Crypto is Too Dependent on ‘Greater Fool Theory’: Former Fed Chair

  • Five-term chairman of the Board of Governors of the Fed Reserve System shared views on Crypto, NFT and US economy. 
  • FTX contagion would not spread to other sectors. 
  • Recession could be the most likely outcome at this time.

Federal Reserve Chairman Alan Greenspan openly shared his views on Crypto, saying that it is “too dependent on the ‘greater fool theory’ to be a desirable investment.” He also argued that the FTX collapse does not mean the whole crypto industry is a failure. Also, this FTX contagion is not likely to spread into other sectors. In a Q&A published by Advisors Capital Management this week, Alan shared his views on the FTX collapse, cryptocurrency, and the US economy.

“Greater Fool Theory”

It states, “There will always be a ‘greater fool’ in the market who will be ready to pay a price based on higher valuation for an already overvalued security.”

Alan had served five terms as a Chairman of the Board of Governors of the Federal Reserve System from 1987 to 2006. Being appointed by four different US presidents, he joined Capital Management in September 2016 as Economic Advisor to the asset management firm. 

When Alan was asked about his views on the FTX meltdown and possible contagion effect on other sectors, he said, “I do not expect the fallout from FTX to spread beyond the cryptocurrency/NFT space.” 

His reply was after considering that the collapse was pure fraud and the whole crypto industry with all the features should not be blamed. 

Even after spending a huge budget on the marketing of crypto firms, the data still says that it is fairly concentrated in a small subset of investors. Meaning that widespread adoption is still a long shot for the industry. 

When looking back at the housing market bubble burst and that of the dot com bubble, it becomes clearer that credit-fueled assets bubbles create far more contagion when they deflate as the crypto/NFT arena is yet to see a considerable amount of leverage dedicated to it. There is a limited possibility of it spreading to other sectors or industries. 

Sharing his views on the US Economy and Federal Reserve’s fight against inflation. Pointing out if a recession is required to bring down inflation, as suggested by some experts, he said, ” A recession does appear to be the most likely outcome at this time. 

Although he does not believe that Fed reversal which could be substantial enough to avoid the possibility of a mild recession, is justified. 

Concluding his views, he said:

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

Nancy J. Allen
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