Paul Krugman, the left leaning nobel laureate economist, seems to be warming to cryptocurrencies in general and bitcoin in particular, publicly stating:
“As I see it, cryptocurrencies like Bitcoin are in effect like digital gold coins, in the sense that they can’t be counterfeited. A gold coin is worth its weight in gold, no more, no less; if you’re suspicious, you can bite it to make sure.
Cryptocurrencies use cryptographic techniques plus distributed storage to create non-material entities that are nonetheless impossible to fake. You don’t have to worry whether a Bitcoin is a *real* Bitcoin.”
There are, of course, many sorts of cryptocurrencies. Ethereum, for example, has smart contracts which allow for decentralized apps. While tokens can act as a company share, as a stable coin, as a reward token, and in more sophisticated implementations as a digital co-operative like John Lewis.
But bitcoin is primarily usable as, currently, a digital asset, like gold, while Bitcoin Cash is trying to be an actual currency, like the dollar, but with a fixed limit of 21 million coins.
“Cryptocurrency lets you make electronic transactions,” Krugman says before adding: “but so do bank accounts, debit cards, Paypal, Venmo etc. All these other methods involve trusting a third party.”
That trust requirement is the main reason cited in the bitcoin whitepaper, with Nakamoto stating in the very first paragraph:
“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.
Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non- reversible services.
With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable.
These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.”
Consumers might not be aware of these problems, but for merchants they are very real. On PayPal, for example, a buyer is by default assumed to be right if he disputes a payment. He thus can receive a service, which could be for thousands, dispute it, with the seller in effect left robbed, without recourse.
And as Cypriot citizens found in 2013, banks can just take their money, although of course not if they are part of the elite, like the president, who allegedly sent his money out of the country just as about everyone else was forced to “pay” 47% of any amount above $100,000 held in Cypriot bank accounts.
Not to mention the fact that, because banks are so heavily regulated – with banker written laws keeping new entrants out – they act in effect like a cartel. Thus rarely compete with each other, leading to billions in profits from overdraft fees while charging citizens 14% yearly interest for the privilege of giving banks your money.
These points are perhaps too abstract for Krugman, who focuses only on bitcoin and ignores all other blockchain innovations, as well as focuses on this idea that it is the government which somehow gives money value rather than its qualities of means of exchange, store of value, unit of account, and so on. In a circulatory argument, he says:
“What backstops a cryptocurrency’s value? Paper money is ultimately backed by governments that will take it in payment of taxes (and central banks that will reduce the monetary base in case of inflation).
Gold is actually useful for some things, like filling teeth and making pretty jewelry; that’s not most of its value, but it does provide a tether to reality, along with a 5000-year history.
Cryptocurrencies have none of that. If people come to believe that Bitcoin is worthless, well, it’s worthless.”
As Venezuelans well know, the government can take their worthless paper money for payment in taxes all it wants, it is still worthless.
While that last quoted sentence above amounts to nothing less than saying: if the sun doesn’t rise tomorrow, well, it doesn’t. Or as Italians say perhaps more vulgarly: if my aunt had… then she’d be my uncle.
Point being belief doesn’t arise from nothing, and doesn’t just vanish to nothing, when it comes to what powers the entire global trading, money.
Where money is concern belief arises not from some government, but from its qualities of means of exchange, store of value, and unit of account.
Even Krugman, we’d suspect, would say public blockchain based digital currencies are an excellent means of exchange. They are as good as instant, they are global, they are very cheap (for those that can scale like Bitcoin Cash or Ethereum), and they can act like cash on the internet.
The store of value part does, admittedly, need a bit of work, but that is because they do not really act like a unit of account (acceptance) yet. Those two, however, should follow the first, because it can be argued it is not the FED that keeps the dollar stable – the opposite – but the fact that it is so globally accepted and used.
However the left leaning economist, who favors endless debt, does seem to have shifted quite considerably from his previous tirades on bitcoin specifically.
The reason for such apparent shift is unclear, but perhaps something within the growing innovation in this space piqued his interest. Or perhaps the old man realizes just how wrong he was previously on technological advancements, and just how wrong he could be once again.