What Is Paul Krugman’s Problem With Bitcoin?

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What Is Paul Krugman’s Problem With Bitcoin?

Crypto-skeptic Paul Krugman wrote in a 2018 New York Times op-ed titled “Why I’m a Crypto Skeptic”:1

“What problem does this technology solve? What does it do that other, much cheaper and easier-to-use technologies can’t do just as well or better?” I still haven’t heard a clear answer.”

The Nobel Prize-winning economist’s views haven’t altered much since we first looked at the 2018 op-ed he wrote while on vacation in Europe, as a consequence of his “hiking and bicycling in different regions of Europe.”

He remarked in 2018 that it takes the monetary system back 300 years, when gold was the major means of exchange, and that there does not seem to be a clear positive to this retreat. Krugman’s assertion is still valid three years later: 2

“even now Bitcoin and its relatives haven’t managed to achieve any meaningful economic role, what happens to their value is basically irrelevant to those of us not playing the crypto game.”

Key Takeaways

  • Paul Krugman, a Nobel winner economist, has never been a supporter of Bitcoin or cryptocurrencies.
  • According to Krugman, these digital tokens serve no economic function and have a shaky worth.
  • It remains to be seen if Bitcoin is genuinely a bubble, but many notable intellectuals strongly disagree with Krugman’s assessment.

Two Strikes Against Bitcoin?

Krugman cites two arguments against bitcoin: transaction fees and tethers. 1

The first is the cost of transactions. When we examine the history of money across time, we may see a general trend toward improving convenience. Currency has made transactions simpler and less expensive throughout time. 1

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Gold has significant transaction costs since it is heavy and big, and it is very costly to keep. Because fiat currencies are paper-based, they have reduced but nonetheless considerable transaction costs. Subsequent transitions to checks and credit and debit cards have reduced the demand for and expense of paper cash even more. As a result, they have been extensively embraced by governments all over the globe. The fact that they are broadly acknowledged adds to their popularity. Bitcoin, on the other hand, includes high transaction costs in the form of energy needs. It is also not generally acknowledged, which raises the expenses of doing actual business using bitcoin. 1

The second disadvantage of bitcoin is its inability to be tethered. In practice, this implies that it has no genuine backstops, as there are for paper money and gold. Paper money gains legitimacy through government endorsement. Gold serves as a “weak but actual connection to the real economy” through jewelry and industry. Bitcoin lacks a tangible application and a central authority to attest for its legitimacy as a medium of exchange due to its digital and stateless character. “If speculators had a collective moment of uncertainty, suddenly worrying that Bitcoins were worthless,” adds Krugman, “Bitcoins would become worthless.” 1

Bitcoin Is a Bubble?

To be clear, this is not Krugman’s first time speaking out against bitcoin. Back in December 2017, when bitcoin prices were at all-time highs, Krugman said that the cryptocurrency was a clear bubble. He said that its costs were rising due to “some sophisticated technical stuff that nobody really knows.” In a previous op-ed, he argued in a similar vein, claiming that bitcoin has no support or anchor. However, he believes the bitcoin bubble will last for a long time. 13

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In his most recent May 2021 op-ed, he argued in a similar vein, stating that he expects the bitcoin bubble will last for a long time, comparing it to Bernie Madoff’s ponzi scam. What’s the reason? Because ponzi schemes thrive in environments with a strong story, and Krugman feels that the “narrative” is where cryptocurrency “truly excels”2.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site. The author holds a minor quantity of bitcoin and litecoin as of the date this article was published.

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