If I want to buy gold, I have to use a recognized, acceptable currency. I can also pay for goods and services with most recognized currencies. I have seen few enterprises agreeing to take Bitcoins or other cryptocurrencies. In fact, getting rich in most instances still means holding U.S. dollars not cryptocurrencies. I admit I regret not taking a risk when Bitcoins might have been valued at pennies, but then again I don't think I would sleep very well if I got rich cashing in on someone else's foolishness.
11
Finally! A thoughtful, well-reasoned and compelling column by Paul Krugman. Never thought the day would come.
8
There is a simple solution.
http://www.businessinsider.com/stiglitz-calls-for-regulating-bitcoin-whi...
2
A fool and his money are soon parted. Tusser
6
Krugman, get back to business. I expect your best work to be applied to the SOTU. No side trips please. The Big Jerk must not get away with his bragging on the economy.
5
When BITCOM millionaires can cash out their chips for US dollars, then they will be millionaires. Until then, they are paper millionaires. If it makes them feel good when they shut their eyes at night, good for them,, but they won't help buy them breakfast in the morning so the only real Bitcom millionaires are those who took the Bitcom buyers US dollars at the point of original sale... Come on sucker! At least tulips looked beautiful and yes, you can still buy them.
2
Why aren't the US Justice Department and the attorneys general of the 50 states going after bitcoin to shut it down?
Why hasn't Congress passed a bill to outlaw the use of bitcoin?
Why aren't international organizations doing the same?
It boggles the mind that a colossal bubble and scam such as bitcoin can be happening with no apparent attempt on the part of any government anywhere to kill it.
6
Will we see a column on MMT from Krugman soon?
1
PT Barnam was right, Ponzi was right, there is a sucker born every minute.
6
It should be renamed KleptoCurrency.
6
The correct word should be "kleptocurrency".
3
It is stated that there is no intrinsic value to Bitcoin like gold. You can wear gold, and gold goes in electronics. Bitcoin does have value as a value store, like gold, that can be transmitted around the world quickly. You can't do that with gold. I can't send 1,000 USD worth of gold to a relative in Bolivia in 16 minutes. Western Union charges massive for this and it takes a long time, and you pay for the conversion fees.
Just like most tech, what Bitcoin is worth is up to adoption. If you have a flip phone what's it worth? If you are the only person with one, it is worthless. Give 2 people flip phones they can call each other. The value has gone up. 10 people with flip phones, now the value has gone up again. Bitcoin is the same way. The more people using it, the higher the value. That's why pricing it is so hard.
11
$100 bills aren’t much use for ordinary transactions: Most shops won’t accept them.
Uhhh, right. I'm not sure what world he's living in. And gold is not the right analogy either but at least closer than $100 bills.
"Like Bitcoins, $100 bills aren’t much use for ordinary transactions: Most shops won’t accept them. But “Benjamins” are popular with thieves, drug dealers and tax evaders"
...and weddings.
4
I'm not a financial wizard, but the first time I read about Bitcoin, I was sure it was an unstable risk. How can you research and verify, something that you can't really verify? That's where con men flourish. There was a guy in high school who told everyone if you baked banana peels in the oven, you could eat it and get high. That was the last time I believed a con.
5
Thank you, thank you , Paul. I have been reading about Bitcoin lately and scratching my head about potential usefulness. I just didn't understand any of it. You've explained it beautifully.
3
Whatever happens, you gotta give the cryptographic gang of buccaneers credit for making a run at the sovereigns and their chest of booty, win or lose. Arrrr.
2
Please stop letting people discuss things if they've done no research into it or even considered a counter-argument. People who are actually interested in Blockchain know that it's value (like Facebook's, which also had no institutional backing) lies in the network and Bitcoin is only ONE of thousands of examples of blockchain's possible implementations. Please require your opinion writers to research before they are allowed to spew this cranky Luddite smarm.
20
This opinion piece is so full of falsehoods and half-truths, it's challenging to pick a point to start. How about this one:
"private hackers, who have stolen a remarkably high proportion of extant cryptocurrency tokens"
that phrase links to a theft of $530 million USD, of a tertiary currency called NEM. The entire crypto market is currently valued at $530 *billion*. Which puts that theft at 1/10th of one percent of 'extant crypto coins'. How is that a 'remarkably high proportion'? A decent heist, true. But nothing to even put a dent in the broader markets.
Second, if I see one more comparison to the Dutch Tulip craze, really? That was a geographically localized phenomenon, which, while impressive, happened almost 400 years ago and had absolutely nothing to do with the broader global economy.
Cryptocurrencies are a truly global, trans-national phenomenon that collectively constitute close to 1% of M1, the total global money supply. That's significant. That's not going away. Crypto is a global force that is here to stay. That's why every major financial institution on the planet, and many governments, have their own blockchain incubator projects.
I hope that readers take the time to research these topics and make up their own minds. For whatever happens to BitCoin, one thing is a certainty: Cryptocurrency is the absolute future of Money.
19
I agree Bitcoin is in a bubble, but it's worth drawing a distinction between it and Blockchain, the revolutionary technology underneath it. Many experts to consider Blockchain to be as potentially transformative as the Internet itself over the coming decades. See for example in the Times a few weeks ago:
https://www.nytimes.com/2018/01/16/magazine/beyond-the-bitcoin-bubble.html
And in the Harvard Business Review:
https://hbr.org/2017/01/the-truth-about-blockchain
If they are correct Blockchain is the "next Internet", Bitcoin is the next Pets.com.
10
Yes, ordinary currencies are under a nation-state's control. But that also means they are under that nation-state's protection. The USA has an enormous law enforcement apparatus to detect and punish counterfeiting. Do cryptocurrencies? When they are stolen by hackers, who do you go to for help?
Those who are so convinced that the days of nation-states are ending would be wiser to invest in guns than Bitcoins, for if the state fails so does its protection over private property, including the fiber optic lines and cell towers upon which the internet depends. Oh, and its protection over your ultimate private property, too -- your body. So be careful what you wish for, libertarians -- you might get it and it might be much nastier than you can imagine. States don't just provide currency, they provide law and order, too. Come up with a blockchain solution for that and we'll talk.
15
One thing that people don't really consider with the legal and economic joke that is Bitcoin is that Distributed Ledger technology can be used to hold and transact things other than worthless made-up pieces of crypto-currency.
Is there any reason that you could not hold and trade a share of General Motors or a bearer bond or a mortgage or a private equity interest through a distributed ledger? And once people start doing that, tell me what the use of a broker-dealer or even a bank would be.
5
Now that Donald Trump is U.S. President will the U.S. experience another Great Depression brought on by his lack of diplomacy? It is said the Federal Reserve is why we had the Great Depression. Also, it is said that the downfall of President Richard Nixon was Watergate investigation by Bob Woodward and Carl Bernstein of The Washington Post. Now with Robert Muller as special council for the investigation into the 2016 Presidential Election in the U.S. and Russia. Not only is it time to hold those responsible for the late 2007 Great Recession it is time to say if we went to war in Iraq in 2003 with President G. W. Bush and then with the uncertainty of what would happen once President Barack Obama became U.S. President then why can't we all agree that Wall Street vs Main Street is the same as President Donald Trump vs the Economy for better or for worse? How did his last name Trump let alone his first name Donald originate? If he can question someone's ethnicity and birth certificate then why hasn't anyone questioned his ties to America's currency with his real estate and casinos and hotels all over the world?
Actually today happened something very promising.
Amazon, Berkshire Hathaway and JPMorgan Team Up to Disrupt Health Care. In essence they are developing Single Payer Non-for Profit Health Care for their companies, which in turn can become the model for the whole country. If that happen it would be amazing progress since we've been trailing far behind in comparison to other developed countries. Let's just hope that sanity will prevail in this rich country where we can't afford quality health insurance. The stocks of insurance companies are down today, on this news. Great!!!
The insurance industry should stop profiteering on human health.
5
"The process can go on for years before something — a reality check, or simply exhaustion of the pool of potential marks — brings the party to a sudden, painful end."
If this article was not about bitcoins, one may have taken the above statement as a commentary on the fate of US dollar. Save the fact that the "players" are different, I do not see much difference between the "bitcoin generators" and "dollar printers". Like the "bitcoin generators", the Feds print as much money as they wish whenever they deem necessary. If it is simply a matter of trust, as the article implies, history has shown that cooked players can be found everywhere.
Stating that the Federal Reserve "reduce the outstanding supply of dollars if inflation runs too high, increase that supply to prevent deflation" does not give confidence to the skeptics. Indeed that is just another way of saying that the Feds could put out trillions of dollars for purely political reasons (such tax-cuts for Mr. Trump's donors) and, then, when things start going wrong they will try to fix the problem by manipulating the money supply.
But exercising such controls (including interest rate) are not free. They come at the price of hurting many people. Of course, you can rest assure that those who are hurt are not Mr. Trump's donors; but those who are already in difficult financial situation.
2
BitCoin is highly volatile. Agreed. Buyer beware. But you haven’t done your homework. BitCoin enables peer-to-peer, secure financial transactions between individuals. This has simply never existed before. You can pass over this fact blithely, sure. But this is profoundly democratizing for finance, money and economics –and this is what fuels the enthusiasm of many developers and users of BitCoin and other crypto-currencies, alt-coins, and smart-contract protocols. Sure, criminals revel in their new power too – cryptographic enthusiasts need to come to terms with this, and it should temper their enthusiasm. But is the future one where we shift more of our trust towards the individual or towards 3rd party financial institutions? Your call on that one. I’d love to see what the Founding Fathers would say. As for me, I believe its a blend -a very American blend- to empower individual citizens as a 1st principle, and build institutions that protect citizens’ basic autonomy as a 2nd principle, not the other way around. And if you think that this is placing a political frame on a speculative craze, I return to my first point: the power to exchange value securely, without a third-party intermediary like a bank involved, has simply never existed before. And what is more political than individual autonomy, and the ability to form networks of equals and engage in commerce together? Don’t invest now if you want stability, but don’t miss the changes coming.
5
I am surprised that Krugman is missing the whole point about Bitcoin: the power to people. He is right that it might collapse, but only because governmental actions. The argument that nothing is backing it up does not differentiate it from regular currency like the dollar. Krigman states that the US government backs it up. puh! A few years ago, I cannot remember exactly when, the dollar went from a pretty stable 6kr/$ to 11kr/$ in a little more than a year, just to collapse to 4,82 a couple of years later. What kind of stability did the US government guarantee then. And todau is 15% lower against the Euro than a year ago. Stability? The fact is that the Bitcoin is as much a balloon as the US $ until the government takes legal actions against it.
3
So, if corporations are people, why aren't they taxed like people.
3
Bitcoin fans, explain me something: don't you still have to pay with physical currency to buy one?
I think the problem here is that it's called a *currency*. Which it's not by most reasonable definitions.
I think of bitcoin as one of those semi-shady securities, tied to reality in a way by some kind of service somebody surely provides (convenient ransom payments? Something...), but essentially buoyed by a combination of trust (in cryptography, I guess?) and greed, and by the proverbial giant pile of money always looking for the next thing to not miss out on.
In that way, it's not unlike those inventive derivatives, is it. If you'll excuse me, I need to go buy some Swiss Francs to put under my mattress.
anyone who compares bitcoin to the tulip bubble has absolutely no clue what they are talking about, and zero understanding of how bitcoin works or why its revolutionary. bitcoin solved multiple computer science problems and decentralized currency - that means no banks, no central reserve, no state control - it is anarchism in money form. no wonder why theres one idiotic hit piece after another from the establishment, who's hold on power is extremely threatened by blockchain technology and bitcoin itself.
as for investing in any new technology (or company for that matter), do your research thoroughly, and treat it like vegas - only spend what you can afford to lose.
6
So Bitcoin is not Trump's fault? I don't believe it Mr. Krugman!
Paul, your barber should not put *all* his money in Bitcoin but he should definitely put *some* of his money in Bitcoin - an amount he could afford to lose. Everyone should have an appropriately small amount allocated to speculation. It could be your ticket to financial freedom. With the kind of returns seen in Bitcoin, it would be criminal *not* to put even $100 in Bitcoin. That is my opinion.
2
I don't understand Bitcoins and perhaps never will. If they cannot be converted to hard currency, how did those who bought Bitcoins early make huge amounts of money? Who are the suckers who gave them hard currncy in exchange for cryptocrap? You don't have to be a genius to know that if a currency you own cannot be exchanged into other currencies, cannot be used to purchase goods or services you need -- the most telling line being "...even Bitcoin conferences sometimes refuse to accept Bitcoins from attendees", or cannot be saved or invested, it's worthless. Dutch tulips, anyone?
An excellent reality check for cryptocurrency advocates. The same attribute that makes these pseudo currencies popular represent its fatal flaw. There is no governmental agency that accepts responsibility for its redemption, and now that we see some Wall Street interest in cryptocurrency, there is the added possibility of manipulation for financial advantage (not that Wall Street would ever do that). Cryptocurrencies are a clever construct that are only worth the aggregate value decided by willing buyers. When you buy a stock or bond it is backed by some tangible asset, not so with cryptocurrencies. Tulips are beautiful but transient.
3
Every time we by something that transaction goes through a bank. We may cash our paycheck at the bank, use the banks ATM or use a bank credit card. Similarly whoever sells what we've just bought has the same interactions with a bank.
And at ever point in that flow of 'money' the banks charge fees. The bank also has a monopoly on managing these 'transactions' and so makes billions, as Krugman points out, with a few computer key strokes.
The theory behind these crypto currencies is that people can buy and sell and bypass the banks and thereby avoid those fees. After all, what does it really cost for a bank to give you your money from an ATM? Certainly not the $3.00 that some of them charge.
The key to the crypto currency field are the international players who often must convert a national currency to either euros or dollars and in the process pay huge fees, billions by some calculations. In theory bitcoin would allow these players to navigate these transactions without paying these fees.
And this is why bitcoin is a bubble (based on its potential) and also why the banks at the end of the day will never allow it to fulfill its promise.
5
That was true at one time but Bitcoin's high transaction fees are now becoming a problem that many people are trying to solve. Several new ideas and also different cryptocurrencies are being created with different systems to lower transaction fees.
3
Excellent
The globe’s first non-sovereign fiat currency
Well, why not ?
Reminds me of what Art Linkletter said he learned from his hula hula hoop investment, “The first guy in makes the most money, and the first guy out gets to keep it.”
4
'Fiat' means 'by decree'; as in the government decrees 'X' to be money.
No government has decreed Bitcoin to be money. Bitcoin's value is determined by market participants voluntarily exchanging their dollars for bitcoin.
1
Ralph Kramden and Ed Norton, infomercial for Bitcoin, "Currency of The Future!":
[Scene: an iPhone counter display c. 2023 with our heroes sweating in mesh tank tops and pith helmets amid record high temperatures]
Ed (tendering to cashier Ralph a saucer-sized token with a large bite cut out): Can Bitcoin score a Apple?
Ralph (snatches coin only to drop it with a loud clink): Ha-HA! Yes, Bitcoin can score a Apple!
[An anachronistic cap-wearing newsboy enters with front-page 72-point headline BITCOIN CRASHES - THOUSANDS INVESTED PLUNGE DRIVERLESS CARS OFF GOLDEN GATE BRIDGE]
Ralph (bug-eyed and purple): Hamanah-hamanah-hamanah ...
4
Mint me some Pot Coin and I might use it...! And a Wimpy Coin for later for which I will gladly pay you Tuesday for a hamburger today...!
4
“It’s a bubble, but it’s also something of a cult, whose initiates are given to paranoid fantasies...” How ironic, that’s exactly how Paul views cryptocurrency. Wouldn’t that make him cult member of the US Fed Reserve? The only paranoia I read is his towards the currency he doesn’t understand. BTC price has dropped, and it has never “popped”. Not sure he knows what a bubble is. No one is forcing people to believe in a future of crypto currency. There’s nothing centralized, unlike the Fed, then which is the cult? There’s no saying what will happen with something unchartered, involvement is the is based on faith, like the word “God”, on the USD. The only truth I see in this blabbing is that editorial wheeling assumptions as fact, is propaganda. This leads to the question of motivation. Is Paul trying to protect others from loosing their money? Or is he just another professional paranoid of being wrong?
6
Great explanation Paul. Thanks.
3
Is the stock market a bubble?
3
Wow, Krugman really disappoints me with this.
The basis of his argument is that Bitcoin is based on nothing and that fiat is based on the US Government's backing. This view has more flaws than a Chinese knockoff Louis Vuitton purse. The blockchain itself is a smart contract that verifies transactions. The coins built on top of it are verifying over 300 million transactions a day from RFID scans to financial transfers.
The system itself makes profit by being useful worldwide meanwhile The US Government's President is threatening nuclear winter on Twitter.
The likelihood of US Government, Banks and Financial institutions crashing the fiat market (which has happened 6 times now) is much higher than Krugman's doomed outcome.
Coins are based on trust and verification. They are being adopted officially in Japan, South Korea, and China. They're not going away any faster than the corrupt and inept government and financial institutions that we have in the United States.
6
Bitcoin is unstoppable.
Either governments will try to prevent people from using it because it proves to be too much competition for their inferior product known as fiat currency or they will use it as a reserve asset to back their currency like they did with gold.
The former scenario will lead to ruin, while the latter will help usher in a new era of global economic freedom and prosperity.
6
The problem here is that most people never did a swift to check how bad and expensive the bank system is. I tried at first with bitcoin and it is impossible to not feel in love with it. Besides that people pays the 3% fees of all purchases with visa without questioning as well.
Very few people have to understand how or why Bitcoin works.
Those individuals who fundamentally understand the essence of money, and which properties make a good money 'good', will lead the way and will have their wealth increase relative to others.
Bitcoin adoption will continue to occur fitfully yet organically, powered by greed and the fear of missing out.
Money ... real money ... either in physical form or in your bank statement is backed by the state. $100 dollars in physical form or in a bank account can buy things because people who accept the money realize that it is currency issued and backed by a real government. Bitcoin is backed by whom? No one. It's essentially made up. It's not issued by any state, instead, some guy (who no one even knows) created a computer program and people "mine" for bitcoins. There is no value in it because there is nothing behind it. One day when enough people wake up to this reality the value will plunge to zero.
4
If only state backing were required to ensure the value of a currency there would be not such thing as hyperinflation. Countless examples, including present day Venezuela, prove that more is needed than only so-called 'government backing'.
If fiat currency is to maintain its purchasing power, it must not be abused by its government and must retain the faith of its users by acting as a responsible steward. This boils down to the government keeping its money supply limited and funding its spending via taxation.
I have no idea how Bitcoin operates and how they come to be "mined".
But the irony Bitcoin stands upon is glaring and needs to be called out.
Everyone, even Bitcoin devotees, all value it in dollars!
5
As pointed out in a NYTimes Magazine piece last weekend, the importance of crypto currencies lies not in the currency itself but in the infra-structure in which they reside. The "block-chain" approach provides the sort of on-line protection that has vanished in the age of FaceBook and Amazon. Someone hacking into the Facebook database can acquire mountains of vital information about 2 billion people in one fell swoop. To manage the same thing on the block-chain platform would require hacking into about a billion different sites. Because information about each individual is stored in a different place. And the only way anyone can access any of that information is if the owner gives it to them.
So, don't put your money into Bitcoin - but put your security into the technology that makes it possible.
7
It is not the blockchain the biggest invention. It is to have a decentralized system that no one is in charge and that can pass trust between two strangers that the transaction will happen. Today all the transactions need a central authority( visa, bank) to verify if is a valid transaction or not. Besides that, no one can change something by their mind in bitcoin. It needs the great majority acceptance to work.
1
Reading the reactions of the pro-Bitcoin crowd is unsettling, to say the least.
One wonders how many of them believe in gravity.
Until one recognizes there are those who think Trump is a genius.
Of the three - Bitcoin, gravity and Trump - only gravity is real.
When reality strikes, it's an earthquake.
3
Bitcoin holders need a steady stream of new "investors."
trump is definitely real... whether or not you like him is a different story.
Recently, I was harangued by someone who claimed to be "a millionaire" through his investments in "Bitcoin"; the trouble was, so he said, that he still couldn't pay his bills. In 17th century Holland, rare tulip bulbs became an investment claim, closely tied to both real estate (the buying of it) and charities (Some of the profits from the sale of them went to support charities.) Other tulip bulbs, on the other hand, represented the pie in the sky to people less able to invest in the rarities, which, ostensibly, had real value. It was the idea of permanence which drove the mania for Tulips, the fact that they would grow and grow and grow, but it was not necessarily the case that the investments would do so. So the toil and trouble was not altogether fraudulent--it was that it was exclusive and this aspect of the times in Holland did tend to make people not only lose money, but also to develop benighted, illusory notions about life and economy. Tulips are lovely! Bitcoins are not lovely.
2
I have a friend who's convinced, and who has spent a lot of money buying Bitcoin. I don't discuss it anymore as the arguments are recursive, closed-loops posted below, and that I've heard from many who were similarly convinced they're onto something regarding silver, (Hunt Bros, today's "tulips") and other such momentary flare-ups.
To each, his or her own risk and reward. Sometimes one walks the high-wire successfully. But if you're gambling with one's family resources, it is not wise business. As Murrow said, "Good night, and good luck".
2
Thank you Paul K This is one of the most helpful columns you have written recently. I am grateful. The "reality" of fiat money versus computer money seems to depend largely on who and how many people (governments included) accept it as payment for goods and services. It is that factor that has me worried since some unfriendly governments could start accepting bitcoins in an effort to undermine the US dollar. There seems to be no way to stop it and as such, attention should be paid.
RW
1
bitcoin reminds me a bit of the "bubble" surrounding arabian horses about 20 years ago. these horses were sold at arabian horse auctions which, it turned out, were "rigged" by "insiders" to inflate the prices paid. and it worked, for awhile. when the auction-rigging scheme was discovered, owners had trouble giving away "$20,000 horses".
of course, to some extent, in view of the run-up in stock prices (their p.e ratios) over the past five-six years, i suspect a similar claim could be made about stock in some (but we don't know which, until we find out) public companies.
when it comes to investing, don't trust anyone. this is partly the result of interest rates being kept so low for so long--people will never stop seeking higher returns, even when it's all a manipulated fiction.
3
I tend to agree, but we probably won't have a handle on the outcome for quite awhile since the core group are buy-and-hold types who have a large amount of BTC and a low investment (a few hundred to a few thousand dollars). Bitcoin won't die until its value is zero for a long time. Meanwhile, there are businesses that are being funded by BTC that may be very successful, thus setting value for the underlying bitcoin.
1
"Bitcoins have no intrinsic value" Nothing has any intrinsic value. Specific artifacts may have use values. Value is something we add, culturally, to those things we value. Money of every kind is a symbol of what we will do for others in exchange for that symbol. In the case at hand, the US govt will not take Bitcoins for tax payment, and will only take US dollars. And the US govt works closely to 1) prevent counterfiting and 2) regulate the amount of currency in circulation. At the moment, the US govt is the institution in the world in which people have greatest confidence in its continuity, at present even with the most stable genius the world has ever seen at the helm. Tonight we find out where that vessel is headed.
4
While I agree with his Bitcoin arguments I don't agree that most shops don't accept $100 bills. Every couple weeks I stop at the bank and get 10 one hundred dollar bills. No one has ever refused one. In fact my electrician and plumber and other tradesmen seem to prefer the hundreds. I only pay in cash for local purchases. I give up all the 1% or more kickbacks but I keep my privacy and when all the accounts at Target are again compromised, mine won't be among them.
3
Yes, that was the one off-note in Mr. Krugman's piece. But it can probably be chalked up to "hasn't shopped in person in many years" syndrome once demonstrated by George H. W. Bush's supermarket campaign stop where he was amazed by bar code scanners and had no idea of what a gallon of milk cost.
Twenty years ago, maybe, a lot of stores would not take 100s. But with inflation, most clerks take the bills without complaint or close scrutiny.
1
Two points/questions:
(1) Krugman argues that Bitcoins are not a wise investment, but he does not argue that they cannot be a legitimate trading currency. As such, they have to have some value. So what should that value be?
(2) Supposedly, the value of Bitcoins won't be diluted by the introduction of more Bitcoins, because there is an upper limit to how many can be "mined". But why can't the introduction of other alternative cryptocurrencies devalue the Bitcoin?
The scary thing about bubbles is that when they collapse the can blow down real structure too.
5
It's unicorn gold sprinkled with pixie dust. Have at it Peter P.
1
Another journalist trying to to argue against Bitcoin without doing much research...
6
Holy cow, OMG, a Krugman column that does not mention President Trump. How refreshing.
1
Cryptocurrencies are useful for one thing: to check that there are still a lot of crooks, delinquents, and fools; another version of "dreamers"... dreaming of becoming multimillionaire with no effort....
1
Paul Krugman and Larry Eisenberg have it right. Buy some tasty garlic, string it around your neck and let it ward off the Bitcoin contagion.
2
Sounds more like a religious cult.
Belief keeps it alive.
And with enough doubt, it dies.
1
A scam is a scam is a scam.
In which Friedman completely misunderstands Bitcoin's value by thinking it is currency.
“So you’re saying there’s a chance...”
1
Don’t you think many of the early investors in bitcoin are fully aware that it’s a Ponzi scheme? These people see this as a game to win or lose and they will be the clever survivors who will cash out before the last people, the suckers needed for it all to work, are stuck holding the bag of worthless currency.
1
What's that Old Adage about a fool and his money ?
2
Should your barber buy bitcoin? Yes, if he's interested in it and does his own research.
Paul, your articles on this subject are misleading. What is bitcoin good for? You give one reference that aligns to a poor alternative to cash. Then you talk about sex. Dude, stop talking about sex. Hearing you talk about sex makes me cringe. It's gross. Talk about economics. That's what you are "supposed" to be good at. Back to bitcoin. You fail to mention all the other things bitcoin is good for. You forget that it is a safe-haven for people in countries with collapsing economies. You forget to mention the brilliant technological developments in smart-contracts. You forget about the corporate alliances formed around crypto-initiatives. Lastly, you fail to mention that blockchain is the biggest breakthrough in secure data storage...ever. You just mention sex. Which is like me describing you and just mentioning you're like an economist, but pretty much just a raunchy old man.
6
Better he talks about sex, than about Trump. Although something tells he he has hang-ups with either subject.
"Its (a dollalr's) purchasing power is also stabilized by the Federal Reserve, which will reduce the outstanding supply of dollars if inflation runs too high, increase that supply to prevent deflation."
This is at best misleading; at worst, plain wrong. For example, the FED has poured TRILLIONS into the economy since 2008 with very little inflation. The main reason is that the FED cannot get the money to the people who need it and will spend it, is it. It can only get money to banks and hope they will lend it to such people. Of course, they have not. It has sat in the vaults of the banks or been lent to the people who do not need it and have been using it to speculate, see market, stock. Such money not only does not cause inflation, it does not help people.
The way to get money to be useful is to have the FED lend it (without interest) to the Treasury, and have Congress appropriate it for worthwhile purposes, e.g. infrastructure, education, research, etc., etc., etc. But Congress is full of idiots who do not know where money comes from, and in particular, don't appear to realize the FED can create as much as we need out of thin air.
But wait, you say. Won't that then cause excessive inflation? Could be, if the money is not properly spent, but remember that while prices are proportional to the amount of useful money in the economy. they are also INVERSELY proportional to the amount of stuff we can produce. So if the money is used to increase the GDP, all will be O.K.
6
False premises based on history. Tulips have nothing to do with the Bitcoin. You should know that. Should I start writing articles for the NYT, Paul?
3
Can I interest you in the Iraqi dinar?
Enron redux.
1
One of the many reasons people and even banks go into Bitcoin bubble is the reality of an unjust, unsustainable and, therefore, unstable international monetary system. There seem to be three routes to respond to such socially and ecologically deplorable situation, the last one of which needs far more attention, study and discussion.
Find refuge and make money with crypto currencies and engage in FOMO—fear of missing out.
Advocate for the expansion of SDR’s so that such basket of major currencies can give monetary guidance rather than being subject to the fluctuations of a domestic currency such as the U.S. dollar.
Transform this deplorable international monetary system by basing it on the carbon monetary standard of a specific tonnage of CO2e per person. The conceptual, institutional, ethical and strategic dimensions of this third route are presented in Verhagen 2012 "The Tierra Solution: Resolving the climate crisis through monetary transformation" and updated at www.timun.net. One of the world’s outstanding global warming scholars/activists states: “The further into the global warming area we go, the more physics and politics narrows our possible paths of action. Here’s a very cogent and well-argued account of one of the remaining possibilities.” Bill McKibben, May 17, 2011
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I hope that you will keep track of the hate mail that you receive about this column & report back to your loyal readers.
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Can I buy a house with bitcoin, or a car, or use it at Walmart or McDonalds or ...?
If not, what kind of "currency" is it?
Instead, at least until you can start using it to actually buy something worthwile, it's simply an "investment." But unlike most investments (like investing in the stock or the issued debt of GM or Walmart or McDonalds or ...), bitcoin makes nothing and provides nothing other than proof that there's a bunch of idiots who think real sellers selling rel stuff may eventually accept as a "currency" something that can lose 10-20-30% of its value in a few days.
Not likely.
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"Not Likely" says J. Cornelio who did no research on the subject.
You can buy homes with Bitcoin:
http://time.com/money/5055888/real-estate-bitcoin/
This comment section on this particular topic seems more like the comment section on a youtube video about Anonymous or the "Illunimati". Lots of paranoia. I guess that's where we live now.
OMG! An article by Paul Krugman that I actually agree with
And don't forget the insane amount of electricity used and greenhouse gases generated to join in this Ponzi scheme:
https://www.nytimes.com/2018/01/21/technology/bitcoin-mining-energy-cons...
To borrow a phrase from a Berkeley prof, this is "spherically stupid" -- a bad idea from any perspective.
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Tell your barber to buy $NEO. Thank me later.
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Fascinating! Thank you. Two thoughts:
(1) In the movie, "Lincoln," the President is endeavoring to bribe someone. Laboring to pass the anti-slavery amendment in Congress.
But this was in the bad old days. Money was GOLD. And. . . ..
. . .the bribe is paid. And gold is heavy. Bulky. The bag (or whatever) broke. Gold coins go chinking and clattering all over the place--as amused Congressmen look up. H-m-m-m-m! Some chicanery going on here!
Well, all's well that ends well. The amendment passed.
Pope (a century earlier) tells the same story. Some courtier--of unimpeachable reputation--was closeted with King William III. He emerges from the room. Various other politicos--hacks and crooks to a man--look up as he makes his way out.
AND THE BAG BREAKS! Once more--gold coins chinking and clattering all over the place. Telling all these assembled crooks and politicos:
"Old Cato is as great a rogue as you." Which leads to something else:
(2) Also from Pope. Paper money--checks and all that--are coming into common use. His poet's imagination was starstruck by the possibilities. Pieces of paper! Which are, at the same time--MONEY. Amazing:
"Pregnant with millions flits the scrap unseen
And silent sells a king--or buys a queen."
But BITCOINS, Mr. Krugman. Wheels within wheels! Chicanery underlying chicanery. Money made for the shadows--the dark places. And nowhere else!
Yes. The sooner it ends--the better.
But what a story.
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Black money for the black market.
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Krugman is exactly right and I would add but one thought. A useful currency scheme would not create a fixed number of currency units but a number that increases at the rate of growth of the world economy. Otherwise, the scheme builds in deflation.
Thanks Paul, for your pithy explanation of how Bitcoin is a scam! In your next article, could you explain how the Federal Reserve is a scam? That would be just dandy!
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Anyone who would espouse and use a secret currency to avoid detection and maintain anonymity must be a nonconformist who doesn't know how to benefit from being a part of the social team in society. Try telling a Bank you have millions in Bitcoin to secure financing. Ya Gotta be init to winit.
i guess im a nonconformist when i use cash too. *eyeroll*
Krugman probably owns more Bitcoin than you and just wants you to miss out.
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An anonymous thief can steal your Bitcoins and you would have no recourse.
so if a neologism were to come from the TRUMPFED, that would be a "shitcoin". fitting!
Paul, when you say arguments like the cryptocoin is used by black market stuff and therefore shouldn't be used it shows that you don't have arguments because this is true to dollar two.
Please enlighten yourself with information with Andreas.
https://www.kevinrose.com/single-post/andreas-antonopolous
Barber? That's an old story from the 1929 crash. A speculator knew it was time to get out when he got a tip from his barber. Or maybe it was a shoeshine boy. Are we borrowing, Mr. Krugman?
To those saying Bitcoin is a bubble because it has no intrinsic value, one word: gold. Explain how gold is any different. Is it because it’s a physical object with actual real world scarcity as opposed to virtually created scarcity? You may want to sit down for this, but the number of things you rely on in your life that are wholly digital & could be erased (unlike the blockchain’s distributed ledger, which keeps a permanent record) are many. If your bias is against something non-physical that stores value, I might remind you that it’s 2018.
Here’s another classic: “it’s not a real currency because I can’t use it to buy anything practically speaking so it must be a fraud.” Yes. Because I went to the store last night and paid for cigarettes with gold shavings. Gold is valuable. Can you use it for daily transactions?
Paper money has been decoupled from gold for years now so it’s not like there’s any real value in your paper money, right? Oh there is? Huh. So it’s possible for a currency to have value if we all just collectively agree that it does? Fascinating! Oh here’s another great argument: it’s not backed by any government so it can’t be real. Ask Zimbabwe how that’s worked out for them. Cant happen here? You haven’t been paying attention. Moreover, gold wasn’t buried in the ground by and enjoy the faith and backing of the government. And still, it has value.
Bitcoin may crash, but it’s because of uninformed pieces like this spreading misleading information.
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Bitcoin is also a great experiment in Gresham’s Law. Bananacoin anyone?
Mr Krugman is biased - "an asset that has no physical existence, " What a good description of US Dollar which has not physical backing for almost 100 years!
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Existence-the fact or state of living or having objective reality.
Backing-Support, uphold or promote.
You conflate two terms which have different meaning.
One of the popular half baked crypto currency myths is that it will be efficient and speed up international funds transfer. This some how improve um trade commerce thingy......hence the eye popping volatility, inflation is um, justified...... but trade is largely based on credit. If I buy a car off you for 1000 Bodge coins which are equal to say $1000 at the time, but when i am due to pay you in say 90 or 180 or 300 days, and my Bodge coin is now worth say $3000.....aim I going to pay you..... dream on.... the volatility of Bodge coin makes it basically useless for commerce, besides all the other problems.
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Wait a minute.
Hold on there, Nellie.
Paul has a barber? Who knew?
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Once the word libertarian was mentioned I realized this is a scam. My state, Utah, is full of constitutional libertarians - you can take them please!
At least with the Dutch tulips, you could plant them and get flowers.
What Man & Machine can encrypt, Man & Machine can decrypt.
Blockchains, etc. were supposedly invented by some one or some group known as Satoshi Nakamoto.
Trust your money to Satoshi? No thanks, at least Bernie was a real person.
Gosh yeah Paul.... I would NEVER put my money in something that is only made up of ones and zeros. That would be crazy!! Just like, I would never invest in a company that just rights code that runs the inside of a computer? That's crazy talk right. I mean they are not really making anything real right? Sure glad I was not around in 1975 to buy Microsoft. Thanks for the tip. Good thing I went with the smart money back then... I love my Betamax. Let me know if you are free this weekend to watch "Heavens Gate"!! Big fan?
Can you say: "musical chairs"?
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Alan Brownjohn wrote a poem 'For a Journey' but of course it's about more than journeys. It's about what happens when you find yourself in an alternative universe. When you lose touch with integrity and decency.
House Field, Top Field, Oak Field, Third Field:
Though maps conclude their duties, the names trek on
Unseen across every county. Farmers call hillocks
And ponds and streams and lanes and rocks
By the first words to hand; a heavy, whittled-down
Simplicity meets the need, enough to help say
Where has yielded best, or the way they walked from home.
You can travel safely over land so named-
Where there is nowhere that could not be somewhere
Be found in a memory which knows and loves.
So watch then, all the more carefully, for
The point where the pattern ends: where the mountains, even,
And the swamps and forests and gaping bays acquire
The air of not needing ever to be spoken of.
Who knows what could become of you where
No one has understood the place with names?
. . . . .
Robert Lindsay Gordon would have understood. He wrote:
Life is full of froth and bubble
Two things stand like stone
Kindness in another's trouble and
Courage in your own.
I like having my feet on the ground. It's humble but real.
Journey with courage and kindness,
Peter Rennie
Any, I repeat any, bank can be potentially hacked. NSA, DOD, Equifax have been hacked. The Bitcoin blockchain has never, I repeat never, been hacked. It is protected by such vast amount of mining power that no single country, not even the US, could engeneer a "51% attack" on it.
So, Krugman, don't make the same mistake many "asset experts" do. Just because you are not able to value an asset, that does not mean the asset has no value. Ignorance does equate valuelessness.
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In my years living in New York, I had another name for one hundred dollar bills; “New York twenties”.
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I am reminded of the possibly apocryphal but still relevant story of how Joe Kennedy, after having received unsolicited stock investment advice from a shoeshine boy, promptly exited the stock market ... days before the crash of '29.
Has the fever finally broken for Krugman? After all, this is the only column he has written in the past year--concerning economics. No disparaging comments about our president? Has he finally been cured of Trump Derangement Syndrome? Has the abject hatred dissipated? Unlikely.
More likely, he realizes that all of his colums are archived--and that coming here several times a week in an attempt to discredit Trump's economic policies, is like trying to put out a forest fire with a glass of water.
The American economy is roaring back to life. People who are paying attention can feel it--it's palpable--and the numbers back it up. And as much as Progressives like Krugman chaff against giving an ounce of credit to Trump--to some degree, he has to know--it's Trump.
It's not a continuation of Obama's policies. By reducing the burden of taxes and regulations and adopting a pro-business attitude, American business is confident again. The boot-heel of of government is lifted. Gone are the days when a president would insultingly lecture--"You did not build that". Trump gets it. WE DID BUILD IT.
Somehow, Krugman must realize.....rooting against the U.S. economy is a fool's game--like yelling into a a tornado. Maybe he'll start writing more scholarly columns about Bitcoin--instead of his usual anti-Trump diatribes--which look more misguided with each passing day.
Yeah, sure. Good one! I'm just amusing myself. Trump Derangement Syndrome continues Thursday!
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Krugman finally said something sensible.
He should stick to economics, which he knows something about.
Thank you, Paul. I'm sorry, Libertarians. I cannot buy into the conspiracy of Nation States. Sure, they do stupid things, but at least I know where my checking account balance is.
One point Professor.... blockchains are in fact traceable, so if you, dear reader, used it to buy illegal substances on Tor, your behind is hanging out the window for the authorities to see.
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yes and no. bitcoin is traceable - others such as monero is not traceable.
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I have yet to find the answer to one question. How does on e find a buyer in order to liquidate to dollars? Is there a secondary market I don't know about?
I've been waiting for this column. Thank you.
Bitcoin. Blockchain. Computer mining, wasting energy.
Commenters writing, "Dr. Krugman doesn't understand it. It's really safe." [read: 'TRUST ME.']
Barbers chattering about it.
Shades of Joseph Kennedy liquidating his equity positions when his shoeshine boy gave him a stock tip in 1929.
Seems like the volcano is smoking and the ground is trembling, and a very large crater is about to be created, evaporating a lot of people's money.
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considering that in the past 10 years not a single person has broken into the blockchain itself, id say that it is very safe (in terms of theft). the thefts you hear of are thefts on exchanges (which are currently a wild west), not theft of the blochcain itself. that would be the largest and most technical heist in history...
Tulip bulb dumpster fire.
Great article. Well said.
I am still waiting for the "Wimpy Coin" to take off, introduced by the master of burger futures, J. Wellington Wimpy.
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In the age of people easily buying into phony money it's easy to understand them also buying into a phony president.
This outstanding article, published recently in the NYT, went well beyond the low-hanging tulip tropes and offered some great insight into the subject of cryptocurrencies and what they may mean for the future:
https://www.nytimes.com/2018/01/16/magazine/beyond-the-bitcoin-bubble.html
Not surprisingly, the article was not written by Paul Krugman. Perhaps he'd have something interesting to offer if he actually understood the subject! Then again, probably not.
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Mr. Krugman, like Mao Tse-Tung in China, you are at least 90% right, but no more than that. I subscribe at least 90% of what you wrote, but that's all.
You see, Bitcoin HAS fundamentals, and it's fundamentals are the computer capacity of the Bitcoin network (!). We do not know how to value something that follows Moore's law of exponential decay of costs, but that value exists, nonetheless.
When it comes to computer power, the real name of the game is not BTC or any other crypto-currency. The name of the game is videogames, and the simple fact is that any off-the-shelf computer nowadays has a GPU 4 or 5 times as powerfull as the CPU itself; if we go into dedicated graphical hardware, the computer power of GPU's can shoot up to tens of times that of today's CPU's.
But then comes one aspect that you didn't mention and makes you well above 90% right --- like Chairman Mao? --- in that GPU's generate as much heat (per unit area) as an electrical stove, and that heat must be dissipated... Bitcoin ASICS are dedicated computers that consume a few tens of W per hour, but the ventilation devices required to dissipate that heat sum up to around 1500 W per hour. And that is because the basic physical problem simply does not have a good macroscopic solution. The problem can be reduced but not solved by macroscopic means: you cannot cheat on Lady Physics!
Add the borderline illiterate and computer challenged to the carriers of $100 bills. I know one.
The $100 bill analogy is not a good one. My bank ATM now provides $100s as the default. No shop in my area so much as blinks when I pay with $100s. Every self-checkout machine I've used recently takes them. For those of us who still use cash, It's simply easier to pay for the groceries with a couple of hundreds than with a wad of twenties.
This is just the flip side of what our sensible northern neighbor has done. Along with widespread acceptance of $100s, we ought to follow Canada's lead and get rid of the penny and the $1 bill.
"Power to The People!" Wow! No more government control!
Meaning: (1) Trusting that sophisticated hackers won't be able to crack the Bitcoin and loot/manipulate it; (2) Trust the firm support of the herd mentality and hot air; and (3) "Assets" created by mining/solving puzzles. As it is pointed out: "There a sucker born every minute."
1) people have had 10 years to hack the blockchain for one of the biggest bounties on earth (whatever today's market cap is) and still have yet to succeed
2) ???
3) you clearly lack any understanding whatsoever in computing. bitcoin and the blockchain have solved one of the biggest problems in both computer science and in currency - how do you ensure something is not counterfeit? how do you ensure someone doesnt spend the same $1 twice? and how do you do that without a centralized authority? the blockchain solved counterfeiting and double spend. bitcoin solved the centralized authority - by having a decentralized network (anyone with a decent computer can mine, but not at a commercial level without seriously expensive equipment) and rewarding "miners" with a % in fees in bitcoin. the miners protect and store the data by solving said puzzles.
there might be a sucker born every minute but it seems like theres an arrogant ignorant fool who thinks they know all born every second, judging by krugman and his cheerleaders in the comments. the sheer lack of understanding of the technology and then the unsubstantiated opinions is really something else.
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Did you ever see a stampede ?
The same thing happens with people, after the Oligarch's shoot off the "Sell" pistol.
Those Oligarch's have already gotten out.
After the financial carnage, (they have swept all your money into their bag), they reset the game then start all over again.
At every casino, they make sure everyone hears the bells and see's the lights flashing when someone hits the jackpot.
Sound familiar?
If you think it is too good to be true, you're probably right. But, as P.T. Barnum said.....
They should close the comments right where they are now, at 420. It seems appropriate.
Have to say, y'all are earning your establishment cred today. That said, not everyone can be a Winklevoss.
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What Krugman forgot to mention is that the number of actual transactions being performed with bitcoin is negligible, and is not growing quickly. It's not a good instrument for criminals, because it is in fact *way* more traceable than cash (as everyone learned when the WannaCry perps were unable to cash out their payments). Nor is it secure, as people pretend it to be - there is absolutely no guarantee that the transaction history won't change if the chain just moves to another branch.
It's idiots chasing returns, and shysters taking advantage of them. Everyone involved fully deserves to lose their money.
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Feels like the emperor's new clothes writ large.
This column and comments section should be renamed "If Dinosaurs Could Write They'd Say..."
It's interesting that Mr. Krugman entirely misses the point of why Bitcoin and other Cryptocurrencies were invented in the first place. Wouldn't you think that would belong in a piece like this? Especially since the writer has dealt with many of the same issues it addresses over the last ten years in this very column.
Bitcoin was created after the financial collapse by a possibly, probably pseudonymous programmer going by the name Satoshi Nakamoto. At that point in time, it was clear that, yet again, the banks and government had let the public down. Fractional banking, bad financial instruments, corruption, greed, bailouts and the printing of money via QE, QE2 and QE3 that was soon to value was depriving hundreds of millions of Americans what they rightfully owned - the value of their own money and investments.
Thus a separate financial asset class, apart from the crooked hand of the financial markets and their buddies up on Capitol Hill and in the Fed was created. One that doesn't subscribe to public bailouts of bad behavior on Wall Street or money printing for years on end afterward to stabilize the economy.
It took a while to catch on. But now it has...and younger people who have been left behind by these very same bankers and politicians can clearly see its benefits. Perhaps if Mr. Krugman could learn a few new tricks, he might as well.
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I understand a lot of early buyers lost their access codes, or hard drives where they were stored, and cannot use or retrieve their bitcoins. Seems to me the negatives of this currency out weigh the positives. Plus, I'm never one to join conspiracy theories about evil governments. There is enough evil everywhere to have any faith in his currency. Seems best suited for criminals.
1
There are terms being used interchangably in this article that are not the same thing, and it is really important to understand the differences. Cryptocurrency refers to an asset class of which Bitcoin is just one piece. It is an important piece, but less and less every day. What is important is the technology that all the other pieces share, that Bitcoin brought us, which is the Blockchain. Blockchain technology has far-reaching world-changing possibilities and to say any different is to not understand it. The same way Prof Krugman can point to history for countless examples of bubbles that bitcoin looks similar to, one can also point to history for examples of technologies that arose, were misunderstood and therefore written off, but eventually changed the world. The Internet for example. One example of the way in which blockchain technology combined with cryptocurrencies could change the world is through smart contracts. To write an article about bitcoin today, and not even mention Ethereum, seems like a deliberate oversight to me. Because although it is easy to casually disregard the significance of Bitcoin as a currency, it is not so easy to do the same with Ethereum and all the innovative technologies it is enabling. This is a really complex subject that is easier to disregard than it is to understand. I would encourage anyone and everyone to try though, even if it is just to prove to yourself that it is all nonsense. You may realize it is not.
1
Other recent bubbles:
Bre-X, circa 1998, a Canadian owned gold mine that went from .50 to $200 on the basis of an assay report that turned out to be from a different mine, then to zero. Didn't completely collapse even after the head assay engineer "fell" from a helicopter. At peak mutual funds were forced to own it because of its market cap, all of which of course denied losing money on it.
Pokemon stock, KIDE - went from $7 in March 1999 to 93 1/4 on the day 8 months later when the first movie came out after a 3/2 and a 2/1 split - then dropped to ~ 10. I failed to sell my 2600 shares at the top.
Nasdaq itself in 2000.
Etc. ad infinitum, including the current US markets. Again.
Please note DOW down 300 today for no reason at all, except maybe a collapsing dollar and a soon to collapse bond market.
It’s down because iPhone X sales are lower than expected and news about big corporate money reorganizing health care delivey
The economic ignorance spewed by Mr. Krugman over the past 5 years regarding Bitcoin has enabled thousands of forward thinking people to buy at much lower prices than they would have otherwise been able to. Thank you!
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As we pat ourselves on the back for oh-so-wisely avoiding the Bitcoin bubble, remember that the crash of the tulip mania—like yesterday’s (2007) crash of the real estate bubble—damaged the economy writ large. The prudent will also suffer.
I agree. That worries me.
Krugman is usually my standard for partisan bias.
Why not blame Bitcoins on Trump?
Bitcoin is supposed to be a means of exchange, not an investment vehicle, just as Uber is supposed to be a ride-sharing app, not a taxi company. However, both are being used in ways that they were not designed to be used. Would you expect anything less than fraud?
When my daughter was in her single-digit age range, she, like millions of other children, fell in love with the Beany Babies. With their rather affordable price structure ($5+/-), saying no to my adorable, scholastically cosmic little girl was impossible. But here was the rumor mill coming out of the Beany Babies cult collectors' clubs: these little stuffed critters with the clever names would, one day, become so valuable, that a complete collection could fetch enough as to pay for my daughter's college education. For those of us who knew better, the proper response was, "obese probability of that" happening.
So welcome to the Bitcoin culture. As Dr. PK describes it there is much to fret about if you are a Bitcoin novice "investor." Think of this as getting your portrait taken with a live tiger at your side. Get the photo and get out. The short advice for Bitcoiners would be, taking PK's vast knowledge at face value, get out while you can.
And as PK tells us, con jobs can last years before being exposed. Bernie Madoff lasted for a few decades before his charade collapsed. Donald Trump's charades expose the man who turned countless failures into riches for himself while sacrificing investors and contractors.
The Crash of 1929 was based on wild speculation without investing. We are heading for a new crash because of out-of-control consumer debt resulting in the fraudulent assumptions of a "hot" economy. The Bitcoin is a symptom of this fecklessness, just like the DJIA.
So is Bitcoin a giant bubble that will end in grief? Yes. But it’s a bubble wrapped in techno-mysticism inside a cocoon of libertarian ideology. And there’s something to be learned about the times we live in by peeling away that wrapping.
That just made my day--and written by an economist!
Well, not that I would ever buy such a thing, but thank you for the info. I have been wondering what it was all about and now I see that it is about a delusion that nothing is something.
Thank you Professor Krugman for such an instructive piece. You should write more often about economic themes.
Thank you Paul Krugman! My thoughts exactly.
Now the next question that's been nagging at me: Is there a risk that the inevitable Bitcoin crash will bring down the broader market? Or is the share of wealth invested in it too small to leave much of a dent when libertarian cultist cryptospeculators are wiped out?
Anyone remember Beanie Babies or Pet Rocks? People were gaga for them. Imagine paying $10 for a rock in a nice box. Back when 10 bucks bought 2 movie tickets, popcorn, and maybe cheeseburgers afterwards. What marketing genius.
Art goes into style and plummets right back out again. This sounds a lot like crypto.
The proof is in the faithful quickly coming to complain in the comment section. Dr. K has a Nobel for international commerce. If he does not know how currency works, no one does. Eeesh!
There are now some 1500 cryptocurrencies with a global market capitalization of over half a trillion dollars. That's enough to cause significant collateral damage when the bubble pops. Wall Street causes enough problems with its "creative" financial instruments. We don't need to manufacture bubbles out of pixie dust. And who needs cryptocurrencies, anyway, but money launderers? Make them illegal.
Those people who do not learn from the latest fiasco with bit coin deserve all the pain they get. If something regarding financial gain is too good to be true, it always is.
Paul Krugman either misunderstands or misrepresents Bitcoin. I agree with his conclusion. Bitcoin is a bubble waiting to pop. In the parlance of financial wonks, a massive currency "adjustment" is going to happen eventually. However, the logic getting to that conclusion is, how shall I say this, dumb.
The entire appeal of Bitcoin or any other digital currency is the non-governmental nature of the enterprise. Yes, the big black market headlines do exist but what Bitcoin primarily provides is an extra-governmental means of transferring funds across national boundaries. The corporate financial implications make accounting inversions look like pick up sticks. Global financial flows are preparing to completely circumvent the traditional mechanisms of implementing monetary policy. Paul Krugman, and actually myself as well, might not agree with this course of action but that's what's happening.
Someone smarter than myself once said cryptocurrency advocates are 20% about technology, 20% about ideology, and 100% about getting rich. The coin itself doesn't matter; the money you save from avoiding all governmental oversight does.
The one fatal flaw, as Krugman correctly identifies, is that you still need a market exchange where Bitcoin interacts with the physical world. Unless you eliminate all physical currencies, cryptocurrency is still tied, albeit peripherally, to the existing financial world order. There's going to be a showdown and it won't be pretty.
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"The coin itself doesn't matter; the money you save from avoiding all governmental oversight does."
Problem there is by saving all that money, thus starving governments of funding, you also lose the goods and services governments provide. Little things like roads, education, defense, healthcare, parks, etc.
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Before I’d accept a judgement of “dumb logic” against Prof. Krugman, I’d need validation for the “judge,” and I don’t have it in this case. The judge and the judgment lack appropriate validation, e.g., through information about the judge’s professional credentials (we have that validation for Prof. Krugman). It’s a bit like Bitcoin. Although Bitcoin may enable nefarious transactions ranging from tax evasion to material support for terrorism, up to now it lacks validation of the kind appropriate to a currency. And that validation cannot be conferred by the say-so of some tech guy (or even a million tech guys) sitting at a keyboard somewhere, who knows where.
2
In addition, it not only enables the independence of the individual to circumvent control of his/her transactions by the state, (yay Libertarians! yay Mobsters!) but also circumvention of sanctions by nation-states, and prevents the transparency of who is doing what legally (yay Democracies!). It also prevents collection of taxes on commerce- if taken to its ultimate realization as a currency.
Technically, I think the value is more realized in transaction like photographers who can attach their information in an image, and each subsequent use then becomes pat of the 'ledger' (yay Kodak!) I think that kind of use has more real-world economic promise and empowerment of the individual than replacement as currency that organized crime, North Korea, Russia et.al to get around illegal trade.
Not to mention the obscene amount of power it takes to run. I'll take my stack of Hamiltons ($10) over this nonsense any day.
2
If I were to place a bet, it would be that Bitcoin eventually collapses, as Krugman predicts. But I question his premise that assets like gold have an "intrinsic" value. You can't eat (for sustenance), drink, or breathe gold. It has value only because people believe it does, and desire it. Sounds a lot like crypto-currency to me.
1
Gold does have intrinsic value. It is used in computer and electronic devices as well as aerospace.
1
Gold has real uses, in dentistry, electronics and jewelry.
One thing not mentioned here is that "mining" Bitcoin requires enormous amounts of electricity to run the computers that generate new Bitcoins. Eventually that fact may catch up to the value of the cryptocurrency.
1
I've also read technical discussions about the ever expanding storage and processing power needed to maintain the block chain. Sounds massively inefficient. Will likely collapse under it's own weight.
3
Back in 1998 the same Paul Krugman that wrote this opinion puce stated: "The growth of the Internet will slow drastically, as the flaw in 'Metcalfe's law'–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."
Cryptocurrency is not disappearing any time soon, history will prove Paul wrong again.
4
Krugman was right. The digital revolution unlike the steam engine, combustion engine, and cybernetics (of which it is a part) has run its course. Stagnation is the name
1
You misinterpret that statement. Its impact on the economy isn't that great today as a growth engine. Just like laptops and tablets are not a growth engine. They are important, ubiquitous, but not having an effect to grow the economy.
2
Having read several dozen of the comments, I was obliged to create an account and correct the unfortunate misperception of so many of Mr Krugman's followers, as well their follower.
Bitcoin in and of itself was a simple experiment. Imagine if Henry Ford made a car model when he was a kid. Most people initially would have said it was a stupid idea. Several decades later you could probably count on one hand the iq's of people who would say that.
For people who want to understand a tiny fraction of the potential that comes from distributing wealth according to factors determined by consensus and intelligence, and also the significance of monetizing computing power, research articles on using cryptocurrencies to develop artificial intelligence, articles on math and science coins like gridcoin, and most importantly THINK. You can do it!
The comments seem to be moderated by Mr Krugman himself, or perhaps somebody he pays to deliver compliments, so I doubt this comment will get published, but I tried.
3
Correct me if I am wrong, but isn't money supposed to be a state emittance?... An IOU of sorts that has value as long as the state that issues it has good credit? And of course, the state has the means to extract taxes, and to administer the commons, to see that a country is managed well and thus the state has a good balance sheet, is soluble therefore money has value?? So then, what happened to our basic understanding of what money IS? Don't we have a concept of "fiat money" that crept of us, need we more of these "cryptocurrencies" to creep on us??
2
I don’t believe for one second that your barber asked you if he should invest all his money in bitcoin. Virtually every hack who slams bitcoin in print tells the same barber story. I, on the other hand, have been talking about bitcoin to all sorts of people throughout New England as a topic of conversation while making calls on customers since October and do you know how many people I’ve talked to other than me who have bought bitcoin? Exactly 1. That is not a bubble. Only a tiny fraction of the 7 billion people on earth have any stake in bitcoin. Yet. But by all means keep pumping money into student loans. In 10 years we’ll see which one was a bubble.
In the end, bitcoin’s scarcity(if every millionaire in the world wanted to own just one as a hedge, they wouldn’t be able to), it’s utility(try getting on a plane with $11,000 in cash and flying to the Caribbean), and its status as the original(Uber and Lyft are both Ride sharing companies, but only Uber is a verb now), in my mind are three virtually unstoppable forces that will ensure it will not go away, and will continue to grow. Add in the fact that it is not controlled by any single government or coalition of governments, and in order for governments to regulate it to death they would have to come to a worldwide consensus(hold your breath for that one), and it’s easy to see that bitcoin will be here to stay. Haven’t you guys figured out that no one is fooled by your biased, misleading stories anymore?
3
You can get on a international airplane flight with $11,000 in cash if you report it.
I am a crypto enthuist that thinks its a bubble.
That being said, I think critics of crypto are wrong for the following reasons.
1. Critics say invest in blockchain. I say I agree!. There are many cryptocurrencies that are trying to improve blockchain technology. I do agree you can also invest in blockchain via the stock market, but don't spread the fud that investing in cryptos is never the equivalent of investing in blockchain!
2. People say owning stocks gives you ownership. That only applies to rich people. Most people do not have enough money to have enough shares to actually have a say in how companies are run.
3. People say cryptos have no instric value. They do! A lot of cryptos are trying to help already existing businesses and governments(not the ones that help banks like RIP ple. I believe those cryptocurrencies are the ones that are more likely to suceed. Unfort., most people only know about thee cryptos that are anti-government or are completely focused on being decentralized.
4. People say the dollar is better. Put you money where your mouth is. I dare you to live your whole life without getting out of the dollar and investing in stocks. I dare you.
People say the dollar is better. Put you money where your mouth is. I dare you to live your whole life without getting out of the dollar and investing in stocks. I dare you.
I've done it so far, and I'm nearly 50...
bitcoin, airbnb, lift, uber...... all attempts to rewrite or avoid the rules. all attempts to avoid taxes or fees of one sort or another. all attempts to impoverish the average person in the guise of easy extra money. the fact that they are popular is sign of our sick society.
2
No, the stupid rules are the sign... There is a serious disease when you have to pay $300k for a taxicab medallion so you can offer rides to people in a vehicle that smells like a gym sock, when there are millions of licensed rivers on the road. The payback to society from Uber in terms of less drunk drivers on the road is incalculable. That old school insanity is going, going, gone...
1
The mere fact that you don’t get this new form of stored wealth makes it more desirable to me and other members of the crypto nation. Why does gold have value? Please spare me the lecture on the industrial application of gold in the dental and tech worlds. Crypto currencies have value because they are 1) transportable throughout the world without the need for exchanges or conversions or other middle men 2) difficult for a hostile government to seize 3) limited in number (unlike a government printing press) 4) perfectly trackable (yet anonymous) through the block chain and 5) a new way to think of money as a token that buys you a service or product versus the token paper that is a US dollar (think about Amazon creating its own currency that is accepted by consumers and the makers of products and backed by Amazon). Ask yourself this....can a Tulip bulb do any of these things?
Still don’t get it? That’s OK Paul. You don’t have to. You probably don’t get why anyone would get into a car without a driver.
2
I can tell that Mr. Krugman seldom uses cash. 100's can be used in almost any store I frequent.
The voice of common sense. Thank you.
1
Hmm. The author must not be carrying much cash these days. In my experience, those 'Benjamins' spend quite easily. 100 is the new 20.
1
Bitcoin isn't the bubble.. it's the pin!
3
If cryptocurrencies only functional use is black market transactions, they should be outlawed. Indeed, criminals seem to have benefited hugely from the existence of Bitcoin, using it to collect ransom payments and get around the previously-unsolvable problem of finding an untraceable means of profiting from child pornography online. Government exists for good reason, and it's time for ours to crack down.
3
At last, we agree on something! Nicely done!
I was struck by the similarity of crypto currencies to the stock market. A big gamble no matter how you cut it. And when the bubble bursts, we all suffer.
1
Dr. K, whose economic takes are spot on, offers a perfectly reasonable view if one assumes all of the over 500 cryptocurrencies have nothing that would give them any sort of value. I think he misses here. I'll grant that Dogecoin, a crypto that used to be worth over $1 billion (yes, with a B) and is now worth a mere $.75 billion, fits his valuation model. I've been short it a couple of times already.
But ya gotta know where blockchain fits into the world of the future (it's not found much in the past) to understand some crypto valuations. And Dr. K would probably agree that the US dollar could also see some heavy weather to the degree US full faith and credit is tied to a serially lying president. And that's a currency he thinks is real. This article may help flesh out the whole theme better, and also refers to an article from MIT Sloan School of Management explaining blockchain so that mere mortals can understand what's giong on.
https://medium.com/@dsf333/cryptocurrencies-and-increasing-risks-under-c...
Not so sure about this one Dr K! Crypto-currency is the future and is going to happen! How else can the Bible come true: No one can Buy or Sell without the mark of the Beast? We will have a Chip in our Forehead or in our Hand...
Ponder that for a while
Since currencies are linked to countries or clusters of nations, ask yourself if you would move to or invest your money in a place “created” from the territory of an existing country, without any verification, deed or other tangible legal documentation. Buying crypto currencies is a blind “investment” akin to purchasing the Brooklyn Bridge. And I thought only Republicans believed in free lunches...
2
As a old hand at Bitcoin investing (original purchase 18:32:47 GMT), I rest assured that my holdings are guaranteed by the full faith and credit of ___________, and are legal tender for all debts, public and private, in _________.
Bitcoin is a fraud? Take a look at the stock market!
2
Barbers & bitcoins on the way to become the 2018 version of 1928 shoe cleaner/shareholder. Amusing.
Mr. Krugman's post is fails to outline the possibilities of the blockchain technology to make make business transaction, verification and costs of contracts lower.
While internet and the flatter world has failed most of us, blockchain technologies offer a vision and have a decent potential to make our societies better and more democratic.
It would be great if NYT could offer its readers not only the dooms, but a properly researched articles which can cover this increasingly important section of the business news. THANK YOU!
Editor’s note: This comment has been anonymized in accordance with applicable law(s).
Don't throw out the blockchain with the Bitcoin. For example, the World Food Programme is using blockchain to keep track of electronic cash vouchers used for food in camps for Syrian refugees in Jordan. It saves WFP about 3.5% that they would otherwise have to pay banks to track the expenditures.
2
While U.S. dollars are backed by the “full faith and credit” of the U.S. government, Bitcoin is backed by the full faith and credit of an algorithm.
1
Bitcoin - good for nothing? Cyber "Benjamins" aren't backed by a tether to reality (like the Fed). They are fake money. Ponziesque. Ditch 'em while you can. We're forever chasing bubbles..."pretty bubbles in the air".
1
The golden calf had it's hour. On the other side of the coin, (no pun intended) by way of collective reasoning the world was flat for many centuries. But, there was controversy between the Greeks, the Muslim world and many in medieval Europe.
It maybe a fake, invented by money launderers, but who knows how long a myth can survive?
3
So what does this have to do with whatever profitable advantage that Donald Trump is hiding from the American people in his personal and family income tax returns and business records arising from his temporary occupation of the Oval Office of the White House?
1
If it is becoming obvious that this is a Ponzi and a lot of people are gonna get hurt, why does the government allow it to continue, in fact, flourish. I know there is a lot of warning out there about Bitcoin but why not stop it now.
Don't you feel the same way about the runaway Dow?
The almighty dollar, backed by the full faith and credit of the trump government. Oops! Fort Knox and the Fed in NY are likely empty of any "hard" currencies and precious metals by now.
Anyone interested in investing in Trumpcoin?
The only people I know who use bitcoin are crooks or libertarian type hipsters. Neither of these groups get to give me any money advice.
1
This is beautifully written. In addition, however, you have to realize that one of the main reasons bitcoin mania has set in is because if bitcoin were an international medium of exchange, there is a limited supply, the system is designed to max out eventually. So that means the people involved thought that they were getting in early on an asset that others would want, assuming that bitcoin became some new universal medium of exchange. The problem with that assumption is that while there are a limited amount of bitcoin, there is no end to the number of new currencies that can be invented. And since bitcoin is first, the question is, are there any technological innovations that could come up rendering bitcoin completely obsolete? The answer is, it would be extraordinary weird if there were not huge technological advantages making some future cryptocurrency far superior. In that case, everyone would jump on that and bitcoin would just -- die. Anyway, it's hysterical that people who have in effect been struck by lightning and are billionaires are too stupid to cash in on their luck while they still have it, but they are still holding on because they think bitcoin is going to go up by a factor of 100.
1
Fake money but a very real Ponzi scheme.
Just enough Americans were conned by Trump for him to capture The White House and become the fake President. Just enough online hype mixed with rugged exceptionalism and digital-powered fantasy to ignite a pseudo money bonfire that attracts sufficient moths to power a real world Ponzi scheme.
Not that everyone will lose their shirts "investing" in Bitcoin. Like Ponzi schemes where the first two or three waves of investors cash in and crow about it so there are suckers fighting among themselves to buy high and hope to sell higher to the next wave of gullibles. Soon enough there will be more sellers than buyers and some folks will be left holding tens of thousands of dollars in Bitcoins that command 10 cents on the dollar or a tiny fraction of their original cost.
I recently visited my daughter at her college and was dismayed by the number of students who said they were pouring all the cash they could muster into Bitcoins. More than one giddy cabdriver mentioned their Bitcoin holdings and expectations of early retirement.
This isn't about some tech disruption of transactional value. It's a tech disruption of Ponzi schemes, with potentially millions of desperate suckers who'll lose tens of millions in hard-earned cash when it rapidly crashes.
This is a digital chain-letter. A few will cash in big but most will lose their shirts.
Bitcoin doesn't measure value. It measures greed and folly.
3
Bitcoins produce no value; they don't create anything or provide for any needs outside of transacting themselves. It is just a matter of simple mathematics that for the aggregate of every bitcoin market:
Money in = Money out
That is to say for every dollar being made by one person, there is an equivalent amount being lost by one or more other people. It's just shuffling money from some people's pockets to other people's pockets.
Every time you see some Bitcoin billionaire, ask yourself "How many suckers did it take to make that guy rich?"
1
Into the implicit, volatile value of Bitcoin must go the markup for strict confidentiality. If it perseveres it will be because privateers, criminals, people with something to hide are willing to pay the risk premium to keep their transactions hidden. And what of Russia and its kleptocrats? What if to avoid money laundering tracking they buy into Bitcoin to subvert elections and democracies? How will we know? If Manafort was paid in Bitcoins would he be facing money laundering charges? If Trump had been paid in Bitcoins for his Florida mansion? There is a risk here that needs to be calculated and combated by economies and free governments worldwide.
Love how Krugman claims that he is like "ordinary people" and goes years without seeing $100 bills.
Point being, if you don’t understand the fundamentals of the technology don’t leverage your credit cards or cash in your 401K in the hopes of getting rich. If you bought after Good Morning America ran a special on the topic you are likely too late.
But, not all bubbles burst and die. Many bubbles burst and recover at a lower value. Unless you have a clear understanding of this technology and a view into the future it’s hard to say this is a fools game.
If you believe his article (and he used lots of trigger words to scare you: tulips, n Korea, dirty Chinese coal, sex trade...), you must also believe in the possibility that cryptocurrencies are laying a platform for future technology we cannot foresee today.
We were all much better off when the dollar was backed by gold too. The gold "standard" was agreed to by virtually every government in the world. it is no coincidence ( blockchain aside) that Bitcoin has raised it's ugly head in the era of Trump. The U.S Dollar can also become a worthless piece of paper ( think DMarks in the 1920's) if the U.S continues on this reckless path. Remember, it is not the "dollar" itself that had the standing as the world's currency,..... it is "faith" in the dollar.
The connection between crypto/bitcoin, bots and large-scale money laundering operations, all of which are connected to the Russian troll-state, is obvious and out in the open. The fact that Julian Assange is out there pushing Bitcoin is all I need to know about how "valuable" this is. It's a gigantic pump and dump operation.
2
The only determinant of the value of Bitcoin seems to be the market - supply and demand. There is no rational value, and there is no inherent value, only a value in the eyes of the beholder. As such, it has no stability whatsoever. Putting one's money into such an instrument seems foolhardy, at best, and perhaps idiotic. All the money that the early adopters have made has come from greedy optimists, not from the creation of something with intrinsic value. It's all predicated on the "bigger fool theory." And it's legal?
I have tried to understand Bitcoin forever. I came close while reading this column, but I'm still not there. Anyone else?
1
A brave column Dr Krugman.
Prepare to repel boarders from the Bitcoin believers.
1
Clever, these humans. Junk bonds. Bernie Madoff. Dot coms with billions in market cap, burn rates in the millions per day, and revenues akin to the corner convenience store. The Trump Taj Mahal and Trump University. Real estate bubbles fueled by junk loans packaged in carious 'derivatives.' And now bitcoins, whatever the heck those are.
They all have one thing in common: every last one of them had a handful of lucky winners (almost always based on inside information known only to the few) - and armies of unhappy losers. And at some inevitable, inexorable point, every last one of them went off like a ten megaton bomb lobbed in the center of the marketplace, cutting a broad swath of economic pain and destruction.
'Stay the heck away' is certainly sound advice.
Fake money but a very real Ponzi scheme.
Just enough Americans were conned by Trump for him to capture The White House and become the fake President. Just enough online hype mixed with rugged exceptionalism and digital-powered fantasy to ignite a pseudo money bonfire that attracts sufficient moths to power a real world Ponzi scheme.
Not that everyone will lose their shirts "investing" in Bitcoin. Like Ponzi schemes where the first two or three waves of investors cash in and crow about it so there are suckers fighting among themselves to buy high and hope to sell higher to the next wave of gullibles. Soon enough there will be more sellers than buyers and some folks will be left holding tens of thousands of dollars in Bitcoins that command 10 cents on the dollar or a tiny fraction of their original cost.
I recently visited my daughter at her college and was dismayed by the number of students who said they were pouring all the cash they could muster into Bitcoins. More than one giddy cabdriver mentioned their Bitcoin holdings and expectations of early retirement.
This isn't about some tech disruption of transactional value. It's a tech-driven Ponzi scheme, with potentially millions of desperate suckers who'll lose tens of millions in hard-earned cash when it crashes.
This is a digital chain-letter. A few will cash in big but most will lose their shirts.
Bitcoin doesn't measure value. It measures greed and folly.
I'm a lousy investor. A scaredy-cat who has lost out on the big gains since Trump's election. If economics is mostly psychology, I'm in therapy. I'm fine with it. I don't need the chaos, because I have enough of it.
Trump's outrageous, untethered statements aren't hyperbole, they are to him fact. His paranoia, his insults, his disregard for rationality is only getting worse. He came very close to firing Mueller, and will to so once the Republicans figure out how to give him cover. Only loose threads hold him in check.
The stock market rise convinces Trump that is he is rational, and is doing right by the nation. But eventually the market will snap, let chaos take over, and Trump will be the guy on the beach in the water as the tide pulls out. He won't be able to handle the shame of the exposure, and will strike back in unimaginable ways. The only thing a rising stock market is doing is buying us a little time.
Vanity, vanity, all is vanity. I know more than you do about this mysterious way to make tons of money.
Good luck with that, bub. There’s one of you born every minute.
I sure hope we don't lose power!
1
Your story about your barber brings back to memory a story I heard about Joe Kennedy, father of our former president and his brother, then attorney general in the early sixties. The story is set in the times just before the 1929 stock market crash, and Mr. Kennedy was being advised about certain stocks to purchase by his shoe shine boy. He went on to say that he knew it was time to get out of the market when his shoe shiner was giving him advise as to what stock to buy. And he was right.
37
Speculation is always speculation. Proof of that will always happen. The jump in bond yields and a sharp drop in stock "prices" is the proof. When bond yields are held lower due to speculative buying while stock prices are doing the same, the opposite will eventually happen. Just watch.
1
More proof that the American systemof education is worhtless. BTW I want my own coin called the Anna. Maybe Kate Middleton can have the Catherine; Ivanka, the Ivanka. etc. Unfortunately, liquidity in terms of functional currencies is nil.
A cult-- well there are lots of those.. out there. the worst callled ISIS>
BTw where's the article on the Luxury Tax.. or at least the history of it lready??
1
Invest in US quarters, rather than bit coins. They are a far better investment. After all, they are "two bits" coins
37
The old cheer I remember is ".....two bits a dollar, all for the "Hawkeyes", stand up and holler!" (or insert your favorite team) A bit might be a 50 cent piece.
As Dr. Krugman implied:
"A major bitcoin conference is no longer accepting bitcoin payments because the fees and lag have gotten so "
Rob Price, NYT, Jan. 10, 2018, 7:27 PM 20,
Now what were you saying about credit card fees?
If Paul Krugman’s barber were to buy Bitcoins, the barber will sooner rather than later taking a huge haircut!!
3
No state to back it.
No central bank to regulate it or act as a lender of last resort.
No SEC, CFPB... to police it.
No FDIC deposit insurance.
Not even a clear legal frame.
This is the Wild Wild West of stock markets.
Expect thieves, crooks, swindlers, market manipulators, pump and dumpers...
4
Bitcoin investors are no different than the day traders of tech stocks at the turn of the millennium or the house flippers of the mid aughts. Whoever got in and out early will win, whoever was late to the party will lose. Same as any other bubble, it will burst.
5
You really believe currencies with decentralized control should not exist Paul?
Maybe your barber should steer clear, but staking your reputation on the premise that only government money is good money is totally absurd.
4
@Bill Logan
You choose to accept "currency" which does not have anything tangible to connect it to the real world? Why do you trust the computer geeks who run bitcoin?
Ironically, banks are already using cryptocurrencies for international transfers. If banks already trust crypto, why wouldn't you? No one "runs" bitcoin. What you're saying is akin to asking why anyone would buy anything over the internet.
Bitcoin, tulips, derivatives, and nukes seem to have something is common: an irrational appeal for risk taking...I'll stick to groceries...
3
The Times' Jan 16 article 'Beyond the Bitcoin Bubble' serves as a thoughtful rebuttal to Dr Krugman's shortsighted and ill-researched polemic against a phenomenon he does not seem much to understand. One would think a self-styled progressive economist might take a kinder view of a technology that potentially shifts power to the people. And no, obviously no one should put their life savings into any single asset- but that is just a red herring, not an argument against digital currencies.
3
@Joel
"...potentially shifts power to the people"? Are all of these people knowledgable about the mathematics and programming that go into bitcoin? No? Then where do the people get their power?
You clearly don't understand progressives or liberals very well.
As much as one admires the leaps, pivots, didoes and magical pretzels that the wackier end of the libertarian contingent creates to try and sell these tulip bulbs, I am afraid I prefer a currency run by a government that at least as SOME responsibility to voters, regulations, laws and market forces to a shadowy system of whatsis run entirely by kids who appear to have zip by way of controls or oversight.
3
Making money buy buying and selling money has always been a scam. Somebody gains, somebody else loses. Nothing is earned. Nothing of value is produced. Cryptocurrency is just a modern take.
10
... and with all the spice of a side of crime and a helping of tax evasion.
but in defense, it sounds perfect for anarchists.
We have not yet seen the most disastrous aspect of bitcoins. It's possible now to take long positions on bitcoin or to sell it short. I suspect that soon bitcoin contracts will be bundled into derivative instruments, and these bundled contracts could be put into yet more complicated derivatives. And it's all secret!
Who knows what will be destroyed when these over-leveraged instruments collapse?
1
Do eight Bitcoins make one Bytecoin?
What is the value of a twoBitcoin?
41
i think it's a quarter. You can get a shave and a haircut.
Check out "Cryptonomicon", a book by Neal Stephenson that first postulated crypto currency using an unbreakable code. Of course, in the book their biggest hurdle was to find enough gold to back it up, and a small island nation-state to locate their bank. The idea was to create real trading stock that was independent of governments, but backed up by real assets (gold).
How about a crypto currency where each coin is exactly equivalent to a US $100 bill. It would have few fluctuations in value, little value as speculation, but would enable completely anonymous online transactions. You'd have to convince people that those $100 bills would be available if you wanted to cash out your holdings, but it might solve the speculation that haunts the current crypto-currencies.
Just for laughs, let's call them "Franklins". The symbol would be an "f" with the two bars through it.
1
It's really gambling with your money if it is crypto money. If you lose it or it's stolen, or services or goods are not delivered, how do you prove you had it in the first place if you want to complain?
1
The gold bugs have moved onto another little hobby.......it won't end well for most, but a handful will get rich at their expense.
2
Exactly what I was thinking! When I was in college studying economics in the late 1970s/early 1980s, I read "How to Prosper in the Coming Bad Years" by Howard Ruff. All the same stuff - can't trust government, hyperinflation is inevitable, gold is a real asset but fiat money is phony. Same old stuff.
I don't have a graduate degree in economics, just a bit of common sense developed from living decades and reading pretty much all my life,
My common sense tells me that "money" that exists only as a computer algorithm can not only be (and has been) hacked, but that things that fluctuate so rapidly in value are not good investments for a reliably comfortable future.
Among my friends who "invest" in Bitcoin, pretty much all are black helicopter conspiracists who think the Twin Towers were brought down by Israel, the US, or both.
6
Unfortunately, I think it is best to not judge technology you don't understand. In 2010, my son suggested I purchase Bitcoin at 15 to 25 cents per coin. I told him the technology was overpriced and just aiding the drug and prostitution industry. Eight years later I now have a Bitcoin ATM in my local mall where I can exchange Bitcoin for dollars- not to mention Bitcoin value has exceeded any rational expectation. It reminds me back in about 1980 when it was suggested by "wiser and more experienced" people that microcomputers were a fad and nothing more than just overpriced typewriters.
3
@Judson Hughes
I challenge you to name the "wiser and more experienced" people from the 19980s who claimed that "microcomputers were a fad" (don't bother naming Wang). Researchers at MIT, at that time, were building computers. You're the typical person who wants to generalize their experience to an entire population.
In 1980, microcomputers were just that: over priced typewriters. Only the foolish rich bought them. Of course, that changed once the bugs were worked out and the operating systems became more flexible and user friendly. Sure, some people made a killing investing in Apple, but it was far from a sure thing at the time. For every Apple, there is also a Betamax. Buyer and investor beware. Caution around new innovations isn't always a bad thing.
Still might be a cesspool for black market transactions and two bit dictators under sanctions, a cesspool that we just steer clear of.
Apparently a man would show up at the Paris apartment and give an acquaintance a 'bar of chocolate' in a blank white opened envelope. Swiss, no less, and let me tell you it was no fun when his widow, The Red Queen, was left feeling despondent and asked Alice to start counting. Halting like a mule on being commanded to do some basic arithematic (I can't even spell the word and would have to go to 'Oxford'), but it was the equivalent of playing monopoly with real currency.
'Secret Transactions' might be the word Cash on a personal check to the landscaper at his request. Back to the matter of Bitcoins which Mr. Krugman has taken the trouble to spell out. Perhaps I should print this out and post it on the fridge.
You first, me next, comes to mind in these new ventures. White rabbits are not the bravest in these financial scenarios, and when a friend lamented that The Stock Market had taken a plunge earlier, I refrained from asking whether the above had been foolhardy. Neither of us have that kind of money, but it is none of my business to be her banker.
Thank you, Mr. Krugman, and there is no reason not to forward 'Bubbles' to a friend or two who also remain in the dark, and remain far more financially astute than this reader.
To misquote Mr. Trump: 'No More Oreos for You Christie!', it's No Bitcoins' here, hidden in the 19th century mock books, where women used to hide their jewelry. I could probably use an Oreo but right now, I am with Mr. Krueger's Barber.
2
For what it's worth:
“Bitcoin has the same character a fax machine had. A single fax machine is a doorstop. The world where everyone has a fax machine is an immensely valuable thing.”
-- Larry Summers, Former US Secretary of the Treasury
Bitcoin is the perfect currency for Trump.
THANK YOU, Mr. Krugman, for this straight-forward explanation of why bitcoin is not an investment tool, but rather a method of gambling. Like all gambling, only the "house" wins and in the case of bitcoin, we don't even know who the house is!!
Like all bubbles, greedy people without sufficient knowledge to make good choices for themselves will be the losers, breeding another angry constituency who will undoubtedly blame others for their foolish choices.
2
Dr. K,
Is there any way to short Bitcoin? I’m all in if you can out how.
Bitcoin now is like real estate in 2008. The people who figured out how to short an asset that “ never went down in value” got very rich.
Bitcoin has 2008 Stock Market Crash 2.0 writen all over it.
1
It boggles the mind that bitcoin lovers trust a few programmers, whose code they can never hope to understand, and whose MOTIVES are a complete mystery to them, over ANY government - even Venezuela has a more legitimate currency. Why? Because they don't trust the government.
The people who love bitcoin fall into 3 categories:
1) Rabid anti-government idealogues who fear the government knowing anything about their finances. In other words, fools - because there is no way you can hide your finances if the govt decides to really dig into them. And unless you are rich, cash works much better.
2) People who want to buy drugs and other illegal items on the dark web. This is the ONLY legitimate reason to use cryptos. If you want to buy from your local dealer or hit man in a back alley, it's hard to imagine anything more anonymous or readily accepted than cash.
3) Momo investors - sorry, I meant gamblers.
What is a currency? It is something with INTRINSIC VALUE, something bitcoin can't even pretend to offer. Gold is a perfect example, and also one that no government controls. But government fiat paper (dollars) ALSO has intrinsic value, even though it is printed for free and backed by nothing. Except it ISN'T backed by nothing. It is backed by the taxing authority of the government, and if foreigners ever perceive the dollar as hyperinflating to worthless, the govt can just double taxes or sell off assets - either of which, though painful, is preferable to a worthless dollar.
2
sounds ideal for someone like Paul Manafort. he could pay for his ritzy suits, his gardener, his Persian rugs, and his debts to Dominik Derapaska and nobody would be the wiser about pulling his dough out of offshore stashes.
plus, when he claims the dog ate his homework, who could dispute him?
I prefer to use Monopoly money for recreational purposes, and U.S. currency for the real thing. Gambling chips called by any other name are Bitcoins.
27
If I own Bitcoins and I lose my password, is there a help line I can call to recover it and my account? No? Yikes!
My local bank has an office and helpful people who know me. Even the credit card companies have fairly responsive telephone staff.
We need some trusted authority to run these critical systems. We also need regulation of such important functions. Private authorities and the government regulators we set up to oversee them are not perfect, and constant vigilance is necessary to keep them running smoothly.
There are no easy answers. Certainly not cryptocurrencies. Get over it, libertarians!
1
I dunno. With Trump in office. Not putting much stock in the full faith and credit of the United States government these days.
The bubble aspect of bitcoin (BTC) is not the important point. Sometime in the future (five years?) one of the cybercurrencies will stabilize in price and become the major means of exchange between people. No nation boundries.
Trying to stop this is like trying to stop email.
That's possible, I guess. Of course it's also possible that bitcoin aficionados, having taken it in the shorts too many times by the inherent instability of an unregulated currency, will admit, grudgingly, that central banks have a role to play, and that optimum currency areas are bound to monetary and fiscal policy. And they will get a new hobby.
Maybe trying to stop this be like trying to stop the laser disc. That's the neat thing about the future. It's unpredictable.
"not tethered to reality"; "it's a cult" Seems to be the Trumperian right-wing GOP age in which live--characterized by an intentional rejection of reason, common sense, and things as they actually exist.
At least with the crytocurrency bitcoin, we can each make a decision whether we want to get involved with this airy-fairy currency.
Unfortunately when it comes to politics, we are all being "bitcoined" by Trump and the GOP, neither of which is tethered to reality and both of which act like a cult.
Hopefully, as go the bitcoins and the crytocurrencies, so go Trump and the right wing GOP. Can't happen fast enough.
The idea of Bitcoin as even a speculative investment is ridiculous. It was never meant to be an investment. It was meant to be a financial tool, a means to move assets around the world with absolute security, nothing more, nothing less. Can they be stolen? Yes and so can your wallet. Is it slow? Yes but trying moving any amount of money over $10,000 internationally and see how long that takes. The problem isn't bitcoin, the problem is people that don't understand it.
1
This is yet another hit piece from an author who doesn't understand cryptocurrencies, and to be honest I'm getting tired of refuting these false claims and hearing about "tulips" in nearly every article. Cryptocurrencies are not like the tulip craze, which itself is very misunderstood. They have intrinsic value and more companies are making useful products or services with them but this takes time. Just read about them from a less biased source if you're interested. There are dozens of promising projects on the horizon as well. The number of news articles that grossly exaggerate the negatives and predict a bubble or crash (especially from CNBC) plays a large role in these dips I believe.
2
Crashes are inevitable. At least with stock market or real estate crashes most of the assets that back then survive and in time recover to varying degrees. With no assets or earnings to support cryptocurrencies they will just crash and burn. We all have friend(s) speculating in Bitcoin. Sad.
1
Rich people have much higher marginal propensities to save and invest than non-rich people who have higher marginal propensities to consume. The world-wide shift in tax burdens from the rich to the middle class has created a tremendous imbalance where there is a much greater supply of lendable and investable funds relative to securities to invest in or projects to lend to with high probabilities of good returns. Bitcoin and the explosion of new cryptocurrencies is only the latest manifestation of the worldwide excess of loanable and investable funds..."
https://seekingalpha.com/article/4139026
1
It appears that the name "bitcoin" was an apt choice. That is about all that will come of it - a little bit left in the participants pockets. If they are one of the lucky ones. Or as Mr Dolittle sang in My Fair Lady: "With a little BIT of luck, with a little BIT of luck, a man can duck".
Somehow I got almost to the end of today's piece before the scales fell from my eyes...I was reading it as The DOW, not Bitcoin...
After all, while presumably (excluding Legal and Financial paper factories) most Corps have some physical tether to reality, a run up of near 50% of market value, while the Real Economy rises only some 4%, over the equivalent of 5 quarters, seems very "bubbly".
(Recently the historians seem to down count the Tulip crash as having involved a few players...as opposed to the (1720 or so) Brit South Seas and French Mississippi comtemporaneous Bubbles that drew in even footmen, candle maker and chamber maids last pourboire sous.)
1
The amount of currency that can remain afloat in a national economy is nothing but a measurement of how much value exists in that society ...infrastructure, businesses, services (law, education, military, health), healthy and employed people. In fact, it NEEDS to be as accurate a reflection of that massed value as possible. Currency itself in any form is/should be without value. Which is why anyone who speculates in the value of currency itself to their own enrichment is essentially robbing society of value, causing everyone else to work harder and do with less to maintain the society that we have. If you take a pint of blood from a body, that body must work harder to survive.
1
Best article I've seen about Bitcoin (or as my friend the Wall Street Wiz calls it "Bit-con"). Although I do know (friend of a friend) who bought and sold Bitcoin and made $100,000, the time for that is passed. Like the people who invested with Maddoff and made money (if they cashed out), there are people who have benefited from it. I stayed away because on a dollar bill is the statement "This Note is Legal Tender for all Debts, Public and Private". Bitcoin doesn't say that. People have to take money; nobody using Bitcoin has to take Your bitcoin.
2
The author here makes a few compelling points, but Ive seen these kinds of criticisms made many times, and while he makes some good points, its clear he really hasn't done much deep research into the blockchain world. In fact there are lots of people who have been using bitcoin for non-criminal things for a long time. Its only very recently that Bitcoin transaction fees have gotten absurdly high. And there is documented evidence that in various countries lots of people have been using it since its more reliable than their normal currency (https://www.theatlantic.com/magazine/archive/2017/09/big-in-venezuela/53....
No doubt is there a bubble (multiple depending on how you look at it), but Id say it's pretty analogous to the "dot com" bubble. Web technology created a bubble but it was still revolutionary technology that quite possibly has changed the world more dramatically than anything else in modern history. There are tons of "blockchain companies" popping up all over the place which are offering "tokens" (a.k.a. altcoins) to buy stake in their aspiring companies. Since all you need is some pretty basic technical skills and a website to raise money this way there are tons of phony companies which exist purely to scam people into buying their tokens (probably the majority of altcoins fall into this category). However, blockchain tech is a majorly disruptive technology which is only just emerging and gaining traction (just like during the early days of the web).
2
Block chain currencies rely on computers and computers rely upon electricity and molecular particles. As I understand it our Sun has the potential, with one powerful sun spot, to lay waste to all computer systems and small. That would break all of our bubbles. I this risk too small to worry about or is it too big to address?
1
Yes the cryptocurrencies themselves should be considered bubble bound.
However, the block chain associated with them has distinct advantages. Open protocols will hopefully make a comeback so individuals can own their own information.
Read story below for an in depth analysis.
Beyond the Bitcoin Bubblehttps://nyti.ms/2FGVArL
Coins, therefore, money was invented oh so long ago as a method of collecting taxes. States were not getting their share of the chickens and weavings that were being used in barter so they invented a method to keep track of all that trading and to get their share.
States and money are things one would think we had all gotten used to by now.
1
I think the cited 8000 inflation rate for Bitcoins can be verified as follows:
[(1 Period/6 weeks) x (52 weeks/1 year) = 8.67 six wk periods/1 year].
Then use the following future value formula:
[100(1 + i )^8.67 = 8000]; so [(1 + i)^8.67 = 8000/100]; so
[((1 + i) ^8.67)]^1/8.67) = [80]^(1/8.67); so
(1 + i) = 1.66, so i = 0.66 or 66% per 6 week period. And,
1.66^8.67= 81; or 8100% as an annual inflation rate.
Thus, since (0.60^8.67) = 0.0119; and, reverse field,
1.19((1 + i)^8.67) = 100; so (1 + i)^8.67 = 100/1.19; or
[(1 + i)^8.67]^1/8.67 = [84.0]^1/8.67; and
1 + i = 1.67, so i = 67% per six week period or 8000 percent per year.
[JJL 01/30/18 10:30 am Tu]
Bitcoin cannot have a "bubble" precisely because it has no intrinsic value - so how can it be overvalued? Who is to say $1, $100, $1,000 or $1,000,000 is "low" or "high" when there is no basis for comparison?
Value only exists if there are at least 2 people that want something. There is no god of value that keeps the value in a box. Value is a function of people's desires, wholly artificial. At the societal level, without government (i.e.; the majority of a group of people) defining value there is no value. Prof. Krugman is correct. Without society there would be chaos. To survive we need co-operation.
Having watched and participated in various financial and real estate markets for over 40 years, a bubble is a bubble is a bubble, and each time it's totally different then everything that came before it. Then it crashes...
1
There's no doubt that bitcoin was designed by the bad guys to avoid the regulations regarding the legal payment of cash transfers. I think you can assume that bitcoin is used by terrorists, arms dealers, drug smugglers, and tax avoiders. If anything good could come from this it is the development of blockchain technology which has the potential to make all kinds of legal, but inefficient, middleman driven transactions obsolete. The key word is "potential".
Good piece by Krugman. The problem with Bitcoin having no physical representation reminds me of the old proverb "You can't take it with you." Except with Bitcoin, you can never really "take it with you," because it only exists via a technological intermediary (computer, phone). If you lack these you lack Bitcoin, no matter how many "coins" you may "own."
All I know is that governmental controlled hard currency can be used almost anywhere in the world, under any circumstances, in any conditions. No technology required. "Cash talks!' is still true.
1
"There’s really no reason to use Bitcoin in transactions — unless you don’t want anyone to see either what you’re buying or what you’re selling, which is why much actual Bitcoin use seems to involve drugs, sex and other black-market goods."
With great respect, this seems ill informed. Transactions will be visible on the blockchain forever. Distributed ledger technology (dlt) enables immutability because data can only be added and as well as it's distributed nature. Wired recently did a write up on how old, careless transaction will haunt consumers for years. https://www.wired.com/story/bitcoin-drug-deals-silk-road-blockchain/
A conversation currently being had is how to privatize transactions using dlt.
This is by no means an endorsement to invest in cryptocurrency.
I thought Libertarians were all about the gold standard? How can they also be about Bitcoin? ... And when the Bitcoin bubble bursts, that will be the fault of a banking conspiracy, which will somehow lead them to reaffirm their support for Trump.
Good question by barber, excellent response by Nobel Economist. Did Krugman tip barber a Benjamin? Likely not. Top 1%, you see.
1
Overall a good explanation of cryptos except for the anonymity part. Because every Bitcoin transaction is recorded in the block chain, using it to acquire illicit goods is not a good idea. There are thousands of cryptocurrencies. Monero for example is the current crypto of choice for drug dealers and other undesirables because it is completely anonymous.
Bubble bubble toil and trouble,and wasn’t there a Nutes tail in there
Somewhere?whitches brew is always available,thanks much for the reminder.
Excellent and well-written article, thank you.
1
After thousands of other journalists and op-ed writers have shared their own hot takes that include a reference to 'Tulipmania' in the lede, Krugman swoops in to offer his. (Tulipmania reference of course included). At least many of those writers also included thoughtful analysis of distributed computing, distributed trust networks or the potential value of other blockchains such as Ethereum. This is more of an un-nuanced "old man yells at cloud" moment than a serious criticism of bitcoin.
There is a small intrinsic value to Bitcoin and that is the ability to buy things anonymously. It does not justify the current value by any means, but it's evident that there are plenty of bad players in the world--sex, drugs, money laundering, arms sales, who knows. I think some version of crypto-currency will survive.
A friend of mine is a Bitcoin expert and had advised me to invest in Bitcoin years ago. I didn't because I couldn't understand the mechanics of it. I kind of wish I had, but just a few days ago, 5.8billion yen (about 53 million US) was stolen from a crypto currency bank in Japan, NHK news said. I just don't trust computers that much, I guess. Thank you for this enlightening piece, Paul Krugman!
“...its (Bitcoin) value is ultimately backed by the fact that the U.S. government will accept it...”
Mr Krugman, this is not really accurate.
The US$’s “value” is determined by a market. That market is a massive network of commercial and banks, central banks, hedge funds, and other financial institutions that trade US$ against other currencies and commodities.
It’s worth more or less than another currency, basket of currencies, barrel of oil because participants are willing to pay more or less for it.
Bitcoin is quoted in dollars.
The FX markets, largely unregulated, active 24/7/365, are the largest financial market in the world - larger than stocks and bonds combined.
Governments not withstanding, loosely regulated, transparent markets are core to libertarian ideals. Unfortunately most libertarians don’t quite get it. Their ideology is as flawed as any other political camp.
Bitcoin’s real appeal is to black marketeers and anarchists.
1
I bet Dr. Krugman's barber shares a fear with many of my contemporaries.
They missed out on early investments in the likes of Facebook because they didn't understand where technology was going, and how various stocks would skyrocket. They don't want that to happen again.
1
I've been a fan of Krugman's columns for a long time but I find this puzzling:
"$100 bills aren’t much use for ordinary transactions: Most shops won’t accept them."
Back when a hundred dollars was worth about 50% more than it is today, a legitimate business that I was in was frequently paid in hundred dollar bills and I can't recall a single shop that wouldn't take them, although it was pretty standard procedure to check them to make sure they weren't counterfeit.
The hundreds mostly came from grocery stores and liquor stores.
This was in New York City and Long Island; I don't know what the situation was like in other areas.
Have things changed since then?
2
I guess I should look at securitized mortgages again.
32
The problems will start when nation states decide bitcoin is a real threat to their monetary monopoly. The question is will digital currencies survide a sustained attack?
The major problem with bitcoin is simple: At some point, someone will note that the emperor has no clothes. Thank you, Mr. Krugman, for pointing that out.
3
Paul misses a lot of key points about Bitcoin and I’ll list just a few:
1) Bitcoin is deflationary by design, which means its value almost has to go up over time because of increasingly limited supply. For example the number of coins that are discovered in each block halve every four years until the year 2140, at which point all bitcoins will have been discovered. So, if you believe that Bitcoin has any future you also have to believe the price of bitcoin will almost certainly need to rise in the long term, a lot. And that’s intentional, because Satoshi did not want his currency to inflate away it’s value, like all fiat currencies do, also by design.
2) This piece also ignores the fact that Bitcoin and other cryptocurrencies are always improving, so all the issues that we see today regarding slow transaction times and High transaction fees are on their way to being resolved either through changes to the original Bitcoin code or through new versions of Bitcoin and other cryptos. We are in the very beginning of this process, so stay tuned.
3) Last, the promise of the cryptocurrency revolution is a remaking of the national and international order in which expensive intermediaries, the middlemen, are largely removed through peer to peer transactions. The promise of that transformation is a world in which people can do business and interact more generally in various ways without going through expensive middlemen, and with less regulation and threat of authoritarianism.
6
Expensive middle men? Umm, One can transfer or pay $1000 by Visa or Paypal instantly and very very cheaply. Buy a Bitcoin in Korea, Japan or Australia and it can cost 20% to 40% more on the bogus market places, after waiting days to clear your real funds into or out of the market place, but let’s not let facts standard the way of a techno geeko mythology.
Like I said, there are growing pains. But you're not even comparing apples to apples. Try sending money with Western Union then compare that to Bitcoin. More generally, I'm referring to disintermediation of many facets of human economic and other activity, which will lead to a massive transfer of wealth from existing intermediaries to other groups.
One can realize it's a bubble and still make money off of it, which I have no doubt many investors are doing.
As for the everyday application of the coin, it can only happen if the price stabilizes
To be fair, nothing has any intrinsic value if humans don't attach a value to it. I don't think it's fair to say that the dollar has intrinsic value because governments back it. The nation state is not a natural institution of the universe; it has not always been around. One could argue that without the contrivances of the nation state, paper currency lacks value as well.
3
One question that isn't answered and perhaps could be in a subsequent column by Mr. Krugman: who will be hurt when Bitcoin crashes? It will obviously hurt those who have invested in it but what about the inevitable spreading circles of damage? This is why nothing economic (or anything else for that matter) should be viewed in isolation from other things unless, by some chance, it doesn't have anything to do with them. Bitcoin itself may not be real but the investors are and the money put into it is.
1
"when bitcoin crashes"? right now it is viewed and operates in isolation, limiting the "circles of damage" to those who took the INVESTMENT risk. as long as bitcoin, esp. unregulated bitcoin, does not become a substitute for hard, stable currency of the realm, krugman's barber should approach bitcoin as nothing more than an investment with concomitant risks, and, like any prudent investor, never should all eggs be put in one basket. faith & trust in bitcoin should never be compared to hard currency backed by the full faith and credit of government. nor will bitcoin ever be backed by an FDIC guarantee or come with a portfolio outlining potential risk factors. it’s the wild, wild west out there in bitcoin country. investors beware.
One point to note, everything you say about the purpose for the use of bitcoin is true in the US and other first world countries. However, in many asian nations, its difficult for the average person does not have access to credit cards and debit cards for everyday transactions. Bitcoin has the potential to provide legitimate transactions in absence of traditional bank cards.
Bitcoin may ultimately be a bubble application of the disruptive underlying technology of blockchain. What cryptos provide is a way to "pay" miners who manage the blockchain which will vaporize huge amounts of back office centralized transaction processing and jobs over the next decade and also provide a higher level of security. Title searches, credit card transactions, virtually all secure records could be in play. Buy the technology not the application.
2
Bitcoin is to blockchain as email is to the internet. Bitcoin, or any cryptocurrency for that matter, is only one of the many uses of blockchain tech.
4
One aspect of bitcoin that Krugman neglected to mention was bitcoin "mining". Bitcoin miners use lots of computing power to generate more bitcoin. I'm not exactly sure how it works, but I do know that it uses large amounts of energy and computing capacity, so while I have no problem with people entering the zero sum market of bitcoin, in terms of wasted resources, it's a disaster.
7
The fact that digital crypto-currencies can and are being used as an exchange medium in the dark economy indicates to me that this specie may have a greater utility, hence a longer half-life, than the undoubted bubble aspects of the overall phenomenon would otherwise lead us to believe.
One caveat as to "intrinsic" value: bitcoin and the other cryptos have no more or less intrinsic value than the $100 bill. There is nothing in either the atomic structure of a Benjamin or any other aspect of its being per se that would confer such value. Rather, it is from their generally accepted and legally mandated use in exchange that such printed papers derive their worth. Those who wish to pursue this topic further are encouraged to read John Searle's The Construction of Social Reality, available in pdf form on the web. Searle also has a lecture series on YouTube entitled The Philosophy of Society, which covers the same topics.
Not to mention the incredibly high energy costs of "mining" new bit coins. Doing so is extremely computationally intensive (a random search for a key) and consequently the computers doing so use enormous amounts of electricity.
Bottom line:, Bitcoin is a environmental disaster. It may be worse than old fashion gold mining.
3
When 1000 people own 40% of the Bitcoins, it should be apparent that it's ripe for manipulation by a few. Somehow or other, 400 million dollars in Bitcoin vanished not too long ago. Nobody is getting their money back.
I wouldn't worry too much about the lost $400mm. Every USD (or other real currency) that was put into the system was taken out by someone. What was lost was the illusion of wealth by Bitcoin appreciation.
Let's say that I sell you a sealed box for $1. At the end of the week, I tell you the contents of the box has appreciated to $4,000,001 (I could even show you some evidence that others were wildly bidding for whatever is in the box). You now assume that you hold a valuable asset and have increased your wealth by $400mm. The next day, you open the box and realize there is nothing in it. You could say that you've lost a fortune and the $400mm wealth was destroyed or you could say $1 was put into the system and $1 was taken out (i.e., no net wealth creation or destruction).
Now, if you decided to direct $400mm of otherwise useful labor and computing power to mining Bitcoins or otherwise gaming the Bitcoin system, then yeah, that's a lot of lost wealth.
1
If you are referring to the recent $524 million hack on Coincheck, apparently 90% will be refunded. This is not to say that cryptocurrencies are in anyway guaranteed or safe. Krugman still has it correct.
http://www.independent.co.uk/news/business/news/bitcoin-latest-updates-c...
I thought that the tether to reality of bitcoin was the physical computing power (and electrical energy) required to “mine” a new coin, a cost that increases exponentially as every new coin must have a unique new algorithm to define it.
Not that this explains the bubble, nor does it make it any less flimsy (why would I pay more just to own a bigger prime number?), but it kind of explains the initial cost and scarcity of supply.
1
When Krugman talks about Bitcoin not being tethered to other things, is he using tether in a technical sense, or in a hand wavy sense?
In other words, do economists have a way to measure or estimate how tethered something is to the rest of the economy, and does being more tethered tend to stabilize prices? Or is it just a word he happened to use?
There are two main constituencies for Bitcoin other than speculation and gambling. The first are those concerned with transaction secrecy. Most of those transactions are criminal in nature. A few weeks ago, the press speculated that Chinese nationals were turning to Bitcoin to evade the Chinese government's currency restrictions, a crime in China. Supposedly, most Bitcoin transactions involve drugs and arms, but no one really knows.
The second constituency is more dangerous and does not receive as much attention. It is composed of so-called Libertarians who believe that government control over currencies is wrong and takes away individual freedom. The role of central banks in creating a stable economy is incontraversal. If the Fed, and other central banks, had not taken action in 2007 when the banking system collapsed, there would have been a repeat of the 1930's Depression. Conservatives in government favored Hoover-like policies. Without the stabilizing actions of central banks, capitalist economies would be at the mercy of boom and bust cycles of the 18th and 19th centuries.
Blockchain technology, separated from Bitcoin and similar cryptocurrencies, holds interesting possibilities, but may have scalability problems. Think the internet version of the Registry of Deeds.
4
There is nothing to prevent the founder(s) of any cryptocurrency from granting themselves as much of the "currency" as they want. These are fraud schemes from their inception.
2
Paul,
With $20 Trillion in debt, another $5 Trillion in (worthless) assets on the Treasury's books, a bunch of old people who want to live forever called baby boomers ready to burn Medicaire millions to stay alive one more day, and, the rate of debt accumulation on an exponential curve....not in Zimbabwe, but, right here in the "stable" USA..
Should I put all my money in US Dollars?
Or something more risky, like, Bitcoin?
LOL
1
Bitcoin is just the symptom that the real bubble is the dollar. And it will make a big bang when it will burst.
1
A troubling thought: How far is buying a Bitcoin from buying stock in Facebook or Google?
4
You forgot to mention the incredibly high energy costs associated with crypto currencies. Just another disturbing ‘trend’ our pathological tech elite are foisting on the world.
3
Could "crypto-currencies" be the net stage in the Russian assault on the west? Accepting fake money is only natural after the acceptance of a fake head of state.
7
Unfortunately, this piece gets several details wrong:
Slow-- a Bitcoin transaction can take up to 10 minutes to, for all practical purposes, complete. How many business days do domestic bank transfers take, nevermind international ones?
Costly: even $10 to transfer unlimited amounts of money anywhere in the world is cheaper than any wire service I've ever heard of.
2
A credit card transaction to buy a cup of coffee or practically anything else takes seconds.
That's the point.
Awesome, as soon as I want to transfer unlimited amounts of money...or something like it.....anywhere in the world, I'll look into it.
When the Bitcoin bubble bursts, what will drug cartels and terrorist organizations do for funding and money laundering?
They'll have no choice but to go back to HSBC and the CIA.
2
I'm reminded of Augustus Melmotte in Anthony Trollope's "The Way We Live Now" (there's also a great PBS 4-part series). The "coin" in this case is stock in a railroad that exists only on paper and will never be built. The stock goes up, and, predictably, it soon crashes. Memotte, BTW, exhibits many Trumpian characteristics and would have loved Bitcoin.
57
As others have pointed out, it's the block chain technology that is the big deal. 90 percent of coins are garbage or scams, so do research before investing. Coins like Ethereum, Ripple and Stellar are promising technologies.
Don't throw your lifesaving at crypto with no research and get upset when you loose it all, blaming crypto.
5
To elaborate, blockchain can securely record transactions involving any kind of asset, from libertarian pseudo money to works of art and real estate deeds. In this regard, an interesting application would be as a wealth tax collection medium. The method would be simple; just periodically transfer the tax from all accounts.
Piketty and others have noted the income disparity benefits and collection difficulties of such a tax. In brief, a 2% wealth tax could allow the complete elimination of all income and vat taxes currently being used.
Ironically (in this case), use of blockchain would need to be mandatory for everyone!
1
The Achilles heel of Bitcoin is the neverending march upward in power costs needed to process transactions. A successful technology generally reduces the costs of a transaction, not increases it. So I agree that there are some bubble issues with Bitcoin, but there are also a legitimate uses for it. If you lived in Venezuela or Zimbabwe, or maybe even China, wouldn't you want a way to preserve and transport your wealth without the state's controls? Imagine Trump had gotten his way and became a strongman, I sure would want a way to move my money out of the US. Or you can go back to WW2 and look at wealthy Jews who probably stayed too long because they couldn't move their money out of Germany. Of course, there are nefarious uses of Bitcoin (just like cash), but there are also benefits to it.
2
A currency must be be tethered to a government. Period.
3
Ok, this many mentions of "tether" probably aren't a coincidence. Prof. Krugman may know about that scam too...
The utility-value-added of crypto over fiat doesn't make sense to me, but I'm not willing to say it's a bubble. The price of gold is also irrationally high, given that it virtually doesn't see any post-inflation price increase while having high volatility. Both are trash assets with irrational supply and demand.
1
I don't have any money to invest in anything! I am protected from speculation and greed because I am poor. Lucky me.
6
The sooner it ends the better.
Do you realize how hard it has been to find a GTX 1080 ti at a reasonable price? The "miners" are actually causing a global shortage of high end video cards (video cards can mine faster than normal CPUs), and as such, are causing knock-on damage to the video game industry and its evolution...
Priorities people! :-D
I mean, blaming miners for the shortage is fine, but we then need to blame gamers for the shortage 2 years ago when the 10xx series launched. You can still snipe affordable cards if you use sites like nowinstock and get text alerts. I don't see a problem with consumers....consuming lol. Now if we are talking about scalpers buying at MSRP and selling super high on eBay, I'm with you!
Don't get me wrong, i understand supply and demand, but miners don't set the price of cards, neither do gamers. If they did...they would lower them, lol. Retailers are gouging.
What is not said is the fact that many banks, US and foreign are spending/investing time and money trying to create a "safe" alternative cryptocurrency. I cannot imagine them doing so if there is no real use for such an instrument. It is possible that they see one as a means of reducing the vast amount of money lost to credit card fraud, especially when used on the internet. My guess, Amazon will jump big time on the bandwagon of a "safe" cryptocurrency.
If/when successful this could lead to a massive loss in value of existing Bitcoin, et al, both the currency itself and the value of shares of Bitcoin-like companies traded on stock exchanges. Professor K. does not mention that cryptocurrency shares do trade as approved parties on stock exchanges. These instruments then truly become the instrument of choice solely for the criminal and those foolish enough to believe the "pot of gold...".
Professor K., I suggest your next column focus on the potential for cryptocurrency if done right.
1
If dictators and kleptocrats were to devise a Trojan Horse capable of infiltrating and disrupting western economies and democracies, using other people's money, this is what it might look like.
5
I am preparing to cash out. When Republicans take over, there is always a run up on Wall Street ... and then the profit taking begins. I hope to beat it again.
72
I was looking at my 401k today and thinking the exact same thing.
I agree with Professor Krugman's conclusions, a rare and unexpected occurrence. In fact, I'm almost shocked; usually he is a high intensity SJW dressed up in economists' clothing.
Regardless, he is absolutely right about Bitcoin and crypto currencies. Avoid them like the plague. They have no intrinsic value, and are not backed by any government. I would rather own Venezuelan Bolivars, a near worthless currency, then participate in this high tech scam. Perhaps P. T. Barnum was correct. Stay away!
1
"They have no intrinsic value,"
To each their own, but this is not factually true. The technology has value, its just that 90% of the coins are garbage or scams. The top crypto have great applications. Block chain technology is great!
It's a gamble, like any investment. I wish I had invested in Amazon or Whole Foods in the 90s. Those companies succeeded of course, but others failed. Investing in Bitcoin isn't supposed to be something you pour all your money into just as much as you don't pour all your money into a single stock. You diversify. It's the profit potential that is stunning with cryptocurrencies. Maybe they're just a craze, maybe not, who knows. But the fact that if you put $500 in back around 2011 you could have around $5,000,000 now is too attractive for most people to just snub. It's a place to put small amounts of money and see what happens. The "frenzy" is just when people pour their life savings into it, yeah that's dumb.
The way I see it is if I had put my $1000 Tesla 3 deposit into Bitcoin instead on that day in 2016, I'd basically be able to pay for the whole car now with that. It was $400 then, and is around $11,000 now. Instead, my $1000 is now worth precisely $1000, so that wasn't the best use of that money.
2
Over a Trillion Dollars in Circulation and the Fed is supposed
to be to trim the "Economic Sails" of the American [ World ]
Economy by raising and lowering the Interest Rates ?
Rather like hanging your bed sheets outside in hope of
slowing down a Hurricane,
2
At least you can plant a tulip bulbs and get a pretty flower.
2
What alarms me about Bitcoin is the vast energy resources it requires.
They are setting up Bitcoin Farms to "mine" Bitcoins. Apparently the processors in video cards are the best which has caused the price of them to shoot up - causing the prices of computers to shoot up.
It will be painful for some but largely a good thing when Bitcoin becomes BitTheDustCoin.
3
Maybe a simpler answer to your barber's question would be to ask him, "Would you accept payment in Bitcoin?"
187
I've seen this greed first hand. I have a good friend who put 20k in a more obscure coin called Icon, and ended with 750k.
But it wasn't enough money. He decided he would only sell when he got to 5 million dollars, return 9% a year on that in interest and retire on 400 grand a year. This is a legit plan I've heard twice since the boom. The problem is, everyone else is invested now and his coins aren't going up in valve. In fact those even lost value, but he keeps holding.
This is also what happened with Cisco stock in the 90s. Lots of greed.
Pretty firm rule in investing is a parabolic move up means a parabolic move down.
2
Sure, bitcoin is a bubble, and it will collapse, but nobody knows when. However, bitcoin is a special case. It was the first blockchain cryptocurrency, and thus has flaws that reduce its utility for transactions.
Other, more modern cryptocurrencies do not have these flaws and are more useful for transactions. They may also have bubbles that will collapse, but have a serious chance of being useful, and therefore valuable, long-term.
2
Thank you for a lesson in economics. It’s refreshing to read Krugman on a topic other than Trump. More please?
1
in which the value of Bitcoin is misunderstood as currency.
18
So long as there is outrageous financial inequality with billionaires hoarding money, other means of unregulated transaction facilitation (i.e., alternate currencies like bitcoin) will continue to emerge. Common sense shows the cure is for Central Banks and government taxation regimes to increase the money supply to more people. Instead we changed our taxes to increase hoarding by the wealthy and those billionaires were in Davos taking seminars on how to win in hoarding in the bitcoin market., which will make bitcoin worthless, like they are making our dollar...will they never learn? Life is more interesting with more money in play and less poor people and poor people diseases: starvation, crime, drugs, etc.
2
I am retired Federal civil servant. A week before Election Day 2016, when I realized Donald Trump was likely to be elected, I commenced the process of transferring all my retirement savings out of the federally-operated Thrift Savings Plan, even though it has the lowest administrative fees in the industry, out of a fear of an evil government stealing all my money. I guess that means I have something in common with Bitcoin investors. Even a paranoid is right sometimes.
1
I don’t know but if you can afford to loose the money, sink an small amount and take a chance. It’s like the lottery if you have FOMO.
I regret selling apple@ 30$ but I doubled my money, that’s the breaks.
2
The last time I listened to Krugman was just prior to The Election. In my opinion he has it right about Bitcoin but wrong about crypto currencies, blockchain technology.
Why?
1. There are billions of people in this world who want to participate in the world economy but are locked out of the banking system.
2. The blockchain isn’t going away no matter how much Krugman wishes—20-30 year olds just don’t care what he thinks.
3. Think about this. What the original internet got wrong was it’s anonymous nature and subsequent election hacking along with anonymous Facebook bots. A crypto currency or token IS absolutely traceable and thus could allow us to vote for the 2024 President at home on a smartphone, for example.
4. There was a tulip bubble and we have tulips today. There was a housing bubble but in many parts it has bounced back better than before. Dotcom bubble yes but you’ll probably check the value of your house on Zillow right after picking up the package on your porch from Amazon which you bought using your Apple smartphone. And the market cap of those 3 companies is how much?
3
If "A crypto currency or token IS absolutely traceable ..." why is no one able to recover the 980,000 bitcoins that had been stolen from exchanges through early December and there appears to be no hope of recovering the $660 million worth of NEM reported stolen by the Coincheck exchange last week?
It’s no different than a lot of tech stocks that pay no dividend, their market cap having no relationship to their actual worth. In both cases their prices are due to pure speculation.
2
This is pretty accurate but there are some differences. At least when you own stock, you own a share in the company's assets including Intellectual Property. You also have some protections against fraud perpetuated by the company owner's. Imperfect of course - but something.
When you own a bitcoin, you own absolutely nothing.
So how is Bitcoin valued? I'm not expert, but usually I see it valued in terms of dollars. Wonder if I take a bitcoin, or a password or whatever, to the bank if they will exchange it for cash.
1
Wheat is also usually valued in dollars. Banks are no more likely to exchange dollars for bitcoins than they are likely to exchange dollars for wheat. The difference is that banks will lend money, not only against harvested wheat but to finance wheat production, secured by a lien on the sale of the wheat.
2
I hope the whole cryptocurrency thing implodes. It makes no sense if there are nation states, taxation jurisdictions, central banks, and national indemnification of banking transactions
2
One other thing is how long will countries allow Bitcoin to exist or to not be regulated. When people in the illegal drug business or those using it to avoid taxes governments are not going to like it. When their citizens start getting scammed or start losing money they are also going to have problems with. Not being able to control your currency or a currency that is used in your country is also something governments especially the more authoritarian will not like. Bitcoins and other crypto currencies very success will probably lead to their doom.
Hmm? So why is the Stock Market bubble any safer than the illusion of Bitcoin if you can lose it all with no assets to recover when a business declares bankruptcy and the proceeds of a liquidation go to creditors? Or in a Bank Savings instrument if the Bank goes under? Maybe I'll keep some cash on me!
2
Fast forward, 2141: The Antiques Roadshow on PBS. "What you have here, from your great, great uncle, is a Nano S "virtual currency wallet" which electronically stored a form of investment asset called 'cryptocurrency' which was temporarily popular way back about one hundred and twenty years ago. It was based on the blockchain ledger concept and actually pioneered the transition to modern blockchain money and quantum computing. The earliest version was called "Bitcoin", and our computer anitiques specialist has determined that Bitcoin is what you have in this wallet device, about two units. Since the intrinsic ledger documentation is intact, we can confirm its authenticity. Production of this electronic token ceased because the costs of production were too high for the limited return on investment, and more refined alternative currencies were quickly conceived and developed. There are few examples left the passwords of which are known. Do you have any idea of the value of your Nano S with two Bitcoin?
"No. I don't have a clue."
Well, at auction we think as a very rare representative of the first global peer to peer monetary virtual coin transition, it would fetch somewhere between two and three million unicoins.
"Oh, my god! I had NO idea! I'm shocked, shocked!"
Congratulations.
4
So refreshing to read a non political piece by Prof Krugman. That’s the reason I started reading your articles - succinct & to the point. Would wish you would produce more of this rather than the usual zealotry pieces. You’re better that that, Prof Krugman - leave the barking to Pocahontas
1
"This will end badly, and the sooner it does, the better."
The same could be said of (human?) life on earth!
2
It sounds as if they might as well be trading poker chips, which are only good for the game.
2
What I don't understand is why if people don't believe in BTC or cryptocurrencies as a whole, do they spend so much energy and time on the subject? Bitcoin's market cap today is 180BN. This is considerably less than the market cap that Amazon alone has added to its stock in the past 6 months.
(I can understand why Mr Krugman or NYT point to it with so much emphasis - clicks + bashing a product that was not born from the established financial complex).
There are many, many places in the world with many, many people for whom a censorship resistant store of value is already a more than interesting value proposition. And not because they're into illegal activities (there's a 4 year study published by Defense of Democracies and Elliptic that points to currently under 1% of BTC transactions being used for illegal purposes).
If this ends up being a bubble or a proposal that fails, the amount of wealth destroyed will be minimal compared to other way bigger issues in history. Ultimately, most of this "bubble" has been done under limited borrowing and by private individuals, therefore the impact should be more self-contained. So don't let yourself get trapped in the narrative proposed by the media, which ultimately is looking at bashing a product only because it wasn't born from the established financial complex (and because they'll make good clicks down the road with it).
5
Bitcoin currency has a rough historical comparison: the German Deutchmark in the years immediately after WWI. The ravages of war and the bludgeon of the Versailles peace accord ruined the German economy and with it, the value of its currency. In effect, its value was untethered from reality; a loaf of bread in the early 1920's cost well over one million marks -- if a loaf of bread was even available.
Most of us know what happened next.
2
Not sure where Paul krugman lives, but most stores and shops I have bought from always take 100 dollar bills. In fact I would be hard pressed to think of a store, shop, or market place that in my lifetime refused a one hundred dollar bill.
2
The author of this article missed the main point of why crypto currency was invented. It was invented to take the value of a currency out of the hands of banks and governments. Any government at anytime can modify the value of your currency by raising or lowering interest rates, printing more money, or simply changing your currency. All these articles about how bad Bitcoin is are simply scare tactics to get common uneducated people to stay in line with what the banks and governments want.
Look at what is happening in Venezuela right now. (2018)The banks froze everyones accounts. How about in the US in 2008. The Federal reserve started printing money and hence devalued the cash that Americans worked so hard to save. Some really struggled when their countries moved to the Euro. I can go on and on how the elite want to have control over the value of currency and crytocurrency scares them as it is an attempt to take back control of the value of our money.
2
Reality check:
Most shops won't accept a $100 bill? Au contraire, very much au contraire. A small establishment, yes, quite likely. But since it is legal tender, unless they can't make change -- which can happen, of course -- aren't they obligated to do so? And, in my experience, they have. And, most often without complaint.
In fact, if you're the lowly cashier, and especially if it's near the end of your shift, you'd absolutely love to get a $100 bill. Made counting your drawer at the end of shift so much easier.
Not sure what our dear professor's casual talk about $100 bills says about his current experience with the "real" world.
2
Krugman makes a few points that are obvious to everyone. However he misses one of the key ones. He says: "But what about the fact that those who did buy Bitcoin early have made huge amounts of money? " Further he suggests that those investors really have made no money, just as those who invested in Madoff never really made money.
It is there his comparison/analogy runs astray. There are many people, some in my office, who invested in bitcoin at a price much less than its' current one, and have since sold it for a profit the reached into the seven figures.
Those seven figures btw are in USD.
Is it speculative? Does the price gyrate like a tilt-a-whirl? It is difficult to understand? Can it be manipulated? Can, and have people made millions in real currency trading it? Yes, yes, yes, yes and yes.
Invest at your own peril.
1
Bit coins are like Trump, no intrinsic or believable value. And it is not surprising that many who buy bit coins vote for Trump, the ultimate schemer.
Cryptocurrencies seem to me little more than online games in which players use real money to purchase virtual credits (fake money) to keep playing. It’s like virtual reality gaming has spilled out into the real world, and is having real world repercussions.
One enormous repercussion is environmental. Bitcoin mining, for example, uses approximately 32 terrawatts of energy each year, or enough to power about 3 million homes in the US, and its power consumption is growing very rapidly.
(http://money.cnn.com/2017/12/07/technology/bitcoin-energy-environment/in...
The servers doing the “mining” require massive amounts of energy to run and are located in areas of the world with little or no environmental regulations. Bitcoin aficionados have assured me that this is a solvable problem, though they are always light on specifics about how.
It seems like a monumental waste to pour so much energy and resources into what amounts to frothy fairy dust, instead of using it to solve real world problems.
1
Marxists understand that Bitcoin is not a currency based on the value produced by human labor-- performing services or transforming raw materials into commodities--but a collectible--that is, a limited item whose value is quite subjective. The question then becomes, are you buying a Warhol or a case of Billy beer?
2
As Warren Buffett often says "when taxi divers (or, Paul Krugman's barber) start telling me how much they are making in a particular asset like the stock market or real estate I know it is time to sell and get out of that asset."
I'm an investor ( I do not own Bitcoin), yet in the past six months I've had numerous everyday people tell me how well they are doing in Bitcoin. Tick...Tick...Tick...
160
Really? I've yet to meet a person that owns a bitcoin and I've met quite a few people who've still never heard of them.
Bernard Baruch, another vested interest who described the scene before the big Crash:
From John Rothchild:
"Bernard Baruch, another vested interest who described the scene before the big Crash:
"Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929."
Are we in a stock bubble?
2
I don't get it. If I don't get it, at least I have learned to stay away from it.
2
That's right Paul, the banks are going to take care of everything responsibly and keep our economy safe. I'm not here to defend cryptocurrency, although I have done well with Neo and Etherium, but it can, and should be part of a broad, well-balanced portfolio. As the world economies continue to evolve and become more interactive and interdependent, the currency of choice, for many reasons, will be digital. True, you may never see a Bitcoin, Litecoin, or a Neo in your life, just like a hundred dollar bill, but your mortgage broker will, your banker will, and multinational companies will. In fact, I have never seen a bond and my portfolio has forty percent of them. I don't pretend to have a magic ball to predict what the future holds for cryptocurrencies any more than I did when I watched forty percent of my 401K vaporize in a global economic collapse orchestrated by the banks in 2008. So don't discount the potential of cryptocurrencies. As my stock and bond prospectives always say, enter at your own risk and always be prepared to withstand a lose.
3
This article omits another defect of Bitcoin: the lack of deposit insurance for Bitcoin banks.
Cryptocurrency fans hate the idea of fiat money being "created out of thin air". But if my bank goes bankrupt (or is hacked) my fiat money savings deposits can be magically re-created at the stroke of a pen, at least up to the limit of the deposit insurance.
1
I certainly don't dwell in an economic strata of the level required to comfortably move in the Bitcoin world, and frankly, I still don't really understand the whole concept. But then, Luddite that I am, I tend to profoundly distrust any form of information storage that I can't hold in my hands. Whenever people start talking Bitcoin, or cyber-curencies in general, I respond with a simple question: Can I walk into the corner bodega with a Bitcoin and buy a newspaper and a quart of milk with it? No? Then I'm not interested.
2
Mr.Krugman, you’re right Bitcoin is a massive bubble, the underlying technology, Blockchain is most definitely not. Many of the biggest tech companies like Facebook take advantage of their size to either buy out (Instagram, WhatsApp) or blatantly copy (Snapchat) their competitors. Companies like Uber produce nothing of real value, and just leach off of being a matchmaker for drivers and users. These companies and their ilk are worth far more than Bitcoin.
Heed my words: Pay attention to Ethereum, a smart contract platform far more ambitious, and far more complex than Bitcoin is. Learn about Dapps, decentralized applications. If data is the oil of the 21st century, Blockchain has the power to democratize it out of the hands of large data oligarchs.
3
Agree.
Krugman's discussion of Bitcoin fails to address the biggest assumption supporting it: The belief in the integrity of the block-chain technology that it relies on. Right now the faith in the integrity and security of block-chain among its supporters seems like more like a religious or cult-like, as Krugman put is, rather than a scientific belief. It's a closed-minded view considering it to be infallible rather than an open-minded perspective seeing it as possibly fallible. That type of belief should be a cause for concern and wariness.
As the old saying goes, when your barber (or shoeshine, or gardener, or maid, or.... (substitute any servant's name here) ) is buying into the stock market (or bitcoin market), it's time to get out.
The question now is whether Trump and bitcoin will collapse simultaneously.
Here's hoping they do, for morbidly humorous reasons.
1
So each Bitcoin is supposed to have an intrinsic value because of its mathematical rarity. But the number of crypto currencies is also proliferating rapidly, with no restrictions. Soon we will be awash in these “currencies”. Whenever Supply outpaces Demand, prices collapse. You don’t need to understand cryptography, just Economics 101.
131
My understanding is there is a cap on the total number of bitcoins that can be "mined". Somewhere in the area of 21 billion bitcoin dollars. What does a fixed amount of currency mean to holders of bitcoin? Does it exclude anyone from owning bitcoins?
Bitcoin stopped being a "currency" a long time ago. However, it is an incredibly effective store of value and a hedge against a nation's currency collapsing. You are forgetting that Bitcoin is global. Not every economy is AAA rated. Watch what happens when the next country's economy collapses (like Cyprus in 2012-2013). Read up on what happened to Bitcoin back then.
I have a lot of respect for Krugman, but he's been wrong before (notably about the internet) and I think he is missing the point about cryptocurrencies. Let's not forget it was the banking system that almost destroyed many people's life savings and the world economy with a real bubble, the real estate bubble and the sub prime debacle. It's no wonder many people now trust the blockchain more than the banking system. It's interesting that Krugman doesn't mention another bubble, otherwise known as the stock market, stock prices left reality a long time ago, once again it's no wonder some people may trust cryptocurrencies more than banks or stocks. Finally some of you may even have more faith in the almighty dollar, a currency based on less than nothing, literally based on mountains of bad debt that will realistically never be repaid. So, Is Bitcoin a bubble, perhaps, but cryptocurrencies, blockchains and smart contracts will change the world just as the internet did. And it just might turn out to be safer than some of the alternatives.
3
Bitcoins are merely futures trading on a nonexistent commodity, the supply of which is artificially constrained by the time and processing demands of bitcoin “mining”. Unlike a real commodity like gold, pork bellies or bushels of corn, bitcoins have no intrinsic value. The demand for bitcoins is therefore completely artificial and entirely subject to the volatile whims of the marketplace. It’s a virtual casino - nothing more or less.
2
I fully understand the Libertarian context of Bitcoin. Banks were always subservient to the government but after the Great Recession Bailout, they were obliged to serve the government. The Government bought the Banks' loyalty. It shows. Consider all the hoops you have to jump through to get your money or deposit money. My banks won't even accept cash if I want to deposit it in a family members' account. I don't like being treated as a criminal.
1
Intrigued, I recently purchased a modest amount of another cryptocurrency. I realize that it can go up, down, or completely crash. The key is to invest only what you can afford to lose.
2
I fear for the dollar. I have lived in areas where housing bubbles exploded, not just popped. People but there savings into buying extra houses to turn around. When the explosion happened, even banks went under.
If the stock market bubble does the same kind of cratering, along with the many housing bubbles in this country, I fear that we could head into a massive depression and with it, a flight of capital to those places where things are actually made.
After all, the dollar is a digital currency, a collection of electrons "sitting" somewhere in some wires. Money is a creation of mob psychology and by itself doesn't even exist.
And if the dollar runs and hides, and business runs away...
Hugh Massengill, Eugene Oregon
I keep seeing people say that 'its value is in the technology,' yet this is irrelevant. Encryption is a wonderful technology, yet just because I send an email via TLS doesn't mean it is valuable - the technology employed does not convey value to the message, any more than Bitcoin's use of blockchain.
But blockchain makes Bitcoin secure, right? The chain is only as strong as its weakest link, and that would be at the ends: the exchanges. The blockchain itself may be secure, but exchanges can be hacked, and have been repeatedly. The server technology employed by the exchanges is still vulnerable.
Bitcoin is non-fiat currency though, right? The claim springs from the blockchain's self-sovereignty, and because there is a cap on the number of Bitcoins which can be mined. That doesn't mean it is non-fiat though; Bitcoin is fiat by definition: it has no intrinsic value, and its worth is solely based on agreement between those exchanging it. A limited supply does not make it non-fiat, nor does the underlying technology. Without the exchanges, Bitcoin is worthless.
Ah, but the claim is that all the energy expended to produce it, reflects the intrinsic value in Bitcoin. Fill a barrel with gasoline and set it on fire, and you won’t have created a valuable fire. Energy expended in Bitcoin mining is no less wasted, mostly in the form of fossil fuel consumption. It doesn't mean Bitcoin generation carries the value of the consumed fossil fuels, just a reflection of the wasted resources.
1
Exchanges are not necessary. Direct peer-to-peer transfers do not require them.
Yet exchanges handle ~95% of volume.
If you take out the anonymity of transactions (intended to facilitate tax avoidance, and other illegal acts), why would anyone want to pay with Bitcoin ? transactions are slow, fees are uncertain due to daily price volatility, acceptance is limited. I can pay with Paypal in an efficient manner. I can take credit card payments with Square very easily. Not to mention cash.
With Bitcoin, as with many things outside the law, there is no recourse to the judicial system to sort out anywrongdoings. Who will you turn to when someone steals all your bitcoin ?
1
While I don’t disagree with the majority of Dr. Krugman‘s comments on Bitcoin, it is a mistake to paint all crypto currencies with the same brush. Bitcoin lacks value or governance but not all crypto currencies. The Ethereum blockchain, for example, provides a Turing complete language that can be used to create value and governance for cryptos based on the Ethereum blockchain. Concepts such as proof-of-stake and proof-of-work provide a means by which individuals are rewarded in direct proportion to their contribution. The Steem whitepaper (https://steem.io/SteemWhitePaper.pdf) and currency provides such a model for content creation.
Why is this significant? Because such crypto currencies provide a means for stakeholders (customers, workers, and investors) to be rewarded fairly and in direct proportion to their contribution with appropriate checks and balances to preserve such rewards. In our current rendition of capitalism, executives and secondary shareholders are rewarded disproportionately to the value they create. Crypto currencies provide a practical means to reverse this inequality, using proof-of-stake and proof-of-work algorithms. The blockchain creates a methodology for fair and transparent distribution of wealth, with the underlying value created serving as the basis for the currency, much like GDP is the basis for fiat currency.
Hidden in the mystery of the blockchain, is the potential to fundamentally change the nature of free markets and capitalism.
1
If you're confused about bitcoin and cryptocurrencies I'd suggest watching "CryptoCurrency Revolution."
It is available online and features some of the biggest names in finance and cryptos, including billionaire Frank Giustra (and Clinton Foundation donor) and the ceo/founder of the world's largest cryptocurrency mining company: https://youtu.be/YwtEUD2crwA.
The potential of cryptocurrencies cannot be underestimated. Cryptos will be the vehicle by which national currencies are completely digitized.
Yes Bitcoin won't likely be the winner when it is all said and done, but cryptos and the blockchain most certainly will be.
1
I wish he were right but seems to me Bitcoin and its kin are too useful for illicit transactions to become worthless. Their volatility is a price many will be willing to pay to be free of government regulation and taxation. If everyday exchanges start moving to Bitcoin, it will not only deprive governments of tax but also the ability to fund themselves by printing their own currencies (aka quantitative easing). Really, they ought to ban cryptocurrency possession and sale, but that would be about as successful as banning possession and sale of drugs.
Rule of thumb: anytime price is driven by liquidity rather than demand, there are the makings of a bubble. This is the untold story of the '08 housing market collapse - Sino-dollars and petro-dollars buying CDO's, developers (who never touch a hammer & nail) bidding against ethanol speculators for farmland, banks loaning 125% of purchase price against infinitely rising property values, purchasers filling new homes with all-new stuff, creating more Sino- and petro-dollars.
So, no, it wasn't the Democrats holding guns on bankers to make them loan to poor people.
2
Mr. Krugman, Wpw, are you old. Clearly, Bitcoin is not going anywhere. These price fluctuations are a bit unnerving to someone who was raised on the 'gold standard' but they're just getting started. Remember, there are lots of 'cults' that have lasted for centuries.
2
What about the environmental impact of Bitcoin? Currently, it uses about the same amount of electricity as Denmark, and most of the "mining" is done in places like China with a high dependency on coal. It is an environmental nightmare, but like most messy things, people just like to ignore it.
2
Bitcoin is one of those scams that carries its future in its name. As in 'he got bit' by the bug. It shares that quality with Bernie Madoff who 'made off with people's money'. It's an oddly synchronous relationship that hints the transactions of those who get bit by the bug will end badly.
It's too popular with criminals and people hiding money as well as millennials. Russian oligarchs have paid Wikileaks and Julian Assange in it and so have millions of dollars now. I don't own it because it is laundering money but that's why it will stay. The government should do something about it but too many rich people love it. It may get hacked eventually and there's a huge bounty (probably by its creator) to hack it but so far no one has. Remember money is also an abstract idea created in Lydia to help commerce which it did.
I wonder if the foolish Dutch tulip bulb buyers in 1635 had so many learned men warning them not to buy? We are surely luckier than they, being well and often warned against indulging in this mania by wise financial authorities.
It will be interesting to see what column Mr. Krugman writes when the Lightening Network comes up on bitcoin, perhaps later this year.
And what what will our advisors advise if the Ethereum network manages to implement a viable proof-of-stake algorithm?
1
It's hard to read an article that begins with such a bad comparison. There's a million reasons why the analogy makes no sense but the most important is the fact that planting a tulip produces more tulips. Of course a bubble isn't sustainable if the product you're buying multiplies at an exponential rate. Bitcoin is the opposite - there is a finite supply.
is this a big enough bubble to hurt the rest of us, those invested in the more modest bubble, stocks?
That’s kind of the problem with crying wolf with respect to Bitcoin. If the price falls there will probably be panic sales but the early adopters bought cheap and did not expect profit. Most were programmers. It’s the hedge funds, wild speculators and likely North Korea that have fueled the more recent insane prices. But, a fall in prices for crypto currencies has nothing to do with a public company or bank going bankrupt. Trading in crypto will continue albeit at lower prices.
Now, on the other hand, if the stock market tanked 40% tomorrow there would be chaos. People would lose jobs. There would be a recession. Anyone near retirement that wasn’t fired wouldn’t want to draw from lower valued retirement investments.
No one really knows what will happen with crypto currencies. But, I hope the market is saturated because focusing solely on price misses too much of the conversation. Yes, most of us should question money and cash and our collective beliefs...and the institutions that make the rules.
You mention that a dollar's "value is ultimately backed by the fact that the U.S. government will accept it, in fact demands it, in payment for taxes." Something that most gold bugs don't realize, or refuse to accept, is that, for most of history, gold's value was ultimately backed by the fact that governments would accept it, in fact demanded it, in payment for taxes.
These days, gold does have more intrinsic value. But most of it's value comes from a kind of inertia. A similar inertia with Bitcoin might save it from total collapse.
Your piece contains a swipe at cash. Although cash ($100 bills) is widely abused, I still view it as a tremedous safeguard against total government control over all transactions. It is also a safeguard agains computer/network crashes (see Puerto Rico) that will inevitably happen. Although its role dwindles, and it is partly used for criminal purposes, cash must remain an option. As for those Benjamins, I still find them pretty cool, and I still use them occasionally.
In discussing the merits of this editorial, my husband reminded me of a Krugman piece from the 90’s in which Mr. Krugman wrote (paraphrasing) that he didn’t expect the internet to ultimately have any more impact on the economy than fax machines. Perhaps Mr. Krugman did as much research then as he appears to have done here because I find this slightly smug editorial even less informed than I am, which is saying a lot since I’m a 64 year old graphic artist. First of all, no one should invest all their money in any one specific venture, so no to the barber. But the common crypto adage is don’t invest more than you are comfortable losing. That could be $600. That $600 may or may not surprise you one day. Second, from what I’ve learned, the underlying blockchain technology is of great interest to large corporations. So learning about how and where it’s being applied is another investment direction with potential. Third (this could have been clearer), bitcoin is only one coin. Like in the early days of the Internet, the crypto world is rapidly evolving, with newer coins than bitcoin applying themselves to using less energy and transactions processing faster than their bitcoin grandparent. And last, re that this is some futile form of institutional rebellion. Consider the burden of student debt for educations that formerly cost a fraction. Consider the transgressions of our financial industries. Consider our crazy leadership. Is it any wonder? Is it doomed to fail? Not necessarily.
3
Pretty good. I see you are still stuck in fractional reserve, though. No. There is no control in our modern banking system on inflation or deflation.
I liken Bitcoin the those toxic mortgage back securities from the early 2000's. It will bring the entire market down once it collapses.
1
A cryptocurrency blockchain is a bank. Like Bank of America or Wells Fargo. Say I deposit $10,000.00 in the morning, then in the afternoon I see a used car I want to buy for $3000.00 and do so using Ethereum or Bitcoin. The difference? Blockchain tells EVERYONE that owns Ethereum that I deposited $10K in the morning and bought a car for 3K in the afternoon. If people accept digital currencies instead of cash it can replace fiat currencies quite easily. Your dismissal of it is premature. Not saying it can't all go wrong. Maybe there will be hundreds of different digital coins and Bitcoin will be nothing buy a 'brand' name. The question is- who would be able to stop it? The 1%? Although the rich own our government completely, what could they do? Take away the internet? It would lead to a revolution. Open EVERY SINGLE PACKAGE mailed to consumers to see if it was bought with digital currency. Not likely. You know as well as I do that our dollar is a fiction, not backed by anything but our trust in it. If the world starts to believe in Bitcoin as much as it does our dollar (and it's already happening), then a world currency based on a closed and trusted system would, although not replace our dollar right away, could mean the end to the US dollar. I trust a transparent blockchain program more than Goldman Sachs anf the government they own. Why did you write this column? What really happens to money deposited in a bank? Laundered? Used to pay bribes? Stolen?
1
Of late, have been seeing many $100 bills, because the ATM machines now have that $300 option for withdrawing quick cash. With groceries, lunch money, other errands, it is not infrequent that $300 get withdrawn in a week.
The example of Bitcoin is particularly relevant in light of the recent passage of the Republican "tax bill." Because the 1% have gotten a huge tax cut, you can expect many other speculative bubbles to rise to the surface: luxury real estate, art work, tulip bulbs (heck, why not?), really just about anything that rich people are willing to buy. None of it will end well.
So Bitcoin conferences won't accept bitcoin. It reminds me of an old truism, 'If you don't know who's the mark in the room, the mark is you.'
2
I bought some a year ago and I bought more last month.
Enough profit to pay off the house, don't try to tell me it was a bad investment.
Sour grapes
2
Mr. Krugman, you do not address two issues:
1) the growing fear of the American public concerning how the tech industry is consolidating information about us in an increasingly Orwellian fashion. All these currencies, Bitcoin, Ethereum, etc. promise the ability, or perhaps now the luxury, of not being tracked, of anonymity. This desire goes far beyond any desire to purchase illegal goods or services. Many law abiding citizens are afraid of being tracked, from bank to credit cards, and in myriad other ways. And, this growing distrust of government is not limited to old white guys living in Idaho waiting for Armageddon. A common example: the popularity among the youth of The Handmaid’s Tale tv show, decades after Atwood wrote the book.
2) Ethereum and other such currencies are using chain block technology, which is a truly new breakthrough that may one day allow us all to own our digital footprint, instead of the current situation where just a few corporate giants make money off information we feel should be private, owned by the individual.
Perhaps Bitcoin is in bubble mode, perhaps it may soon be worth as much as a wilted tulip. But, you cannot deny the growing desire for freedom from Silicon Valley created Big Brother that is underlying the interest. The human spirit universally craves freedom. Always has, always will. See U.S. Declaration of Independence and perhaps re read Orwell.
2
All true but pretty similar to
https://www.project-syndicate.org/commentary/why-bitcoin-is-a-bubble-by-...
Just this week. Roubini's argument is more robust (as usual)
In keeping with the spirit of computer-generated market dips as a "flash crash," they should just change the name of Bitcoin to "flash cash" and get it over with.
Perhaps Dr.Krugman could comment on the 20 trillion dollar central banks ponzi.Please tell me if you consider any major equity market to be free and fair.
The Japanese central bank owns 75% of all domestic ETF's.The Swiss National bank owns nearly 12,000.00 dollars of American equities for every Swiss citizen.
Major international banks operate like criminal cartels.I could go on and on.
What about the stock market bubble? Can't Trump and his cronies manipulate the stock market? Can't these guys make insider trader dealsto make it look like the market is active and soaring? Can bitcoins be used to buy stocks?
I agree, its best to invest in reality and use dreams for fantasy. However, I got a rude awakening when speaking with some people from the outer rings of the former Soviet Union. Bitcoin and other crypto currencies are a cherished. Those who live in countries ruled by total corruption, with local currency voltile and valueless, with laws preventing citizens from bringing in, or taking out,money, and corrupt banks that people do not trust. They love bit coin systems. Unstable as it is, it is seen as a better deal than their local currency. When traveling outside of their borders, they can access their wealth undetected from their dictators.
1
A clear, precise and professorial class about the 21th-century internet Ponzi scheme of the so-called cryptocurrencies. For hardcore gamblers, no need to go to Vegas anymore.
1
Sadly, the word 'Bitcoin' conflates three (3) technologies - bitcoin the currency being one - creating great confusion and masking the 2 technologies that are as fundamentally transformational as the Internet itself. The two technologies that readers - and Mr. Krugman - must understand are:
1) a peer to peer decentralized network with no central authority that automatically detects fraudulent behavior
2) the Proof of Work (PoW) algorithm prevents this fraudulent behavior.
For the first time anyone on the planet - including the billions of unbanked people now locked out of loans, banks, etc. can not definitively proof their identity and thus engage in transactions hitherto impossible.
1) and 2) introduce the Internet of Money. This is a global fundamental disruption of the entire financial system. 1) and 2) are orthogonal to the currency nonsense.
The fraud Krugman discusses is about the currency which is FAR less important and a distraction from 1) and 2). 1) and 2) are the story. Not the currency.
But evil governments are stealing all our money. Cut taxes more than spending, borrow money from foreign entities to purchase foreign goods, maintain a constant trade deficit, and fight endless wars on borrowed money. How will dollars not eventually become worthless?
1
The bubble to fear most is not the bitcoin bubble. Few of us are directly involved in it. The real bubble to fear is the Donald Trump stock market bubble, It is the one which will be bursting next. With a terrific worldwide bang.
2
Yes, the bitcoin bubble will bust at some point, but that does not mean there isn’t still speculative money to be made with cryptocurrency. I’d recommend investing in a different currency (there are plenty of them to choose from) and keeping the investment to a minimum amount you don’t mind losing. In other words, if you have no other investments and no extra cash, absolutely stay away. If you have some extra cash and plenty of safe investments, the risk will probably pay off and if it doesn’t you’re no worse off anyway.
As an aside, the true value of Bitcoin at the moment is being driven by massive investment by the ultra wealthy. Stymied by low interest rates, they’re desperate to get big returns no matter the risk. I am indirectly involved in a large scale mining operation funded entirely by wealthy investors. Personally, I think they’re insane, but to these folks a few hundred thousand is chump change, so I believe they’re following the philosophy I outlined above. In the end, perhaps Bitcoin has no value, but for as long as the rich are willing to pour money into it, the value will incrementally increase. The day they pull their funds due to a hacking scare or loss of confidence is the day this market collapses.
Paul,
And what of the almighty dollar? Since 1913 when the Fed was created, it has lost 96% of its value. It is routinely loaned into existence and let's not even mention QE, which has flooded the world with this scrip. The only thing propping up the dollar is the laughable 'Full Faith and Credit' of the bankrupt US government. We are all on shaky ground here.
My gratitude again to you, Dr. Krugman, for your chronic candor and sane
Lucidity. At 81 and post-Stroke, I am Grateful, always, for Something in this Existence...to Not Think About.
Anything that is a threat to Wall Street banksters control, I am all for.
1
It's amazing how many people who work for a living are speculating on Bitcoin, sometimes putting their life savings into it and bemoaning paper losses they can't afford. Why does the federal government permit this swindle? Oh,right, it's the Trump Era.
Blockchain technology though is being taken very seriously including by Wall St big boys and banks. Maybe that column belongs in tech but Bitcoin & ether etc are the bubbles, the blockchain tech is going to change how it all gets done. Wish you'd weigh in on that?
Paul, your analogy with $100 bills does not wash and pegs you as an urbanite. If you want to see a great many $100 bills being spent, just stand near the checkout lines at the working-class supermarket where I shop in Dover, NJ. Many people need to spend in the 100s and lack plastic.
When it all crashes to earth, then what will be your advice? How about the world's bank all agreeing it worthless stuff, fake currency in search of promised profits someday ... but not in anyone's lifetime. Confiscate these digital balances and prosecute anyone who trades or sells them.
Although it shares some features with a Ponzi scheme, I don't think it is correct to call it one. But it strikes me how many people gamble on state lotteries and in private casinos where they are up against the certainty of a negative sum game. Is it any wonder that speculation in cryptocoins is attractive?
I thought I heard that people in crazy run countries like Venezuela like bitcoin as more reliable than the local currency.
This is the umpteenth article I've read explaining Bitcoin, and I still don't understand it. What I have come to understand is that it somehow burns a lot of electricity, all to support mostly illicit ends.
Come to think of it, it's a perfect metaphor - we have a Bitcoin presidency.
It's somewhat amusing to have watched the cryptocurrency fever grow over the last couple of years. My usual golf partner asked my opinion early last summer after his son, a Baptist minister(!), had bought one and was considering buying another. He is an outdoor retired advertising executive who bought several income properties, and considers himself fairly money savvy.
I tried to explain why a cryptocurrency is not a fiat currency, but rather a speculative venture depending on the confidence of the participants for its intrinsic value. I even mentioned the tulip debacle that got its investors in "dutch" (I know you're out there; I can hear your collective groaning).
I also pointed out speculation caused the 1929 stock market crash. Wildly inflated share prices (not unlike the current markets) led irrationally exuberant investors to borrow on margin, to buy shares they couldn't cover when the bubble burst.
Inflated cryptocurrencies may be a kind of canary in the coal mine, warning of the diminishing quality of the financial air the world breathes. Like a heroin junkie looking for another quick "fix", investors are rushing headlong into something they (as well as many others) don't really understand.
I hope Gresham's Law doesn't apply to Bitcoin and its relatives, driving out fiat currency for an economic pig in a poke.
We may eventually have a cashless society as envisioned by science fiction writers, but we lack the unified world government they also envision.
1
Maybe the good professor should have asked his barber if he would accept payment for the haircut in Bitcoin.
If we all spoke the same language would it be good? If we all had the same currency would it help? I think so.
2
Dear Professor,
I remember you writing something similar two years ago. But Bitcoin is still here.
You have reached the third phase of the five phases which our great Mahatma Gandhiji described for a great idea. The first editorial, you dismissed it. The second editorial, you ridiculed it. Now you seem to have accepted it.
Way to go Professor!
It would help if you could read the paper, mysterious Satoshi wrote for bitcoin. It is supposed to be an easy means to transfer money and there is nothing which stops Government from regulating it. That Governments chose not to do so is their problem.
If you are not paying attention, the underlying principle of blockchain is considered one of the best ways of keeping records and big companies are investing billions in the technology.
So, professor, it would be better if you explained the basics of bitcoin to lay readers like us than joining the fearmongering crowd.
Regards,
Ravi Kiran K
1
Paul Krugman wrote - in 1998 if you please:
“The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”
Blockchain is the latest iteration of the Internet - the next phase of its development if you will - the newest protocol that allows the transfer of real value. Bitcoin and Ethereum and the others may all fall by the wayside (or not), but Blockchain is here to stay.
1
Approximately 10- 15yrs ago, the most popular thing among kids then was a site called "Club Penguin" where you used "Club Penguin Money" that you earned either by playing well or with cash to buy things for your penguin. Bitcoin is just "Club Penguin Money" for the criminal. It is not so creative. I also refuse to invest in any enterprise that is primarily used for a bad end, bubble or not.
82
Crypto currencies have the same "value" as currencies in video games. Ether. At least with Monopoly money you can turn it over and write your grocery list, or use it to wipe, um, something.
The U.S. dollar has been the choice currency for thieves and drug dealers far longer than digital currency. Do you abstain from using the dollar to express value because criminals also use it?
My understanding: a big selling point for Bitcoin is that there is and always will be a finite number of Bitcoins in existence. That makes it different than gold and dollars. If there is a finite amount of anything, its value will go up and up as more and more buyers surface. The fallacy is that, even if there is a finite number of Bitcoins, there is nothing to prevent Bitcoin I, II, III etc etc.
1
BITCOIN
Crypto is a no-go
Cash is a nonstarter
Money has no mojo
Bitcoin brings back barter.
1
I agree with this assessment of Bitcoin, but what is the commodity backup for the American dollar?
1
ChesBay....the dollar is backed up by the full faith and credit of the United States government which is paid for by $18.6 trillion in annual Gross Domestic Product (value of all goods and services).
Welcome to the world.
3
The coercive power of USA to take the assets of the debtor who defaults on a contract.
National currency actually represents a debt owed to the holder of the bill. We collectively believe that the debt is honored because it is backed by the military of the issuing nation.
From the comments it is clear that Krugman is persuasive and has many who agree with him and feel strongly enough about their view to express their agreement in lengthy explanations. Yes, it is best that they avoid this phenomenon altogether. There is some comment consensus that blockchain may present some solutions when applications are finally developed.
What is striking about the column and the vast majority of comments is that there is no discussion of the concept of consensus money or that since 1971 when the US abandoned the gold standard the purchasing power of the dollar has declined so much. Of course, there is also no mention that Milton Friedman in 1999 advocated a peer-to-peer, Internet based system of exchange. It is clear that Dr. Krugman likes the current fractional reserve banking system and its ability to create currency out of thin air and to reduce supply when it deems it necessary. He also seems to favor the credit card companies whose fees are not transparent to most of us, but are 2-4% of every purchase and banks that impose often large fees when the consumer has no alternative. Yes, the status quo is what most favor.
In all, an instructive perspective on a phenomenon that less than a year ago was unknown to the vast majority of people, but now elicits such negative, passionate sentiments.
3
The Great Depression took place under the gold standard. It was only the worst of several deflationary recessions in the decades following the civil war.
Milton Friedman predicted the last 3 of 0 great inflationary since the Reagan administration. I'm not so sure I want to rely on him for currency
Without putting it in so many words, Krugman explains Bitcoin is not actually a currency, contrary to popular belief. A currency is controlled by a nation state. Bitcoin is an electronic *commodity*. It differs from gold or pork bellies only in that it is purely digital. That's a testable assertion: name one way Bitcoin resembles a currency more than a commodity. There is none.
Nothing in Krugman's essay defends the overly costly payment clearing system we live with today. It's absurd the credit card companies charge a commission rather than a flat fee. We buy phone and tv and Internet service per month; why do banks charge per transaction? It's the system that costs, not the use if it.
In the 1950s America invented a central check-clearing system, run by the banks. Have you ever paid a fee to pay by check? No, and checks are much more expensive to handle, especially in those days, when each one had to clear and be returned to the issuer. Why not adapt that model to electronic payments? If the banks bear the cost instead of profiting from it, they'd have reason to improve efficiency. Yay regulation.
1
Paul seems to be addressing the fanboys of Cryptocurrency, not the reasonable supporters. Those of us who are reasonable know that investing in cryptocurrency has risks and could ultimately fail.
The real magic here is blockchain technology. While it could be the case that bitcoin and co. fail as investments, blockchain technology is here to stay because the many advantages it brings to the table.
4
You must mean the advantages of burning as much electricity as Denmark to generate each new coin. You must mean the ginormous daily power consumption to support a whopping 18,000 transactions a day. Yeah, Bitcoin is the future alright. The future of the big short.
Explain to me again why we need anonymous transactions? Every explanation I've ever heard devolves to evil governments and fiat currencies. Arguments, in other words, untethered from any understanding of history or economics.
Every Bitcoin believer is either an ideologue, or innocent of macroeconomics, or mesmerized by technology they fundamentally don't understand. Or some combination of all three. Reasonable doesn't describe even one.
Bitcoin lost 40 % of its value. I am sure many people bought it at the highest price and lost money. Where are those people and why are not they complaining and warning? The only people who are complaining and warning are those who never own it !
18
Or as the saying goes, 'victory has a thousand fathers, but defeat is an orphan'.
1
Many people who I know who lost money on Bitcoin generally get embarrassed and feel too proud to talk about it. They probably didn't want to hear the "I told you so" that many people will tell them
1
Perhaps the chapter in Huckleberry Finn about the duke and the king and their ability to scam a town three nights running with “The Royal Nonesuch” would explain that phenomenon.
Or maybe not. I suppose we’ll see before too long whether there’s enough value here to justify the price.
1
"$100 bills aren’t much use for ordinary transactions" That's strange, here in Austria slightly more valuable €100 notes are in constant use for ordinary transactions and you van buy a cup of coffee with one at any cafe. Bank machine withdrawals here give you €100 bills automatically when you withdraw money and every business takes them as a matter of course. Maybe because the Austrians were used to large denomination bills before the change over to the Euro when the Schilling was worth only a fraction of a dollar.
2
So, how much is acup of coffee in Austria? Just curious.
Wait, most places don't accept $100's as payment? I can't go into Target, or Home Depot, or my grocery store and trade a single $100 bill for that value in goods? I'll bet these stores (and the Fed) would advise differently.
6
Yeah, surprising statement -- to me -- by the good professor. I'm relatively poor, but I get, see, and use $100 bills a lot. Alternative universes?
Obvious bubbles are often a sign of general overconfidence, and may beget other bubbles. People see others apparently making money and are open to all types of schemes by which they can catch up. Are Bitcoin and other quasi-currency bubbles a sign that less-obvious bubbles are getting ready to pop?
3
The main point seems right: Bitcoin doesn't show any signs that it's about to displace conventional banking and credit cards, as a means of payment for groceries, gasoline, rent, restaurant meals, payroll, and Amazon orders. It's owned for speculation, and for a relatively small volume of black-market transactions.
Where I question Dr. Krugman's conclusions is on the claim that taxation is a significant form of backing for the US dollar. Imagine if something like Bitcoin truly lived up to its cultists' dreams: imagine if there were a form of electric currency that could eliminate both the opportunity for credit-card fraud and the need for most of the operations of banks and credit-card companies, and do so without any comparable costs of its own. Imagine it working so well that there would be no reason to do any transaction in US dollars, other than paying taxes. How would dollars be worth anything? The US government would promptly accommodate taxpayers' need to pay taxes in (what would then be) normal money.
8
Maybe, dsws, but those are a lot of ifs
Perhaps the US government would see this coming long before and make bitcoin illegal?
The cult dream is infeasible because the technology won't support it. If cost-free transactions are possible, how exactly is the crypto-ness the critical advantage? Can't the regular banking system also be made cheap?
Readers of Krugman should well know the answer to your question -- why wouldn't nations surrender control of their currencies? -- is simple: Greece, Greece I tell you! To control the money supply is to control the economy. Just ask the Weimar Republic.
Believers in Bitcoin's free-transaction hypothesis make two mistakes rooted in libertarian ideology. First, they believe a "free" currency, unburdened by government can of course operate more cheaply than hidebound, bureaucratically controlled state-issued currency. Why? Because government. Second, they assume the expensive transaction-clearing system we have today is inevitable and unchangeable. Again, a different understanding of democracy and regulation leads to other conclusions. It's not that Bitcoin is so good, you see; it's that government is so bad.
My question is whether bitcoin (and the like) can be used to launder money. If the answer to that is yes, then perhaps the price rise is not actually a bubble. If bitcoin is a money laundering tool, then I believe we might be able to say the it is money chasing a rare commodity (easy money laundering).
6
" actual Bitcoin use seems to involve drugs, sex and other black-market goods."
Welcome to the world, Paul.
12
Surprised you don't know that. Bitcoins were likely a venue for the Chinese trying to move their money off source. That and Macau.
This is especially true if the money was dirty to begin with. However, laundering money via crypto coins is not a bubble made. Quite the opposite, depending on how desperate one wants to wash one's money, one would take anything. Something is better than nothing, or worse!
4
Not really. Transactions in bitcoin are too costly, too slow, and, if you're not careful, too traceable. The black market has moved on.
Per Wired magazine, the cryptocurrency preferred by drug dealers is now Monero.
What probably doesn't occur to most people, but I quote from the NYTimes itself: 'Creating a single unit of the digital currency Bitcoin requires at least as much electricity as an average American home consumes in two years. The process involves computers using special software to solve mathematical problems in exchange for Bitcoins'.
Applies to "the cloud", as well - everything has a cost.
20
"the cloud" has a cost, but it is useful as well. Think of your contacts which are updated automatically on all your Apple devices when you change or add a contact to one device. Would not be so easy without "the cloud"
1
I think it's wrong to say that bank accounts are Those records represent the liabilities of real corporations with real assets and capital behind them. Moreover, those corporations are heavily regulated and subject to examination and must publish audited financial statements. They are also subject to regulations that require that they adhere to minimal computer-security standards and back up their records. While not perfect, and as we've seen they don't guarantee that the bank won't default on its obligations, they are far better than any security you get with a cryptocurrency. Finally, if the bank defaults on its obligations, there is a government-controlled insurance plan that will compensate you for at least part of the loss. Can bitcoin top that?
12
FDIC insurance is only up to 100,000$. If you can’t keep 1 password secret and off of phishing emails then yes you probably shouldn’t use crypto currencies. That said, bitcoin is much more secure than any bank, utility, hospital, credit agency... The list goes on. Cybersecurity is a global urgent problem.
We know that the bubble is about to burst when common people are investing their hard earned savings in it. The speculators have already got their profits and mow the support for Bitcoin is from people that shouldn't be gambling their savings. But how different is it from the current stock prices.
I wonder what will crash first the overpriced market or the mystical cryptocurrencies.
So not to mislead, I have no expertise in these fields except for my 80 years of life and knowledge that hoola hoops and spinners prices and value is in the eye of the pied piper follower waiting for the next tulip bulb fad.
28
Miners of Bitcoin appear to have plenty in common with gamers. The difference is the price tag is exceedingly higher.
6
This opinion piece is effective in its arguments and clear in the end. I have been always speculating that the methodology, behind the currency's market, must be analogus to the Ponzi scheme. Because the whole digital high technology itself was new and had been well received, many people might have had no cautious attitude toward the digital currency at the beginning, either.
The sentence appearing in the second paragraph from the end indicates a lot. Psychologically and practically, those who invested or are investing Bitcoin would be very sensitive, if not dangerously hostile, to any criticism, because no circulation will lead to their loss or total loss. Its virtual value, if any, in fact, depends on the populace's awareness.
The writer touches importantly more. As pointed out in the piece; no linkage between Bitcoin and reality means that its self-dependency is the sole way to generate profits within its digital fortress, which has been solidified [probably only] with the information most preferable to them.
3
No circulation leads to loss whether bitcoin or billionaire hoarded US dollars...
Er, no offense meant, really, but your writing: It's so formal, stiff, and reserved. You are obviously intelligent and educated, but what do you do, or did you do, for a living to learn to write that way? British government service? Technical writer? A bureaucratic lawyer?
Just curious. :-)
I've been paying for all my transactions in b-coin. (It stands for bo.li coin, not to be confused with the other b-coin.) B-coin has a superior blockchain, the algorithm that is supposed to ensure trust and ensure that accounting can't go awry. I know it is superior because (unlike that other b-coin) my b-coin has never been stolen or evaporated into the accounts of unknown others. I don't have to spend legendary amounts of (real money on) computational power (in meaningless thumb-twiddling) to make more b-coin. And furthermore you can trust its value. I've kept the value stable at b-coin=1$, but i'll bid up the price a bit if the dollar becomes weaker, but since there is no danger of speculative bubble there is no danger that the b-coin I pay you with will lose its value. Anyway, that's what the b-coin form which met in my office this morning decided. So much superior to that other b-coin! You can't refuse to accept it.
3
Bitcoin is another sign of an economy free from ethics. Why does anyone think they deserve to be wealthy by not doing a bit of work, but simply by being luckier than the poor slob who will be left holding the bag. That is far from "an honest day's work."
49
And there are many other groups of people in this country who " think they deserve to be wealthy by not doing a bit of work", and they aren't about Bitcoin.
I take it you don't invest in the stock market. People become wealthy there without doing any work all the time.
All true of course. Never mind the light bulb will come on some day burning a lot of people most of whom seem to be in Asia. Dr Doom (aka Nouriel Roubini) has produced a rather good and more detailed explanation of why Bitcoin and all crypto currencies are a fraud and of the limitations of the entire blockchain concept which is widely touted as a wave of the future and as a sort of good that has come out of the Bitcoin fraud.
https://www.project-syndicate.org/commentary/why-bitcoin-is-a-bubble-by-...?
8
A bubble means the price is really off the real price. We all know the real price is decided by demand and supply. Just forget about the demand. We know the supply curve is in fact the marginal cost of the producers. A genuine question: can you estimate the marginal cost of bitcoin and show us the number ?
3
Bitcoin has an Achilles heel that is not shared by all blockchains. That is that the reliability of bitcoin transactions depends on validation by miners. As the number of mined bitcoins approaches the fixed limit, the cost of mining approaches infinity. Sooner or later, there will be no miners, and no validation of transactions.
7
Actually, that's incorrect. The Bitcoin system also includes payment of transaction costs to miners for maintaining the blockchain. As the number of Bitcoins trail off (around 2140 at the current rate of production) the transaction payments remain.
5
How will those payments keep up with the cost of mining?
Yeah, because we all know technology never changes over time and no ones ever thought of a viable solution, like, I don’t know, off the top of my head, charging a transaction fee? Just think for a moment about all the energy and cost that is currently spent just in one particular town or city on securing precious metals, paper currency, and bank transactions. Armored cars, security guards, high tech vaults, IT professionals, brick and mortar buildings that have to be heated and cooled, the gas that is used driving to and from them by all these employees and customers... All the costs and energy used to verify bitcoin transactions are tied up in only one area, the cost of the mining rigs, which some have focused on to make the argument that Bitcoin is wasteful and unsustainable. But few ever stop to think about how much is spent on secure transactions now...
My one brush with Bitcoin has been a headache. I had a client last year who insisted, after the work was done, in only paying in Bitcoin. He is a medical professional in Nigeria (I know, Nigeria, right? I do scientific editing for authors all over the world, most of whom I never see. He was the first who ever gave me any trouble with payment). After haggling with him I tried to become able to accept it, but the entity I tried to sign up for, that said they could basically be the middle man, asked for my website in their long application process. I don't have one. Maybe I should, but I already had wasted hours on this Bitcoin issue and wasn't about to start up a website just to receive a few dollars. So I just gave up on it, going to try to just write it off. If it is such a hassle to deal in Bitcoins, I can't believe it will ever really make it as a currency.
62
Wow, it's so simple. I think you are just challenged. I remember the first time I sent a payment with bitcoin. That was the moment I realized it was going to be huge. Just copy the wallet address you want to send to, enter the amount, and hit the send button. So easy.
this shows you don't understand the simplest mechanics of bitcoin. All you had to do was download a bitcoin wallet to your computer and send him your bitcoin address. That he didn't explain this is also suspect.
All you had to do was setup a wallet, free software, and give him the address. No middle man is required with cryptos until you want to cash out into a fiat - that's the point of a crypto.
I can't predict the future of Bitcoin, but I have been happy to use it as a way of learning more about the technology in general. I paid some money a few years ago to get into a mining operation. My goal was to get 1 Bitcoin. As the technology and the user experience improved I paid a little more to get my 1 Bitcoin quicker. Last December I took out my initial outlay and a little profit and kept the rest where it is. To this day I keep getting a little Bitcoin every so often as part of the mining operation.
I've never thought of Bitcoin as an investment. I'm human, so of course it has been interesting to watch the cycles and imagine. But, I'm not putting any dollars into Bitcoin anymore. The lesson is too expensive now.
7
You are putting money into bitcoin. You're paying it in electricity for your mining operation.
Bitcoin is taking a page from gold. The intrinsic value of gold is limited to the properties and uses of the metal. Non-oxidizing, and malleable, it has a lot of uses.
But the sale value of gold is related to what people think gold ought to be worth. All of that excess value is bitcoin value - based on the belief that gold has a high investment value and will continue to have high investment value beyond electronics, fillings and jewelry. Both have a real use and real value but those uses and values are not attached to the price of the asset.
Both gold and Bitcoin value comes from people's fears that the value of real assets - homes, companies, stocks and funds, the economy - are not to be trusted. They can sock cash or gold under the mattress - or Bitcoin under their password - and feel they are protected. That's an expensive security blanket.
We'd do better trying to figure out how to fix our economy. But that's not going to happen soon. Maybe our best investment is a chunk of arable land.
31
@Cathy Hopewell junction ny
The analogy with gold is flawed despite the superficial intrinsic value similarities. With all its limitations as a medium of exchange gold does have a physical existence, some utility (as you mention) and it has longevity. It's been regarded as a store of value for thousands of years.
6
Gold's principal utility is as portable & universally recognized liquidity. It's doubtful that industrial capitalism would ever have gotten traction, without the infusion of New World gold. A one-off, you'll note, seldom taken account of in arguments about the sustainability of various models.
1
@Nancy
Corinth, KY
What you say about Gold's portability and recognized liquidity is entirely true but its role in creating industrial capitalism was relatively limited. There was a chronic shortage of specie in the 17th and 18th centuries caused by the demands of dynastic wars and developing capitalism which largely accounts for the development of central banking, and by the middle of the 18th century privately issued paper currency was fairly common.
2
Strange, frightening times, these. I have been asked by several people, all of whom I know identify with the right wing, whether they should buy Bitcoin. I tell them that I wouldn't, but I just leave it at that. However, it is very telling that many of those interested in Bit are solidly of a mind that the government, apparently any government, is not to be trusted, including central banks. It's all a global conspiracy of the elite you see. And yet these people are willing to throw their money at something that they absolutely do not understand as a protest of the conspiracy. That is precisely the mindset that led millions to elect a dangerous demagogue with a clear and verified track record of fraud and outrageous behavior. And they vehemently support him to this day. We are in serious danger, and it gets darker by the day.
513
This is a good observation. I never really about how bitcoin and trump might be two manifestations of the same phenomenon. But it strikes me as true. Both types of people basically want to believe in something because it resonates with their ideology in spite of evidence. Would be interesting, if anyone could get the data, to see what the correlation is between voting trump and investing in bitcoin.
10
Well, serious danger of what, Bitcoin, Trump or both?
1
Instead , you would have preferred a criminal? I despaired the entire Obama tenure because of the vast expansion of federal power with so many government agency out of control. I despaired to the point of getting set to withdraw all investments in the stock market and my own company in the event that Hillary was elected. Instead, a wonderful event occurred and I invested more in American business and what a fantastic result. I'm delighted.
There's hype around the currency aspect but what gets missed is the blockchain story. It just so happens that cryptocurrencies get all the headlines because money is being made now rather than later.
This is one key difference between bitcoin and ethereum for example - BTC is a one trick pony (although also the most freely convertible of them all) whereas the ETH blockchain can be used for more purposes.
To be clear- there is for sure a bubble now. But there was also an internet bubble.. it popped dramatically, but internet still changed the world. Pets.com vs Amazon vs Netflix.
Remember the old Qwest commercial with the dumbfounded guy at the dusty motel that has "every movie ever made, on demand" .. the catchphrase was "how is that possible?" It wasn't then, but now we have more video services than we know what to do with.
One just need look at the amount of blockchain interest at Davos.. they're not talking about (just) the currency dimensions, but the potential for disruption of much more. For example the mortgage approval process in Australia has gone from taking up to several weeks to just a few minutes because of re-engineering the process to benefit from blockchain trust and information approaches.
Lots of people will lose a lot of money before the cryptocurrency market matures. But the long term result will be a new technology that will be as important to society as internet.
43
"as important to society as internet"? Remove internet and estimate value of blockchain. Remove blockchain and estimate value of internet. Which gave you the higher number?
1
Of course you're right, there is no blockchain without internet.
You could wind that back all the way.. without electricity, there is no internet. Without turbines there is no electricity. Without refined metal there are no turbines. Everything is the sum of human innovation.
I work for a multinational in the top 30 of world's most valuable brands .. and yet, when the request went to the MD to procure the .com address in the mid 90s, the answer was "we'll buy it just to protect the brand, but this internet thing is a fad."
Let's talk again in 10 years. Blockchain is effectively like introducing http as a protocol. And that's why I think it will be as meaningful as internet.
1
This mortgage approval process example is very interesting. Do you know any other Block-chain application on design infrastructure projects that involving PPP or public offer bid tool demanding thrust on big data amount? Maybe in countries with lack of trustful govern institutions could be useful. https://rmeutemporal.blogspot.com.br/ [email protected]
Yes but block chain ledgers, albeit computing energy and time hogs, are very interesting for all kinds of verification. Bitcoin may be shaky, but blockchain tech has immense potential.
20
Bitcoin has the same relationship to blockchain that pornography had for the internet and VCR: driving early adoption through socially marginal activity.
1
Your logic is "the dollar may be shaky but printing on paper has immense potential". So what?
The point at which Bitcoin and other crypto currencies become an issue is when they do become tethered to reality in the form of actual capital or seed for a valuation in actual capital. As long as they stay isolated from reality, a bubble will have little impact. But we should all fear when financial institutions begin to take these currencies seriously.
4
I have a question. I think I understand that the "value" of cryptocurrencies is based, in part, on the supply restriction inherent in the "mining" process. Massive amounts of computing capacity are required to produce a unit of the currency. Won't this whole system ultimately come crashing down when quantum computing makes that process a snap?
15
Asic and GPUs today are already hundreds times faster than when Bitcoin came out. The difficulty of solving equations adjusts depending on how fast the previous equations are solved to account for this.
1
If quantum computers work than encryption is at risk. If you’re asking if increased computing power speeds up the mining, no. The system is designed to increase the work as computer processing increases.
2
One of the more fascinating aspects of this Bitcoin fantasy is the reality that a core group of developers, perhaps a dozen or so, have control over the changes to the open source code that enables Bitcoin.
The core developers are not the BitCoin miners. While open source systems benefit from the inputs from thousands, maybe millions of users, the technology still requires some designated people to maintain the code that is used widely. Differences of opinion among the core developers can lead to variant forms, of which BitCoin now has several.
Oh yeah, there's one other interesting aspect of the core developers.
They can create BitCoins should they decide to do so. Whether or not they can increase the size of anyone's holdings is not clear, but technically, it is not an issue. It's an opportunity awaiting someone.
BitCoins. They belong with Tulips as a currency.
17
You have no idea what you are talking about. The core developers can change the code all they want, but unless the network agrees those changes are not implemented. There is no centralization to Bitcoin, or BitCoin as you bizarrely spell it.
This is a departure from any previous monetary system. The very point you use to denounce Bitcoin can be said about the dollar, as it's under the control of a very limited number of well connected people that probably don't have my best interests in mind but rather theirs.
Krugman doubted the internet would have an impact on the economy. He was wrong then. He's wrong now. The only thing I learned in this article is that mess on his head actually requires a barber to maintain. And yes, Mr barber, based on your work you should buy BTC. You'll never make it cutting hair.
My understanding is that it is all based upon a computer algorithm somewhere. It has been claimed to be 'safe,' but if there is an algorithm, there are also hackers who can mess with it. Beyond that, it is something that I do not fully understand. Only a fool puts her/his hard earned money into something she/he does not understand. Apparently there are many fools out there currently riding for a fool. I'm not one of them.
43
If hackers messed with the Blockchain, that would be the downfall of bitcoin. Krugman might be right to be skeptical of the underlying value, but what people don’t appreciate is that the Blockchain is perhaps the most impressive invention of mankind thus far. It combines the most impressive aspects of mathematics and computing. Nine years, never hacked.
The system is designed so that such a thing is not possible. Not in a “this is really good code” way, but in physics design like “can’t go faster than the spread of light” way. People’s keys have been stolen off of traditional centralized databases, but the Blockchain of bitcoin has never been fraudulently altered.
Cryptocoins are a godsend for the pump & dump gang. This works even better than hyping penny stocks on Yahoo! Finance, considering of the volatility, anonymity and global nature. And they are unregulated to boot. What's not to like - for the fraudsters!
37
The biggest plus in bitcoin is that it isn't a fiat currency, the rest is consequence.
But, contrary to other non-fiat currencies, bitcoin is a cryptocurrency: you can't 'mine' more bitcoins than it is possible, but you can create other cryptocurrencies. Therefore it is a non-fiat currency that is a fiat currency, a fiat currency with extra steps. Hence the bubble: bitcoin's rise lifted up subaltern cryptocurrencies, which inflated its own price, which formed the bubble.
Such thing wouldn't happen to e.g. gold, since we know there aren't any more significant reserves in the globe. But even gold fluctuates, because it isn't money anymore, and it has to compete with other commodities (including some other metals, like silver and platinum, in normal times, but also normal investments when profit rates are high).
4
BTC price could be a bubble. But what I lack to see is any mention of the underlying tech. For example a friend tried to send me some money from Denmark, but the fee from the bank itself ended being half the amount I was getting. This being because our banks didn't have direct connection. With BTC and other crypto currencies you know the fees you incur before doing the transaction and which depends on the volume of transactions (BTC at least). It's 1 hop, from that friend to me. On the banks it's first hop to the bank with connection to a bank with the connection (could be more middlemen) to my bank and then I get something.
You could say this is the same as Western Union or similar, but you need a Western Union that is close to you too retrieve the money. In crypto currency you only need a local exchange and an internet connection.
8
The reason you don't see any mention of technical analysis is that Krugman is a hack. He knows nothing about the innovation, only that it threatens a reality bubble he's enjoyed his whole life. The only bubble about to pop is his.
A good currency is a medium of exchange. It’s not an investment, which is designed to produce a return for an outlay of capital. The two concepts are mutually exclusive: You would never say that you are “investing” in euros or yen or Swiss francs. Speculating that their value relative to another currency will increase or decrease, certainly. But betting is not investing, since no net gain is produced.
12
The phrase “tether to reality” used by Paul Krugman to describe what is lacking in Bitcoins is the best way to explain why the bubble will burst, as sure as night follows day.
I have heard intelligent, wealthy people at cocktail parties describe why they bought Bitcoins and why cryptocurrencies are the wave of the future. I listened to enthusiastic explanations of how modern and refreshingly unregulated the concepts of crowdfunding and initial coin offerings are.
The same fans of Bitcoins, however, give a very unsatisfactory answer when asked what happens when the prices start to fall. What happens when Bitcoins are supplanted by a more popular cryptocurrency?
As someone in his 70s who still smokes cigarettes, drinks black coffee after dinner and tries to have ice cream and chocolate chip cookies at least once a day, I am grateful that I passed on this particular addiction. It was easy.
23
Something I'm not clear on: Suppose you were an early investor in bit coin and thus reaped a huge (virtual) return. What is involved in converting that virtual return into a more tangible, secure return? I wish someone would expand on that.
36
A secondary service known as a "bitcoin wallet," such as the website Coinbase, lets the user link their bitcoin account to a regular bank account.
Bitcoin is purchased with dollars from the bank account, and dollars are deposited into it when bitcoin is sold.
I was an early investor in Ethereum, the second biggest cryptocurrency, so I'll try to answer this. I only put in about $100, so I'm not a millionaire or anything. But I've heard stories about those who are.
You have several options. If you believe in the technology, that it really is the currency of the future, you can keep holding most of it. You can also trade Bitcoin or Ether for other cryptocurrency so, some of which are interesting, some of which are blatantly obvious scams. As they say in the crypto community, do your own research.
You can also cash out into USD, or your local currency. I've heard of people who paid off credit cards and mortgages that way. But you'd also have to pay capital gains tax.
Anyway, hope that helps.
1
As with any paper-return (say, a rising stock market): sell. For real currency. While there is still someone out there to buy.
Bitcoin is the microcosm of the larger speculative whole that contains it. The financial markets especially the derivatives market in emerging in economies are similar to bitcoin. They claim a larger value than they actually contain. This will collapse too. Money does not breed money after all. That is the most self deceiving idea of those who gamble in the stock market.
The need for credit gave birth to this place where money concentrates and is occasionally used for productive purposes. Not much of that is happening now. What we buy and sell in the form of derivatives is an illusion. Did we forget 2008. Or wishful thinking is more powerful that the evidence after people keep buying lottery despite the small probability of winning.
17
Except “money does breed money.” When you put your money in the bank some of it, no, most of it, is loaned out in the form of mortgages, home equity loans, business loans, etc and there is a multiplier effect. When the fed changes the interest rates by buying more or less treasury bills they are effectively dropping off bags of cash into the system via a virtual helicopter.
I think it’s funny how much faith people have in the traditional currency system compared to crypto. Do they all really understand the mechanics of traditional money or is just what they are comfortable with because they grew up with it and saw their parents using it? Seems like a different priesthood but it’s still a priesthood and it’s all still based on faith.
I would not advocate “putting all your money” in crypto. But if can afford to take some risks, why not a little? I would also think curiously and be judicious about which crypto currencies you participate in. Eth seems legit to me because there is underlying value associated with the compute power in the Ethereum virtha machine.
Money represents value. Value represents the labor it took to produce the service or the good. Labor produces surpluses (it is the only source of surplus) which are divided among profit, interests, rent. This has been studied for more than 150 years starting with Adam Smith. The marginalist counterrevolution neglected this to focus on the use of things as a source of profit. From then on no crisis has been explained by this approach. Only the contradiction between use and exchange value correctly explains crises and speculative phenomena like crypto currencies
1
Your last comment about hackers seems one of the most important. As others point out there are more cryptocurrencies than just Bitcoin. All are subject to hacking and at least several have been to the loss of tens of millions (in on case hundreds of millions) of dollars worth of bitcoins. If hackers can hack military and spy computers, it is sure they can continue to hack the bitcoin systems. If your bank or bank account gets hack there is your bank and insurance to make you whole. Do bitcoin operators provide the same assurance?
5
For clarification, some of the exchanges have been hacked but the bitcoin protocol itself has not been hacked. You can invest on the exchanges and transfer your coins to wallets that are offline - so called “cold vaults”. The cryptography is strong.
If you stick a bag of cash under your mattress and it is stolen, are you offered the same assurance?
There are instances of crypto assets being insured against theft - Coinbase has insurance on their “hot” wallets, for example, which is the small fraction of cryptocurrency stored on internet-connected servers (done for convenience to allow the day’s transfers to be more or less immediate).
There’s no reason why cryptoassets couldn’t eventually be insured - your bank balance isn’t really backed by anything tangible either other than an agreement between banks on what constitutes “money” and how it can be “transferred”.
It's a mistake to think of Bitcoin and other cryptoassets as currencies. They aren't meant to be currencies -- they are designed to serve decentralized networks (i.e. peer-to-peer payment systems supported by blockchain). The way to think about these assets is as early-stage technology companies, like venture capital on a public exchange.
Too much attention too early is overheating the market. The fundamentals are just not there to justify current valuations. Keep in mind that 90% of start-ups fail. However, these systems are open-source, so the intellectual property is preserved and can be improved even if a company fails/a bubble bursts.
I agree that these assets are in a bubble. The technology and infrastructure need more time to develop before they warrant this level of investment, but peer-to-peer payment systems and decentralized applications are here to stay.
7
Bitcoin is just the largest in market cap of all crypto-currencies. There are others that succeed where bitcoin is lacking. Ethereum is great due to its low cost but also requires significant energy to process transactions which also costs users a portion of money.
Cryptos such as RaiBlocks and Stellar are much cheaper and faster to process. These will be where the future of crypto-currencies lay.
2
The energy costs are not only interesting for the user, environmental consequences of energy squandering are paid by all.
But, I'm so curious, what is the real advantage of a cryptocurrency? As far as I can see, it's just good for money laundering and criminal transactions. Until that problem is solved (and it won't because it's system immanent) cryptocurrencies should not be encouraged.
5
That cryptos are a risky bubble does not mean that there are no advantages.
Ignoring philosophical reasons that may not be universally loved (preferring exchange rates to be purely influenced by the market rather than QE money pumping/buying by central banks, for example), one of the most practical advantages of a crypto is that it gives the anonymity of cash with the convenience of digital.
Criminals and money launderers love cash. As do Germans. Should cash then also be discouraged?
https://qz.com/1141199/germans-still-love-paying-with-cash-but-often-the...
Green economy, huh? Triple bottom line, eh?
Essentially it is throwing good money after bad money.
18
If only Bitcoin were as innocent as a mere speculative bubble. As it turns out, virtually all of the increase in price of Tether over the past year has been caused by a company called Tether Limited. Tether Limited claims to issue tokens that are each backed by 1 US dollar--but in reality, it generates these tokens out of thin air. The fake "tether tokens" account for more than a third of the funds that have gone into Bitcoin.
What's more, Tether Limited is owned by the same team that owns Bitfinex, the largest cryptocurrency exchange in the United States. So far, the Bitfinex/Tether team has generated $2.2 billion in fake "Tether tokens"--half of those in just the past month!! 90% of those Tether tokens have been traded out by Bitfinex for Bitcoins. And most of those Bitcoins have then been cashed out for real cash. But the company DOES NOT redeem Tether tokens for any of that cash.
Forget bubbles. Forget Madoff even. What we're witnessing is the biggest Ponzi scheme in history, and certainly the biggest financial fraud since Enron. If a warrant doesn't go out for the Bitfinex/Tether guys within the next few weeks, they could go down as the most successful criminals since the 1940s.
118
Wow. Thank you for pointing this out. I found this article about it. Jawdropping ...
https://mashable.com/2018/01/29/bitcoin-tether-stablecoin-alleged-scam/#...
What to you do when a demanded audit is about to prove that you don't have the reserves to back up your fake "stable" currency? From the story, this:
"That Tether may not in fact have the billions in cash reserves to back the billions of Tether tokens issued could be easily disproved by an auditing of the company's books suggests a simple solution: release an audit. And yet, while long promising such an audit was forthcoming, the latest hope for such an accounting was dashed Saturday when CoinDesk reported that Tether and its supposed auditor were parting ways."
1
But it will all trickle back down to the dead-broke marks when the cryptobitcrooks pay people to clean their mansions and wax their Lamborghinis.
1
Indeed. Don't buy it if it does not exist. Warren Buffet buys railroads and other real-world assets and businesses, not pipe dreams of pure speculation.
Bitcoin will be hacked, just as Enigma was hacked.
Right now you can buy shares in some of the most profitable businesses in the history of mankind. Bitcoin is not one of them. If you can't kick the tire and light the fire, it isn't an airline.
Saying that no one can break the code of the cryptocurrency is like saying that this ship cannot sink. Bitcoin is a first class ticket on the Titanic.
All ships can sink. A Bitcoin-Titanic ticket is as worthless as a degree from Trump University. Totally worthless. Believe me.
39
Comparing the Enigma to Bitcoin is all kinds of terrible analogy.
Bitcoin uses Elliptic curve cryptography, the same protocol used by the NSA for ultra-secure encryption. The same type of cryptography (AES as well) is the underpinning of the entire modern internet.
Elliptic curve cryptography is less susceptible to attack by quantum computer, so it represents the leading edge of provably secure communication.
Basically what I’m saying is - whatever you may think of bitcoin, if the underlying cryptographic concepts are ever “hacked” it would also mean the end of secure communication period.
Warren Buffet was looking into investing into Ether, a crypto currency along the lines of Bitcoin.
At least if you bought tulip bulb back in 1635, you had an actual tulip bulb which you could use to... I dunno... grow a tulip or something...
52
Psst. Don't mention to anyone that Satoshi's original stash of 'coin is protected only by a thin cryptographic veneer-- subject to quantum computer attack! Who needs a puny x-prize when the golden 'coin pile beckons?
7
You do realize when quantum computing comes of age, all encryption on everything secure by today's standards will be ripe for braking into.
Bank accounts, stock exchanges, bitcoin, etc...
Essentially nothing will be safe. We are a long ways off from that. I would imagine they'll have to migrate to quantum resistant bitcoin wallets and quantum resistant encryption methods.
And it's always your barber or shoeshine guy, not someone sophisticated at finance, who's putting their money into it. It's people who've never invested in anything before but they think they can jump onto a trend and look like geniuses. Not realizing that if there actually is any smart money on this, it's already cashed out.
Shaun Eli Breidbart
www.BrainChampagne.com
8
There is an old story that Joseph Kennedy got out of the stock market in 1929 after getting stock market tips from his shoeshine boy.
Wow, all Krugman has demonstrated is how poorly he understands Bitcoin and all crypto currencies. Bitcoin is not anonymous. People used to think it was, but the blockchain is very public and capable of being linked with individuals. Some firms specialize in doing just that. Furthermore, Bitcoin and other proof of work currencies do have intrinsic value. They represent tremendous amounts of energy which was required to mine them. They are at least as legitimate as fiat currencies (like USD), which aren't backed by anything except our trust and belief in government. And yes, many in the blockchain space have a diminished belief in the government as a solution. Lastly, Bitcoin is only the first of many, and probably the worst example of the coming blockchain era. It is slow, it is expensive, and its dominance will likely wane in future years as other currencies prove themselves faster, cheaper, more stable, more anonymous, etc. The key takeaway is that it's idiocy to expect that crypto currencies are going away. They are the next big thing, and it would be wise to start getting educated about them. And remember, it's still very early days in the space. In computer/internet terms we're probably in the early or mid-90s. There's a ton of money to be made, lots of excess and scams and big ideas, and yes, most of them will fail. But in ten years or so we'll look back and see where the Google and Microsofts and Amazons of the blockchain came from.
20
Blockchain might or might not prove to be viable. But even if it does that doesn't mean that cryptocurrency will succeed. Currency that can't be depreciated on a country-specific basis can be a real pain (just ask the Greeks, who are still being crushed by the euro).
9
I'm trying to understand this, why are you saying energy spent in mining gives it an intrensic value? isn't that just dissipated heat? sure, as time goes by it can require more energy to mine the same amount, but how does one calculate the real value?
23
At least trad bubbles were powered by hot air. Bitcoin mining/processing energy consumption now equals a city of 4.5m US households. That's 0.2% of the world carbon footprint. All for a speculative boy toy.
9
Now let's talk about another market that seems to be "untethered to reality". Yes, I'm talking about the DJIA (and the broader equities markets).
I've seen a number of charts which show both DJIA prices and trading volume on the same timeline. What is instantly apparent is that just days after Trump's election near the end of 2016, trading volume roughly tripled - and has remained more or less consistently at that same 3X rate (relative to the previous two years) ever since.
I've seen nothing about "market fundamentals" (old-fashioned metrics like P/E ratios and quarterly profits) which reflect inherently "added value" to companies in the DJIA that would warrant a 3X increase in trading volume. Likewise, the fact that the Dow has added about 8,500 points since November, 2016 as a result of this tripling of trading activity seems to also be "untethered to reality".
As far as I can tell, this is nothing more than a "Trump bubble" - an act of pure faith by gullible investors that simply because Trump has sold himself as a shrewd businessman (as opposed to the pathetic and inept con man that he really is) that he will magically pump up economic activity.
Tulip mania or Trump mania. Both are bubbles of incredulity with no visible means of support. And once reality reasserts itself, the inevitable collapse of Trump mania will burst the Dow bubble just as surely as the tulip bubble.
It'll be 2008 all over again, with the same few insider winners and tens of millions of losers.
173
The corporate income tax give-away represents a real benefit to share-holders despite the fact that overall effect of the tax bill represent a cost to the real economy (i.e. does nothing or less to incentive work and investment) and will inevitably have negative consequences for the value of those firm. So the rise equity prices makes some sense in light of the fact that benefits are short term and the costs will be felt further down the road combined with the fact that the marginal investor is myopic.
Very well-stated. I concur!
Trading volume is not up.
I thought we already had a payment mechanism that didn't require you to reveal or prove your identity, but just show a secret passcode instead -- Swiss numbered bank accounts.
3
Not all can access Swiss bank accounts. BTC is for everyone with a bit of tech knowledge or the willingness to learn.
10
If you had put $1000 in a Swiss Bank account in December, it would still be worth $1000. If you had put $1000 into Bitcoin in December, it would be worth $500 now.
Is BTC a bubble? It could be, but I'd encourage Krugman to put his money where his mouth is and short the stuff. Talk is cheap.
Last paragraph is revealing:
"...This will end badly, and the sooner it does, the better."
A charitable reading of that sentence would be that he is worried about the financially illiterate losing money, and that the end of Bitcoin would spare his barber. But then, why not tell the barber: "I really don't know, but definitely don't put more than you're willing to lose into it".
The fact that Krugman is cheering for an end to Bitcoin (rather than merely warning the financially illiterate) betrays his statist instincts and U.S.-centric worldview. He isn't so much predicting an end to Bitcoin as recognizing it's powerful implications and praying that they don't come to fruition.
Sure, the U.S. dollar is backed by the U.S. government and a fairly responsible Federal Reserve. But can he say the same of other central banks around the world? How about Venezuela?
Krugman, perhaps we can agree as follows: insofar as central banks around the world behave responsibly, you have absolutely nothing to worry about. BTC will collapse in value. After all, it is merely the plaything of libertarian crackpots.
Until that time comes to pass (BTC failure), I'd suggest you either (i) stop writing about it, or (ii) short it and put some skin in the the game. In fact, I'd be happy to lend you my bitcoin for however long you'd like, at no interest. This could be fun.
12
How do you short bitcoin? For real money, I mean, not another version of tulips.
If there was a legitimate market selling put options on bitcoin I would be all in. Right now the only contracts available otc from very shady companies or individuals.
Here is a good example of one of those for whom cryptocurrencies are a cult. The distrust of traditional institutions is clear, as well as the hostility toward anyone who makes a negative prediction about the future of those currencies.
Some people are going to make a lot of money on bitcoin and other currencies; some people already have. But many more will lose substantial sums of money when this crazy scheme finally crashes.
2
It is an unregistered bearer bond. That’s all. Unregistered bonds are illegal. That’s the gorilla in the room.
7
Can I use Bitcoin to buy myself a United States Senator?
That's the killer app right there. Bribing corrupt politicians is a huge market! Now I understand why it is taking off!
24
Clever thought, Schrodinger. That is entirely plausible, esp. if you extent that to Russian oligarchs, Chinese princelings...
1
If there's a bubble now, it may be the stock market. give us the data on how much is being bought on margin; margin rates can be tightened. Countering this is Templeton's prediction/admonition from years ago, that in the future, trust and pension money will be seeking the safest securities in increasing volume, driving the price up. This has happened aided by the fact that many of these companies are monopolies or shared monopolies.
3
I used to be a shopkeeper, and no way would I have accepted bitcoin -- its value is far too unstable. Bitcoin is a commodity, not a currency. It is a more reliable currency only for those who wish to conduct their business outside the law and the light of day.
6
Cryptocurrency will be the currency of the future! When does this happen and how does this happen? The comments implying that dollars or yen or pounds should be invested in bitcoin or other cryptocurrencies miss the point that it is the currency that is utilized to make the investment. Once you buy a bitcoin you will be reluctant to use it (even if you can) because it will, you hope, be worth more tomorrow than it is today. Next point, currency is a reliable store of value only to the extent that the issuer is considered reliable. Is there even an issuer of bit currency?
3
If I give someone an ounce of gold in exchange for services that person fails to perform, I could sue that person for the market value (in dollars) of an ounce of gold. I think the courts would recognize the gold as having intrinsic value. But, will US courts recognize Bitcoins as having intrinsic value? While I personally don’t believe in crypto-currencies, this question remains to be answered and it may have a profound effect on the future of all crypto-currencies.
5
The Bitcoin that you received in exchange for services would have the value that it was exchangeable into dollars on that day and time. Just like gold.
Mr. Krugman respectfully misses the point of blockchain technology. Sure BTC is slow. Is BTC the future? Maybe not. But blockchain technology will change the world.
Ask yourself this: why were some of thepiratebay's BTC seized by the FBI (government) if the US doesn't recognize as having value? They do recognize them as having value, but they cannot have a finger in it. When the right regulations are made, crypto currency will either crash and burn, thrive or become like a black market.
Putting tangible assets into "a technology I don't understand" sounds a lot like the mortgage investment real estate bubble of yore.
6
Mr. Krugman: "Bitcoin, by contrast, has no intrinsic value at all."
Where is the "intrinsic value" in the US dollar or, for that matter, any currency?
The value of the dollar is derived from many different factors, but the most important one is that we all have agree to trade with it, to accept it in stores, to pay bills, to buy a subway ticket or a car. If tomorrow everyone in the country, or even half, stopped accepting dollars the value would go down like a lead ball dropped from an airplane. Fast.
The dollar, absent wide acceptance, is nothing more than a piece of paper with scribbling and pictures on it. That has value? Tell me how.
One theory of poverty in this country is that because of the banking system, and because a significant portion of the population is locked out of the game, we are all tied to the dollar and those who can use it to advantage continue to win while those who can't lose, always. An alternative currency that allowed people to buy goods and services outside of the official structure might allow those in poverty and just above to escape some of the grinding impact of always chasing after hard currency. Then, in turn, those at the top, the rich and mega-rich, would be less wealthy because fewer dollars would be sent upward and into their eager hands and bank accounts.
What I am suggesting, as a non-bitcoin investor or believer, is that secondary currencies of some type could have great usefulness. Please tell me how I am wrong, if you care to.
13
Although separate, the currency of the Confederacy, issued by Southern banks during the Civil War, in many ways faced the perceptions and conditions you describe. A little noted fact is when the Confederate government went to borrow money from France and other European states, the bonds were often secured by cotton rather than government revenues.
Also little known, much of the Confederate paper currency featured African-Americans in a variety of scenes, including one in which an African-American woman was posed on the bill's engraving in the image of a Greek goddess!
12
"...the modern dollar is a “fiat” currency, not backed by any other asset, like gold, its value is ultimately backed by the fact that the U.S. government will accept it, in fact demands it, in payment for taxes."
A definitive observation.
1
It is not merely group fantasy that gives currency value. It is law. Dollars have value because they are backed by the faith and credit of the United States, and their supply is monitored and regulated by the United States. This gives them stability, and with stability, utility.
But you are right, very right, about this much: too many Americans are locked out of the financial system, both because the banks won't deal with them, and because they have no financial literacy.
If the US is serious about helping those who work hard for low-income and middle-class pay, it could take easy steps to create solutions: pass a national usury law; regulate check cashing and payday loans; give financial support to, and relax regulatory burdens on, credit unions, and in particular community development credit unions; force the large banks to support community development credit unions with low-interest, subordinated loans; force the banks to create and maintain a free financial literacy website; and require banks, schools, unions, and employers to offer free financial literacy classes and materials.
2
I understand what Krugman is trying to say here, and I agree.
However, I'm going to quibble. The $100 bill has become the new $20. I've always got some. I can't use cash without them. And using cash can get discounts, with a bit of bargaining, because credit cards take a healthy percentage off the top.
I can save more, as a percentage, using cash than I can get in interest at current rates offered by banks on deposit accounts. A lot more.
Our system has distortions that Krugman is skating over here, to make his point. Banks are looting us in ways big and small, just as economic inequality has distorted who ever sees a $100 bill.
25
Yet another reason to be wary, according to news that circulated in December, just 1,000 people own up to 40% of the world's supply of bitcoin. And many of them know and talk to each other. This would not fill me with confidence as an investor. I had a fun ride owning at bit of GBTC last year, but I am out and done.
https://www.bloomberg.com/news/articles/2017-12-08/the-bitcoin-whales-1-...
15
All currencies, fiat and crypto, have value only because large numbers of people agree to trust them. Trust in fiat currencies is supported by the backing of the issuing government. Trust in cryptocurrencies is purely a matter of faith, even though the underlying blockchain computing platform is thought to be (mostly) safe. Technology isn't the issue. Trust in your fellow currency users is.
Add to that that Bitcoin is not the only cryptocurrency. They are starting to proliferate like rabbits. Which ones should you trust, if any? Why do you want to do business in multiple currencies? For now, I'll stick to the dollar, and while traveling I'll use the local fiat currency. I at least know who I'm dealing with and can understand the risk.
9
Government backed fiat has at least two things guaranteeing their fiat at some minimum value. One it is the only currency accepted to extinguish tax liabilities of said country. Two government has a monopoly on organized violence to enforce only acceptance of said currency for their tax liabilities.
"Trust in fiat currencies is supported by the backing of the issuing government."
As long as the issuing government musters the United States Marine Corps as a constituent member, I'd call that a pretty safe bet.
In a world where currency represents one of the last vestiges of semi-privacy, however fleeting and wishful such thinking may be, your statement that "'Benjamins' are popular with thieves, drug dealers and tax evaders" falls very flat on my ears. I'll keep using my Benjamins, no thanks to you, and the fear that someday soon we might not be able to will no doubt inspire cryptocurrency developers for the foreseeable future.
13
Here's an excellent rule of thumb for detecting the peak of an investment mania: it's when your barber or dentist expresses an interest in it.
Prof. Krugman has just blown the whistle on the Bitcoin bubble. My thanks to him - and to his barber.
303
A friend who works in a library says that all sorts of people who don't appear to have any special investing or business knowledge -- elderly people who haven't gone to college, undergraduate humanities majors, people who work for or just above the minimum wage at Walmart or Burger King -- are coming in asking for books on Bitcoin. Hopefully they will get books that are not just trying to entice them to invest in this bubble.
87
James:
In the 1920s, it was elevator operators.
Bernard Baruch said that he knew it was time to get out of the market when elevator operators were offering tips on stocks.
3
Obviously, if you want a stable and profitable investment, you're better off investing in publishing books on Bitcoin than buying Bitcoin.
3
Paul Krugman neglects to mention that the security of the Bitcoin network is enforced by requiring "miners" to perform throwaway cryptographic calculations to make faking transactions unfeasibly expensive in terms of energy. As of today, this "natural Ponzi scheme" burns as much energy as the entire nation of Iraq on these throwaway computations - most of it produced using dirty coal power in China - and rising every day. And that's Bitcoin alone. The societal cost of cryptocurrencies is far greater than speculators losing their investments.
210
Many cryptocurrencies are moving to proof-of-stake and away from the energy intensive proof-of-work you mention. Some even use verification methods that are free. Developers are very aware of the environmental impact and new methods are being implemented over time.
2
I really don't understand the electricity burning aspect of cryptographic calculations, however this is perfect place to assess a carbon tax on these electronic cryptographic calculations. Anyway one thing for sure, that if it takes so much energy to protect something, then it will take so much more in the future. Just look at walls, ask China , ask the Soviets, ask the Americans 10 years from now.
1
Not so. This was found to be overblown by a recent report. Consider doing some current research.
Forget talking about Bitcoin. I want to know when the stock market will correct itself.
37
Charlie,
Now is the time to put all of your dough in Krugerrands. Do it online tonight, or at the latest tomorrow morning. She's gonna blow!
Regards,
Chuck
Bitcoin is backed by the full faith and credit of the internet.
319
Hilarious!
I agree with you about everything except your wildly inaccurate statement about the rarity of $100 bills. The government keeps claiming inflation is insignificant, but prices keep soaring, and these days $100 bills feel about as valuable as twenties did 10 years ago. I almost never leave the house without a couple in my pocket.
21
I adore seeing right-wingers and libertarians who pride themselves on their keen insight, their edged cynicism, their superior analysis, buy into the notion that the guys who run Bitcoin love them so very, very much that they will guard and protect and love them back, and bring them safely into the Harbor or Wealth.
In other words, good luck with that.
44
No individual runs bitcoin. That's the whole point
Nobody runs bitcoin.
I don't understand the math underlines the Bitcoin. Yet from what I learned from NYT and other published report it's an obvious bubble in unsustainable path to destruction. I like to make the following points.
1. Bitcoin requires enormous computing power and energy to mine, furthermore it will require more and more, just like searching for the next higher prime number or calculate the value of Pi to the next quadrillion place.
2. China has already banned the Bitcoin mining as wasted energy for non productive work, essentially digging a deeper hole.
3. It's only a matter of time before U.S. will ban Bitcoin as a Ponzi scheme.
5
If you're interested in learning more NYT isn't really the place to.
1. It absolutely does require power, but the amount is not going to keep rising. The reward for mining is reduced on a set schedule. People will only use energy to mine as long as it is cost effective.
2. China has not banned Bitcoin mining, the vast majority still happens there due to the cheap energy and proximity to the chip manufacturing.
3. It's not possible to ban something that is decentralized and running on thousands of servers. It's possible to add regulations to exchanges but not ban it entirely.
3
Colin... "China has not banned Bitcoin mining, the vast majority still happens there due to the cheap energy..." That "cheap" energy likely comes from coal and is not cheap when environment and lung health are considered in the "bargain".
You can't "ban" crypto (including Bitcoin) because it's decentralized. You can shut down centralized exchanges, or make it difficult to get fiat in or out, but banning it is impossible. The cat is out of the bag and putting it back in is impossible. Also, if crypto currencies are a Ponzi scheme then so is equity markets.
These days it's fairly easy to load up a grocery cart and have a bill add up to one or two hundred dollars. A hundreds dollar bill doesn't go that far these days but takes the same room in my wallet as a single dollar. I still find them both useful.
16
Your barber shouldn't buy only one type of asset, period, whether it's Bitcoin or bauxite or bonds or Berkshire Hathaway. He should diversify his investments. But I agree with you Paul that Bitcoin does not belong in the portfolio of a barber. It only belongs in the portfolio of someone who is so wealthy they can afford to lose the entire invested amount. That is to say, someone who can afford to make a high risk, high reward gamble. If feels like history keeps repeating itself. A bubble pops, years pass, kids become adults and don't have the intuition or experience to recognize a bubble, and then it happens again. Hopefully this popping bubble won't have enough bang to topple those of us who invest more prudently.
7
I agree about Bitcoin but not about $100 bills; that's an old stereotype. Nowadays most ATMs give out a mix of Benjamins and Andrews, and more and more businesses accept the former. $100 is not what it used to...
9
All accurate points from Mr. Krugman. Yet, the fantasy of bitcoin is still enticing many a person to part with his/her money. A related craze, but one with some tether, no matter how tenuous, to reality is marijuana retailing. A friend with high income and significant investable cash asked my option of both, in fact about blockchains rather than bitcoin, but roughly equivalent, recently. I know nothing about the marijuana industry, nor have any interest in it. From some superficial reading, it appears that there might be an opportunity to make money by investing in marijuana retailing, but it appears just as likely to be an outlet to lose all of one's investment. Regarding bitcoin, there is no "there there", as Mr. Krugman notes. Regarding blockchain as technology there may be applications where the technology has a use, but any pitch from a promoter about blockchain's value as some kind of investment is purely of the snake-oil variety.
3
When I was living in Seattle many years ago a friend told me to invest in a local coffee house. I followed your advise, not wanting to part with my hard-earned money. The coffee house was called Starbucks.
That's interesting. I was thinking about the stock market bubble. That has assets, or do they?
4
Bitcoin is the underlying technology of bitcoins blockchain. It is a prefect currency and you make money while you spend it. I feel sorry for those who don't understand blockchain. Meanwhile I will get rich on Bitcoin.
3
@youngsta...I'm having a bigly tulip bulb sale. Very, very... Sell that boring place on the canal in Amsterdam and invest in something solid. Tulips...they're not just for the Dutch anymore! People are saying...
Professor, I think you column is a service to society. Clear, logical, and convincing.
There seems to be several threads to people's;attraction to cryptocurrencies: the mathematical ingenuity of distributed authority, the secrecy of ones transactions, attraction to gambling, and a surreal infatuation with a mysterious form of currency.
Your logic may not save many of them, but it hopefully will limit he damage.
4
The good Dr. fails to mention the energy demand Bitcoin "mining" requires. I would like to see a head to head to head comparison of Bitcoin vs gold vs US$ carbon footprint and general sustainability.
2
That comparison should include the costs of minting traditional currency and all those servers running to process visa, chase, MasterCard, and so on.
At least with tulips - you got to hold something in your hand which could be planted, grown and admired for it's intrinsic beauty. Bitcoin's value is measured in sovereign currencies and Mr. Krugman's barber, like Bitcoin conference organizers, would be unlikely to accept Bitcoin for payment (were that even possible) because Piggly Wiggly, Ralph's, Vons, Stop n Shop and Whole Foods etc. only conduct business in bucks. Bitcoin's legitimacy as a currency will only come about when the IRS, retailers and auto dealers hang banners saying 'We accept Bitcoin'. (I'm betting Jeff Bezos isn't likely to adopt that stance in the immediate future)
3
The problem with the tulip comparison is that if I buy a tulip this year it will produce a half dozen the next year. They're plants - they reproduce.
As with all investing, don't invest any more than you can afford to lose. The issue with bitcoin is that it isn't only some of the things the author talks about, but it is a method of payment that is used in places without stable money. The funds transfer rate is lower than using dollars to go to any place with the wire transfer people, who use it as a money making scheme, that movement of US dollars.
But be the naysayer, and tell the barber, not all his money, that would be bad. Buy gold, silver, books on simple things like gardening, brick laying, wood crafting, arts and crafting, like making paper out of plant fibers, those things you might need when the Dollar collapses after the Nukes rain down. Oh and some bitcoin on a solar powered/hand crank wallet....
I own a little bit of everything.
3
Most U.S. currency is backed by assets. Federal Reserve Notes represent loans from the Treasury to the Fed and are secured by collateral. Part of that collateral are Gold Certificates issued by the Treasury in exchange for the Fed's gold. The gold is valued at the official price of $44.44444 per ounce, but at market value there is about 21.35 cents of gold backing each dollar along with 98.96 cents of U.S.Treasury, agency, and mortgage-backed securities.
2
Dr. Krugman is (as usual) right about Bitcoin being a huge bubble right now. But I would love to see a longer essay from him about the promise/threat of blockchain currencies other than Bitcoin.
For example, legitimate uses in non-black markets, the need to pay "ransom" in cryptocurrency as a driver of worth, replacement for precious metals and other scarce resources as a currency, etc.
They aren't going away...
2
I think of the 1920's bank runs in the US. I think of the elimination of value placed on money in the joining of USSR and again as independent nations. I think of the replacement and devalued monies in DR Congo. The flux in South African Rand. All government backed and insured for those who made the policies. If you want to smear the get-rich-quick idea behind cryptocurrency investment; it should be separated from any statement regarding federal powers and protections.
1
Benjamins are great for buying cars with... And other large ticket items you’d rather us pay additional transaction fees and interest.
1
Creating Bitcoins requires exploiting vast electrical power. Real people, working at real jobs, every day, provide this power – which in this case is used to create a worthless virtual commodity.
Consider designing clothes for avatars in Second Life, which are sold in virtual dollars that can be converted to USD at some exchange rate. There, the designer is at least providing a service in exchange for real money.
I taught for many years. I got up every morning, fought traffic, put my heart and soul into it, and provided a worthwhile service to my students. In exchange, I received money that I could use to buy goods and services and to put into savings and investments for the future.
The value of Bitcoin is not the tokens themselves but the concept of the blockchain. That mechanism will be propelled into the future for a variety of uses, long after Bitcoin itself rests on the seabed of oblivion.
Bitcoin is really about how we treat each other. We can choose to exchange our ill-gotten and useless Bitcoins for cash, ripping off others. Or we can buy stuff with them, and then use that stuff or sell it, again ripping off others.
Maybe somebody, somewhere, will become uber-wealthy from Bitcoins and will then use their riches for the general good. But can we count on that? Not really. And is it worth the suffering to everyone else who will lose so much? We need to stop conning others for personal gain. The blockchain will survive – but us? Maybe not so much.
2
Krugman obviously does not carry cash. I can assure you that shops do indeed accept $100 bills all over the country without issue. Many use the counterfeit pen but pretty much everybody accepts these bills.
9
Anyone weary of their $100 bills may give them to me. I am old school, not even liking stocks. It may be time to put away more cash to buy another rental property, because this phantasmal economy of electronic money and legalized gambling is going to crash, Bitcoin, stocks, and all. Knowing when is the tricky part.
5
Someday when automation wipes out most of our jobs, we will revert back from a large factory model to cottage industries utilizing cheap non fossil fuel energy, cheap food produced by robots, 3 D printers... And with our internet and money will run in blockchain. Corporations will hang on for awhile, old school, trying to stop the rest of us from printing our own pieces to fix broken items ( instead of purchasing new from them.) Eventually, the dinosaurs will fall if their own weight, and the resources they horded will be returned to us.
2
I love Paul Krugman's columns and he gets it right more than any economist out there. However, I see in his column and in these comments a real misunderstanding of cryptocurrency and its potential. Yes, it's true, Bitcoin will never be a currency. It's slow and outdated, the transactions are expensive, and it's volatile. It's the first and largest cryptocurrency so it's the one everyone knows. However, if you go to the number two cryptocurrency, Ethereum, which is much more sophisticated, you'll find a vibrant community of very smart developers working on everything from fast banking transactions to supply chain management to decentralized apps and a lot more. The Enterprise Ethereum Alliance comprises such companies as Microsoft, Intel, ING, UBS and the list goes on. All are looking to develop blockchain-based products and services for their companies. Do these sound like the stereotypical libertarians, tax evaders or money launderers to you? And Ethereum is one of many that will change the way we do international business in the future. Oh, and yes, there is a basic mistrust of Wall Street and the Government as it stands right now. Subprime Mortgages anyone? Enron? Bernie Madoff? Occupy Wall Street didn't vanish. It moved to another investment platform called cryptocurrency. There will be bubbles and crashes. Those who do their research and have good instincts will come out ahead, others won't. How is this any different from stocks?
26
Sigh. If you don't understand the difference between stocks and cryptocurrencies, then I would strongly recommend that you dabble in neither.
Since the first time I read about Bitcoin, I haven't been able to figure out a really good reason for its existence beyond being attractive to people conducting illegal or embarrassing transactions. Bitcoin has always looked like a bubble to me, but isn't it worth noting that the American economy is a prime example of "Bubblenomics?" We reel from one bubble to the next always looking for that get rich big and quick scheme. We had the tech bubble, the housing bubble, and now we're talking about the stock market bubble. I suppose this is inherent in the greed that lies behind so much of America.
Mr. Krugman limits his column (here) to the bubbly aspects of Bitcoin and doesn't mention what may be the worst aspect of cryptocurrencies -- energy use.
1
There are plenty of good reasons to have Bitcoin or other tokens beyond illegal activity. One of the biggest is remittance payments. Cryptocurrencies allow people to send money inexpensively by removing middlemen, saving money for people who often need it the most. Also consider that in the US we aren't too worried about our money supply collapsing, but not everyone has that luxury.
The motivation for cryptocurrencies, a decentralized fiat, has its uses and value, for actors ranging from petty criminals to dictators to the citizens of failing states. But, for a decentralized fiat currency to be reliably valued, there can only be one. The problem with cryptocurrencies, then, is that there are hundreds, none meaningfully different from the next. You just change a few network and crypto parameters and, voila, you have a new and disjoint cryptocurrency. So with a theoretically infinite number of decentralized fiat currencies, the long term value of any one of them is diluted to zero.
What if, in practice, there are barriers to the popping up of countless crypto weeds? One might think there would be a first mover advantage, but that's not so clear to me. Every crypto relies on a network of cooperating nodes (both mining and passive), all agreeing on the rules of the game for that currency. The incumbent currencies have the largest networks. But, as designed, most cryptocurrencies become less and less lucrative for nodes to mine over time, and miners use dashboards that give them the mining return rates in real dollars for various cryptocurrencies and freely jump from one currency to the next. So it seems like old networks will shed nodes to newer ones, quite the opposite of stickiness... Quite the puzzle.
2
The more I see people saying Cryptocurrency is doomed the more reason I think that we haven't heard the last of it.
In the case of every bubble I've experienced, among others the dot com and the reality boom, there was total confidence that it would go on forever. I've seen nothing but mainstream doubt about cryptocurrency.
The other thing that complicates this question is the fact that the underlying technology of the blockchain is likely to become a basic part of future designs.
Too many people are jumping to conclusions. It shows that even the smartest economists are not getting their minds around this yet.
6
Pau: No serious person in tech ever thought the Dot Com would go on forever. If you're basing you're confidence in bitcoin on the skepticism about it, then you're building a house on sand.
1
Bitcoin: 16.7 million Bitcoin =16.403 USD= 275 billion
The total value of all gold ever mined would exceed US$7.5 trillion valuation and using WGC 2017 estimates.
there are approximately 1.56 trillion Federal Reserve notes in circulation as of July 12, according to the Federal Reserve. There are about $13.6 trillion dollars in circulation, according to the Fed, as of August 2017.
The question is in What world economy can run on Bitcoin or Gold? How?
Yes you can run narco economics , money laundering but not legitimate economy.
Very succinct summary of the subject. Should be required reading in all econ 101 classes.
As Nassim Taleb says, the turkey population graph looks great before Thanksgiving.
Bitcoin appears to be another innovation to get around regulation, much like our mortgage industry prior to the Great Recession, where essentially unregulated mortgage companies and non-depository (investment) banks avoided depository banking regulations.
Our regulators back then, under the spell of conservative free market fundamentalism, didn't bother to put in down payment requirements or require demonstrated ability to repay the loans for these shadow banks.
Then, conservatives just lied and blamed the government for forcing the unregulated banks (through some miracle) to lever themselves into oblivion, a piece of economic jujutsu that only works on, as Ben Kenobi said, "the weak minded."
I wonder who will lie about cryptocurrency, since nobody is in charge of it either.
8
Weren't those Mnuchin Mortgages?
I am reminded of a quote attributed to Joe Kennedy Sr. (paraphrase), When I start getting stock market advice from barbers and cab drivers, it's time to get out." Which he did, just before the '29 crash.
A Bitcoin crash probably won't change the world, but one wonders what will pop the stock market bubble initiating the Trump recession.
4
Bitcoin may not be extremely useful in it's current state (slow transaction times, high fee's, limited real world acceptance) but it's quickly gaining ground on all three of those areas, while other projects already have mostly overcome the first two. The thing this article misses is that use-case examples evolve over time (the internet wasn't terrible useful for normal people initially either) and solutions are already being worked out and implemented.
As for the non-backing of the asset, the entire premise is a form globally acceptance money that is NOT controlled by a central authority. That simply has no been available or technologically feasible until blockchain technology provided a mechanism for it. Decoupling money from governmental control is a true libertarian future-state, which now is more real than ever. This is not a paranoid "cult" mentality, we have seen numerous economies collapse and leave their currencies worthless and their citizens all but bankrupt. A global currency, however volatile, that is easily stored by the citizen and accepted globally mitigates that risk in a very real way.
Obviously cryptocurrency has it's pitfalls, but ignoring all of it's benefits and revolutionary technology that enable this type of system to even exist is unfair.
2
Monopoly Game bills are safer than Bitcoins because at least you can touch them, and buy small properties that maintain their value during many years. Ah, no hackers are allowed because you can see the players all the time..
4
How much of your net worth can you touch vs how much is a number on a bank's server?
OK Professor, all that's why your barber should not buy (invest in) Bitcoin. Now tell us why he should, and why many smart people are continuing to buy at very high prices.
Imagine if China, with its far more advanced online marketplace than the US, got behind and backed Bitcoin as the new global currency standard. Of course they'd slowly sell their dollars at the same time making the Dollar fall in value faster than the FED could prop it up. They've already curtailed the pace of dollar buying.
"they (Bitcoins) lack one crucial feature: a tether to reality."
Expect the Republicans to propose a currency switchover within the next month.
3
The better analogy, I think, is that a Bitcoin is the digital equivalent of a gold bar: it's worth whatever others are willing to pay for it. Given the absence of a central authority, the value of a Bitcoin (like the value of a gold bar) will never be stable. Quite the opposite: the limited supply means it will always be vunerable to price maniupulation by the speculators who own most of them. And they'd be fools NOT to manipulate the price: it's ridiculously easy, the profits are immense, the victims are clueless, and there are no regulators to worry about.
If you're rich, you can in theory stash gold bars in the basement and spend them only when they're worth at least what you paid for them. But gold bars don't earn interest, transaction costs are high, and there are thieves perpetually skulking about, so in the long run you need good luck just to break even. Bitcoins are merely more convenient.
At the end of the day, Bitcoins have no real-world advantage over traditional currencies, other than - as Prof. Krugman points out - the ability to hide transactions from the authorities. That's great for criminals, of course, and it may give the warm fuzzies to conspiracy nuts to know that their online purchases are a big secret from . . . well, nobody who cares, but hey, it's a Secret, and that's what matters to a conspiracy nut. For rational people, volatility, zero time value, and steep transaction costs are not what anybody wants in an investment - or in a currency.
2
Ultimately, it's all a confidence game -- in a positive as well as the negative sense of this word. Dollars have value because they are backed by the full faith and credit of the United States. And despite of a year's worth of shame brought upon the U.S. by Trump, that still means a lot. But Bitcoins? They are backed by the full faith and credit -- of a bunch of anonymous strangers dispersed across a web of inaccessible computers. Good luck with that. When you figure out who to sue, be sure to let me know.
2
Here we go again with the tulip madness myth, there was no tulip madness, the only people who really dealt in tulip bulbs were, suprise, suprise tulip dealers and importers, any downturn in the tulip market was very localized and did not impact on the dutch economy in the slightest. There is no evidence that anyone went bankrupt because of the 'tulip bubble', or that people bought single bulbs for the price of a grand Amsterdam mansion, the tulip madness really is fake news, simple as that.
1
The good prof never sugggests that tulips (or BTC) brought down an economy. He actually linked to Garder's 1989 article showing the tulip bubble was acute for only a month. Which fits his narrative that a bubble burst in time saves...
2
@ Bob. Pretzel logic Bob. The story has historical legs because someone lost out. "Fake news" is Trumpian baby talk masquerading as adult language.
Tulips are not durable, not scarce, not programmable, not fungible, not verifiable, not divisible, and hard to transfer. But tell me more about your analogy...
9
Mark it down. The 29th Day of January, In the Year of Our Lord, Two Thousand and Eighteen. For the first time in my life, Krugman and I agree.
1
My experience with people who come across the newest "sliced bread in town" is to talk it up as much as possible and get as many people to also invest in the same. It seems like they want a self fulfilling prophecy - it's so hot that millions of people are queuing outside to buy in.
And when it fails? They'll also be the first to say that you should always assess your risk when making investments. As Paul states in his column, bitcoin will end in a ball of fire.
3
There's a common but critical mistake in this editorial - making bitcoin synonymous with the entire cryptocurrency space. Just this morning, one of the largest public-sector pension plans in Canada announced plans for a new investment arm dedicated to acquiring and investing in both companies and the underlying cryptocurrency associated with the Ethereum blockchain:
https://www.theglobeandmail.com/report-on-business/omers-expands-cryptoc...
I wouldn't characterize OMERS, and other institutional investors waiting in the wings, as paranoid cultists. Like any emerging disruptive technology (dot-com boom circa 1999 and pets.com, anyone?), crypto has its share of scams and speculation. But make no mistake - there will eventually be huge winners in this space (AMZN collapsed to $6 in 2001, and the rest is history). Public, decentralized, trustless value transfer via blockchain is here to stay.
Big risks often lead to disappointment. Sometimes, they lead to incredible rewards.
3
Is this the same wise Canadians who invested in a cartoon figure and drug addict, aka Toronto mayor, Rob Ford?
Bitcoin is a collectible; it is only worth what another Bitcoin aficionado will pay for it. In a sense, it is akin to Pokemon cards or beanie babies. People with a financial interest will keep up the chatter and the hype until they can get the price they want for their Bitcoin. Then they will move on to the next fad.
At least you can hold a Pokémon card or a beanie baby. Try to get your hands on a Bitcoin. Or the blockchain ledger that records your ownership. If you even know what that is.
1
Anyone can easily view the ledger. Google Bitcoin blockchain explorer and you can see a near real time record of all transactions on the network.
I'm not normally a fan of Krugman, but he is 100% right on this. This is all going to end badly for everyone who put money into it, unless their underlying intent was criminal. It also seems obvious to me that, with the anonymity of BTC, some very bad actors are probably using it to launder money and, once that becomes clear, it could result in a ban or material prohibition.
Now, if I could just find a good way to short this thing...
For the first time in many years of reading the wise words of Prof. Krugman I find myself in disagreement! I don’t think the US dollars has “intrinsic “ value. As Dr. Krugman clearly articulated the dollar is valued by the US government, and the fact that oil is traded in dollars. If either of those two fail the dollar has no value. If China and Russia decide to trade using another currency, the dollar is toasted!
2
The article isnt about the USD as some kind of default reserve currency forever. He was merely illustrating the solidity of national fiat currencies, all of which are 'valued' externally by fluctuating currency markets.
The pipedreams of crypto enthusiasts collide in one basic tension. The commodification of these 'assets' by get-rich-quick speculators scares off real world businesses from accepting them as pseudo currencies as long as their value is so unstable.
2
Thanks, Paul, for such a lucid explanation. And your conclusion makes eminent sense.
Paul compares the bitcoins to $100 bills but they are more like a deposit box in Switzerland holding virtual gold bars. Most people do not know that there are a limited number of bitcoins created everyday and that the number of bitcoins programmed to be created in the future is finite, like there is a limited quantity of gold. The anonymity is as secure as Swiss bank accounts. No wonder that thieves, drug dealers and tax evaders are looking at bitcoins as a way to launder their dollars. But here is the problem: bitcoins value is tacked to the value of a basket of currencies which reflect the value of the underlying economies so long as they can be exchange against these currencies. Seeing that crypto currencies pave the way to money laundering, countries will sooner or later forbid the exchange of bitcoins, or impose a tracing method to track the ID of holders, thus render them useless. Already words of regulations have had a dismal effect on their value.
Thieves and tax evaders are essentially free riders, they need a functioning state to enjoy the fruits of their loot. Without the possibility to exchange bitcoins anonymously their value sinks. This bitcoin story encompasses the contradictions of our time, and reflects the foolishness of libertarian ideology.
1
This is the first- fairly comprehensive explanation of Bitcoin I've read. It still does not go far enough in explaining how one actually "gets rich" investing in Bitcoins; how does one ultimately exchange them for tangible 'money'? For instance, an individual can cash-in their gold stocks (or bars) for hard currency. Bitcoins appear to be a fad-fantasy: If I can't buy groceries with them or pay the mortgage, utilities or the dog's groomer- they "ain't" much use.
1
A friend of ours put $10,000 in Bitcoin a few years ago. He cashed out some of it for 5 million. Is letting some ride. Paid off mortgage, etc. Keeps a low profile. Worked out for him. If this guy did it, I imagine there are quite a few more like him. If they can keep or reinvest their gains, good for them. If they blow it all, tough.
If you have a Bitcoin account, and unable to retrieve your password, you no longer can access your Bitcoin. Until you remember or retrieve the password. There is no keeper of passwords for crytocurrency accounts. Maybe this is what has kept up the value of Bitcoin. Numerous account holders cannot access them to cash in.
3
Thanks for weighing in on this new "derivative" that does not appear to have the backing of a single government. If some government does back this new currency beware that government. This is a "Ponzi" scheme and I am pretty sure that you can't use this electronic bookkeeping scheme to buy any real goods like a house, automobile, or groceries.
I read Robert Shiller's stuff and agree that the price of equities is far in excess of earnings. It is frustrating, that we can't see the need to move out sharply on investment in non-fossil energy technologies. It seems that people are investing their savings in stock that gamblers will keep investing in non-existent earnings growth. Your reminder on Okun's law slapped me into reality.
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Just a note - there is nothing new about private currencies that have no government imprimatur. In effect, that is what frequent flyer points are. There are huge advantages to official government currencies, which is why they dominate the markets in most places.
And yes, bitcoins are designed to be deflationary. But that is the problem with them as useable currency. Its probably one reason that most of the true believers that own them aren't selling them. How much is your house worth today in bitcoins compared to a year ago? How many people will buy something today that will be cheaper tomorrow and keep getting cheaper for the foreseeable future?
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I remember S&H Green Stamps my mother got at the grocery store in the 50's and early 60's. We used to put them in books and look at the goodies you could get with them from the catalog. You needed a lot. They even had a (almost zero) cash value.
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They were real stamps, redeemable for real merchandize, like my first baseball glove.
lol, I recall licking all those stamps that went into Mom's S&H Green Stamp books! They left a horrible taste in my mouth--much as I imagine Bitcoin will in the mouths of the last of the pre-bubble investors.
As Krugman stated, Bitcoin is not a currency. It works on a mind blowing Blockchain transaction verification via mining system. It also continuously gets exponentially harder to mine in order to verify a transaction. In other words it is pathetically slow and will only get ridiculously slower and more expense to verify a transaction as time goes on. Never mind the fees per transaction. As for anonymity, every Bitcoin/Blockchain transaction is ubiquitous and completely transparent. Though the owner of the Bitcoin wallet is not easily known. As I stated before it is nothing more than digital pixie dust.
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Somewhat like the stock market.
Bitcoin and its analogues are frequently used for transactions on the "dark web". Anonymity there is the main reason. As others have pointed out, any fiat money has value only to the extent that someone else will exchange something of equal value for it. So it is with bitcoin. There is no intrinsic value to bitcoin but there is general faith that it does have value.
The question of what that value is, though, is more problematic. Rapid wild fluctuations make bitcoin a poor medium of exchange or store of value or unit of account, the three functions of money. And the supply of bitcoin cannot be adjusted to the need for it. Gold backed money had this problem too because the need for gold backed money in a growing economy outpaced the rate at which gold could be mined.The result was chronic deflation caused by appreciation in the value of gold. When bitcoin appreciates, as did gold-backed money, it makes owners of it richer. But fluctuating value makes bitcoin a lousy unit of account. And bitcoin doesn't just go up in value making it an uncertain store of value. At best bitcoin is a speculative investment, not money.
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Bitcoins were provided as rewards to developers who helped perfect the blockchain technology that will remake industries.
I agree with the good professor: bitcoins are used for money laundering, drug trafficking, tax evasion, and unwise speculation.
The developers who earned bitcoins the hard way - perfecting blockchain technology - would be wise to cash out to a better store of wealth for their work, which would be about anything but another cryptocurrency.
Sovereign nations will eventually outlaw the use of cryptocurrencies for its obvious use in illicit activities and dangerous financial speculation, and issue digital sovereign currency that can be stabilized using the expanded tools of monetary policy and monitored for transactional taxation.
On the other hand, blockchain technology has a number of exceptional applications - particularly in an age of increasing concern over cybersecurity, cyber-crime, and election manipulation.
Sovereign issued identities using the far more secure blockchain technology would replace widely distributed and traded Social Security numbers, for instance.
Already, the world's largest banks have developed an international payments systems that would allow existing central bank currencies and any new sovereign digital ones to be transacted using blockchain distributed ledger technology.
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