Economist Paul Krugman has embraced his role as a crypto skeptic going as far as joining a forthcoming crypto conference with his arguments against crypto assets.
But before speaking to a difficult audience of crypto enthusiasts, Krugman used his column in the New York Times to reiterate his concerns with crypto coins, the most common form of digital assets.
https://twitter.com/paulkrugman/status/1024205104570884096
Krugman believes digital coins add unnecessary friction in transactions, while the worldwide monetary and payment systems have been working for centuries to reduce friction:
“Instead of near-frictionless transactions, we have high costs of doing business, because transferring a Bitcoin or other cryptocurrency unit requires providing a complete history of past transactions. Instead of money created by the click of a mouse, we have money that must be mined — created through resource-intensive computations.”
Users of Bitcoin often report the opposite experience - having faster and smoother transactions without intermediaries, compared to using bank transfers. And some coins are even faster and cheaper, while ensuring anonymous transactions. However, Krugman believes the costs are too high, and cannot be innovated away, at least in the case of mined coins like Bitcoin.
“Governments have occasionally abused the privilege of creating fiat money, but for the most part governments and central banks exercise restraint, again because they care about their reputations. But you’re supposed to be sure that a Bitcoin is real without knowing who issued it, so you need the digital equivalent of biting a gold coin to be sure it’s the real deal, and the costs of producing something that satisfies that test have to be high enough to discourage fraud,” Krugman wrote.
Krugman is a supporter of the system of fiat money, which he believes are more frictionless and fit the dynamics of the current world economy.
“If you look at the broad sweep of monetary history, there has been a clear direction of change over time: namely, one of reducing the frictions of doing business and the amount of real resources required to deal with those frictions,” the Nobel prize-winning economist wrote.
Crypto enthusiasts have realized the limitations of Bitcoin, but have voiced their appreciation for sound money in a world where central banks were capable of encouraging hyper liquidity, thus in effect creating hidden, or obvious inflation, as well as generating asset bubbles.
Krugman’s criticism is also pointing out the fact that crypto coins have not been widely adopted in commerce. Merchants may only accept crypto coins as a form of signalling, and in the past, many services have in fact discontinued taking crypto assets.
Yet Krugman believes that despite Bitcoin’s relatively weak performance as money, it may still be an asset that holds value:
“Does this mean that crypto is a pure bubble, which will eventually deflate to nothing? It’s worth pointing out that there are other currency-like assets that don’t actually get much use as money, but which people hold anyway. Gold hasn’t been actual money for a very long time, yet it retains its value.”
Krugman also gives an example of the US dollar used as a store of value, while actual cash usage is dwindling, due to low-friction methods.
However, the criticism of Krugman misses the advent of new crypto assets, some of which allow for faster payments without mining, through nodes and staking. Krugman also criticized Bitcoin as being used as a replacement of large-denomination notes, which also serve for illegal deals, along with gold or diamonds.
The other criticism against Bitcoin is that its value is not guaranteed by any entity, unlike the US dollar, which would always be accepted by the US government. Bitcoin has no entity backing it - without counting Vinny Lingham, founder of Civic, who has placed an order to buy all outstanding BTC coins at $0.10, in case the asset crashes to nothing. But Bitcoin is still not legal tender, meaning no legal system is obliged to accept it as a means of debt repayment.
For Krugman, this means that in theory, Bitcoin could depreciate to nothing:
”Cryptocurrencies, by contrast, have no backstop, no tether to reality. Their value depends entirely on self-fulfilling expectations – which means that total collapse is a real possibility. If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, well, Bitcoins would become worthless.”
Krugman believes that Bitcoin may hold some value, and be used illegally, but will most probably disappoint the hardline crypto enthusiasts. At the time of the analysis, BTC prices sanк to $7,990.44, once again threatening to enter a downward trend as the $8,000 level proves difficult to protect.
This article appeared first on Cryptovest
