’s reversal, which could be substantial enough to avoid the possibility of a mild recession, is warranted.

Concluding his views, he said:

“Wage increases, and by extension employment, still need to ease further for a decline in inflation to be more than transitory. So, we may have a brief lull on the inflation front, but I think it will be a little too late.”

Nancy J. Allen
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