The answer is that bitcoin makes it possible for people to hold their money directly - ending the bank monopoly on the control of money. But that's not really the question. The question is, "Why do we need to end the bank monopoly?"
Please see my full response here:
https://www.globalcurrencyreport.com/blog/2018/8/29/the-problem-bitcoin-...
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Technobabble? "The Times They Are a Changin'," (not the NY "Times") As intelligent as Krugman is, his intellect may be stuck in the legacy financial system. Buy Bitcoin, folks. But like with any investment, only invest what you are willing to lose. Krugman's negativity probably stems from a lack of understanding Bitcoin's technology. Or he is closely associated with the Fed, banks and other financial institutions, all which hope to dissuade as they buy Bitcoin at suppressed prices. Or... he's just "blocking up the hall."
@Jamie Dimon So you haven't answered the question. What problem do cryptocurrencies solve?
@Jamie Dimon
"The Times They Are a Blockhanin'..."
It is Aug 24th and ...
By all means, tell us how did your debate go in Las Vegas!
Pretty please. With sugar un top!!
If crypto is a complement to the set of pre-crisis institutions, then it could be a risk free opportunity and default medium of exchange, since cash's yield, the negative inflation rate, isn"t constant.
The technology can do some good things, such as real estate transactions, whereby it actually reduces friction and transaction costs. But the key to the problem (which you point out) with Bitcoin is it can't be a currency with such wild value variability. It can't both be a speculative investment and currency. As you mention, who would give it up if it might double in value? But also, who wants to take it as payment if it might drop dramatically. It's price is a bubble, propped up by fervent belief and libertarianism. I don't think it will go away but it will go down stteply before it settles.
The awkward moment you talk about transaction costs -you even put it inside your title-, and this guy sends $300 million worth of bitcoin and pays $0.04 (that's four cents) for the transaction. Here's a link to the story: https://ethereumworldnews.com/300-million-usd-bitcoin-btc-004-usd-fee/
Tokens and cryptos are just one part of the equation. For once, let's look at the forest (blockchain and dApps) and focus less on the monetary part. It will make everyone wiser.
I cannot claim to have read all the responses, but the ones I have read have indeed depended on a mixture of technobabble and libertarian derp, admixed with some deeply wrong understandings of the economics of money.
Well, your analysis is centered in one and only one Cryptocurrency, the Bitcoin, and as such doesn't point to much of what's happening there, which in my view are mainly diversification in securing the blockchain (alternative to proof of work) and alternative monetary policies (in terms of controlling the supply).
Okay, people will call that technobable as you put in your article (kudos for promoting a healthy debate), but that to me is where this column gets it wrong, by addressing a whole movement on its first attempt and ignoring underlying premisses of the movement.
But addressing the question, 1) It removes artificially imposed national blockers to trade. 2) It provides a public ledger and even though criminal activities use it, they may be in bigger trouble than they are aware, since it's fully traceable and the FBI and other agencies are constantly looking into it and it has provided them even better ways to trace illegal activities (money is not easily traceable ... money laundry?). 3) It removes power from Governments to seize assets either through direct action or through monetary policies. 4) It allows the separation of "store of value" and "mean of exchange" as established in FreiCoin(http://freico.in/about/) and this way remove the ability of money to fuel growth of inequality, since capital accumulation is desincentivized.
In summary, it's very disingenuous of economists to ponder in the amazing benefits of money without ever mentioning Poverty and Inequality.
3
Your bedrock argument against Blockchain is based on Crypto currencies and how they perform? That’s just silly. I was going to suggest a life jacket for the Blockchain conference but I ebbing towards a RIB now. Am I too late to offer a couple of precursor sentences ahead of your talk?
1
What problem does cryptocurrency solve?
In my opinion, cryptocurency solved the problem of high inflation rate.
The inflation rate of Bitcoin is 4.0% this year, below1.8%/year after 2021. By contrast, the inflation rate of US dollars is about 6%, the inflation rate of Chinese money￥ is about 15%.
**The inflation rate which I mean the growth rate of monetary aggregates(M2)
What do you think of this point of view?
Looking forward to your reply :)
1
People love currency with low inflation, at least I am ：）
Bitcoin is a pure example of the naive arrogance
of those who think they can re-invent human nature.
Bitcoins will be manipulated by someone(s) until
they suck all the profit out of them and then their
price will collapse and the owners will be holding
digital air.
2
Hurrah. For the first time in years, a Krugman column I can agree with. Moreover, I can't recall a previous occasion when he didn't excoriate Republicans or the present or previous Republican President. Professor Krugman, you should spend more time on holiday!
2
I will soon be releasing a new cryptocurrency to be called the "gornit". Gornit will be created by a laborious process to be designated "nitpicking". Those who succeed in nitpicking will then have, well, gornit. But I'll get rich on transaction charges, to be paid in gold.
Bitcoin isn't the story, ethereum is the story. All this focus on the currency aspect of the tech misses that the big innovation took place not when cryptography solved a monetary problem, but when cryptocurrency solved a computer science problem.
Specifically, the problem of how to build a decentralized network capable of resisting the infinite loop problem. Cryptographic currency is a means to this end, an instrument. Unsurprisingly, one of the very first things built on this global computer was precisely a kind of reserve banking system called MakerDAO, where people deposit their 'digital specie' and receive 'digital notes' in return. Focusing on the freaks and geeks is like thinking that because graham crackers don't *actually* cure masturbation, smores are a failure. Look deeper.
2
I'm glad that an eminent professional economist agrees (this must be standard textbook fare, but I don't read economics textbooks and only realized it recently) that the value of fiat currencies is ultimately based on the fact that you can pay your taxes with them.
And that cryptocurrencies have no such tether to real value. Nor do tulip bulbs, outside the garden.
Bitsonline wrote a great piece, without the hysteria as you called for, debating some of these points. Worth a read, Paul.
The call for a non-hysterical and reasoned debate over cryptocurrencies is entirely warranted. This article appears to rebut some of Krugman's points well. https://bitsonline.com/paul-krugman-doubles-down-crypto-skepticism/
1
What problem do cryptocurrencies solve? Carrying out untraceable transactions. Comprehensive police state monitoring makes true financial privacy impossible using central bank currencies.
In addition, it is not true that modern payment methods are nearly "frictionless." All sorts of fees are attached to payments (including those in cash because the cost of credit and debit card charges have been rolled into prices of good and services by the providers).
Bitcoin avoids those fees in addition to serving as an insurance policy against the costs that would be incurred by detection of transactions disfavored by the authorities, especially large ones.
The alternative, transporting large amounts of cash especially across borders has become increasingly difficult and there are also costs for physical delivery and safeguarding the pile of cash before and after delivery.
I think the value of the financial institution charges or cash transfer costs cash avoided, added of the "insurance" against detection of transactions, would be expressed as some percentage of the underlying value of the Bitcoin.
But on that, I think Krugman is mostly right: the only value is the cost of producing more bitcoins, if I am right about their serving a useful purpose (if not there's no point to producing them and thus the effort is wasted).
But there does not seem to be any relation between the cost of production of bitcoins and their price.
"ultimately, [the dollar] is backstopped by the fact that the U.S. government will accept dollars as payment of tax liabilities."
I would point out that ultimately gold had that same backstop - until we replaced it with dollars. Ancient monarchs discovered - by accident, and probably without completely realizing it - that as long as they required the peasants to pay their taxes in gold, the gold in the royal treasury would continue to have value. Otherwise, a peasant trying to eek out a living had very little use for gold. So really, gold was also fiat money.
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Blockchains are a trustless transaction system which has value and could replace the need for escrows. The trust is based in math.
Besides that I agree, it is just another means to contract and transact.
1
I agree with regards to blockchains’ lack of utility with regards to monetary transactions and the storage of value but I think you are missing the whole topic of the so called smart contracts, i.e. applications / programming code running on a blockchain. Those applications are mostly about transacting and computing data - not sending money or storing value - and here you have clear gains in transparency combined with incorruptibility and thus gains in trustworthiness and - in the long run - efficiency. An example would be publishing of and managing ownership rights to digital content or monitoring the flow of donations. The most helpful analogy I still find to be a programmable blockchain (eg Ethereum) being like a transparent and incorruptible ‘world’ computer/database. The associated gains from more transparency and efficiency are applicable for any industry or type of organization that sends or manages data in any way. Ethereum based systems are already being trialed by many major banks and corporations. The marginal gains in efficiency derived from greater transparency and reliability are more boring and incremental than most crypto enthusiasts imagine but they are solid, and likely widespread and lasting. Please see UBS’ recent research report on what value the blockchain technology as such - not any particular cryptocurrency - is likely to add to the global economy over the next 10-20 years. In other words, I would be curious to hear your opinion on smart contracts.
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@Jco40 After engaging in some technobabble -- thanks for sparing us the libertarian derp -- you got down to the point: blockchain and crypt are not one and the same. Any more than paper and money are the same. Paper is a way to print money, but also to do a lot of other things. Blockchain's ability to create trusted networks in which ownership of assets, transfer of assets, and double-entry-type ledgers of who is owed what --it's brilliant. Using blockchain to try to replace any monetary system with "crypto" (the name itself reeks of young men in bathrobes) is silly, as outlined by Prof. Krugman.
I’m a math person who has worked in insurance/investments. Places I worked had the ability to quickly wire transfer 100m, 500m anywhere they wanted.
Try to set up an international transfer of 10k, 100k, as an individual and you get nailed with transaction fees! I set up an overseas bank account (not tax evasion, thank you, just my Dad’s home country to help out relatives) and it was so expensive that we decided to go with old style travelers checks stuffed in our luggage.
As an encrypted transaction method for small amounts, (I mean, large to me, small in an economic sense) crypto currency makes total sense. So that is a real problem that it helps solve, that I have personally encountered.
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@AReader The transaction fees are the result of businesses having the leverage to separate you from your money when you need to move it. This friction could be greatly reduced because most of the transaction fee is pure profit for the person doing the transaction. This is gouging by the corporations who run the transactions.
I find it easier to pull cash out or us a US credit card to bring money into Europe.
BTW: What is the cost of transferring money with crypto currencies. First you have to transfer to the currency and then transfer it back to the currency you need.
The vast proportion of BIT transactions involve exchanges in Asia - presumably to circumvent strict currency controls in China. I suspect that the evenual equilibrium price will reflect the cost to transact/mine and the value of illicit/prohibited transactions. I would expect a material drop in value if the guys with guns in Asia stopped looking the other way. Oh, and I’m sure that wealthy BIT holders had a lot of fun usuing them in Puerto Rico after the recent hurricane destroyed the electric grid...
And how would people have accessed cash at an atm or from under their mattress when buildings were blown apart and flooded? You would've had an easier time getting to a community generator charging station and exchanging bitcoin savings from your cell phone.
Now Puerto Rico is successfully focusing on luring cryptocurrency businesses there to help with the economic recovery. Very smart on their part to focus on a growing money-flush industry. It's already helping to generate funds for recovery and make a positive difference.
1
@Pen Name... uh .... I guess cash is too complicated...
What problem does cryptocurrency solve? Well, it makes it much easier to pay untraceable ransom to hackers who lock computer systems. Just ask them.
1
@1954Stratocaster In short time, yes. But ALL cryptocurrencies utilize immutable ledger(record of transaction), and given time every one of the criminals will get caught eventually due to all the transfer record PERMANENTLY.
There are several companies that provide such services to police all over the world.
Of course there will be many attempts to avoid this, but then there will be another team to counter.
In comparison, no fiat currencies have traceable records nor diamonds. NOTHING!
I am really skeptical if Paul understands anything about the cryptos. I will say he is a very good baseball player talking about basketball with very little knowledge.
1
In my opinion, even Bitcoin/crypto usefulness as a mean for conducting illegal business is fairly limited. Suppose you conduct an illegal transaction - say buy drugs, or pay a bribe. You, obviously, cannot fully trust in the other party - you are not completely sure that the drugs will be delivered or that the official will make decision in your favour in exchange for a bribe. It is very likely, that your trust in the other party is much lower than your trust in whatever system of payments you are using (since system of payments are usually bigger than your counter-agent). Many people buying drugs using bitcoin actually hold their money on bt exchanges or on the drug marketplace - essentially trading higher confidence in Bitcoin for increased convenience of using a financial intermediary of sorts, and holding claims on Bitcoin instead of the actual stuff. So, the only value of BT for illicit transactions lies in fact that you can buy and sell it without raising suspicion from authorities. Should US government ban Bitcoin exchanges, the currency would become useless. And there are alternatives. My VPN provider accepts Walmart gift cards as a mean of anonymous payments - something that can also be traded without suspicion and is backed by Walmart's promise to exchange them for goods. My trust in Walmart may not be very high, but it is much higher than my trust in the VPN provider, so overall trust is dominated by my trust in VPN provider. Gift cards aren't much less convenient.
The SEC is a completely corrupt organization, a wholly owned subsidiary of Wall Street. It's entire modus vivendi is to protect Wall Street's monopoly on global money flows. The ICO phenomena threatens to obliterate that monopoly, and break Wall Street's control of money. Cryptocurrency makes it possible for any individual to issue their own money,... for little more than the price of a cup of coffee.
Baron von Rothschild once said he didn't care who ran a country so long as he ran the currency.
The first consequence of the SEC's losing rear guard action to kill cryptos -- they will fail -- will be to lock America out of the leadership role in the new entrepreneurial age which will be brought about by cryptos.
The SEC was created in 1933 by FDR. who hired the same Wall Street thieves that brought about the Great Depression, and most recently the 2008 mortgage-backed securities global economic collapse. They were put in charge of creating a safe securities/capital markets environment. But they simply saw the opportunity to lock anyone else out of that hen house.
All the US govt financial/economic/monetary institutions are headed by Goldman Sachs alumni, consequently the US "regulatory" institutions are in fact textbook examples of regulatory capture.
Other countries wil sieze the oppotunity to sponsor cryptos, and Wall Street will lose, but it will take the US along with it.
The Banksters "own" you,... but not for long.
1
@Jeff Davis Just so the criminal justice system diesn’t own me.
I think the issue here is the same as most internet people had when selling the concept of e-commerce in 1995 as I was. Some of us could clearly see what the technology could deliver and all we had was "it will be used for porn and criminal activity". Paul the blockchain (let's forget Bitcoin etc a minute) will revolutionise econmics both at macro and micro levels and your report, though seemingly thorough, is lacking an understanding about what smart self - executing contracts are going (yes I said going) to achieve. The potential is happening but like my 2400 baud old Compaq modem in 1995 hardly shows the capability. But ask the Trillion Dollar company what impact that had on Steve Js results. From where I am sat you are King Lear and as the Fool said " ...sire you are but a shealed peascod" Or similar ;) I think the report drives debate but grossly underestimates the tsunami coming and we all should be prepared for it. Disruption is even coming for the disrupters and you will hopefully reflect on this in not so many years. But a great report to inspire the next generation of Internet entrepreneaurs to demonstrate life changing applications. Which trust me are coming!
1
@Richard George it is entirely possible that the crypto will become more useful in the future, but I have some doubts about the smart contracts. It seems to me, that creating good smart contract is hard (since you have to, essentially, write a bug-free computer program, and not much people have succeeded in doing so). Furthermore, if your contract includes some kind of real-world transaction of sorts, you still need traditional means of enforcement - courts and police. You can, of course, use tokens, but you need police to ensure that tokens will be given in exchange for goods. I am not entirely sure, that overall cost of writing and enforcing the contract will be much lower than the cost of the present system
@Richard George Yeah, but my bank account will still be viable and my checks and my cas on hand. One will always need to buy bitcoins.
What problems Cryptos solve? For one international cross border transfer of fund will be frictionless with minimal charge(For DAG cores, not blockchain) to help the poor migrant workers and their families. Second, if structured properly, it will become the currency of the people with smart contract so that it can become the medium of exchange when all other fiat currencies fail which can fail at anytime by the will of a few. Cryptos, once deployed, can not be changed by a few. Third, cryptos can be divisible by 8 zeros makes it perfect to machine to machine transfer of fees, etc, and on and on. The application of cryptos in real world is only limited to imagination of the person with insights to technology and business model.
5
The blockchain technology that underlies Bitcoin has significant possibilities for use in managing and validating permanent, public and transparent ledger systems for a variety of applications, and research continues to look for effective new uses.
But I agree with Mr. Krugman that cryptocurrencies are an example of a solution that creates more problems than it solves.
2
Why does this article makes me feel a VERY good baseball player talking about the basketball's effectiveness as a sports when he does not even know about the rules of the basketball game.
6
What problem does it solve? I have yet to see a clear answer to that question.
Bear in mind that conventional money generally does its job quite well. Transaction costs are low. The purchasing power of a dollar a year from now is highly predictable – orders of magnitude more predictable than that of a Bitcoin. Using a bank account means trusting a bank, but by and large banks justify that trust, far more so than the firms that hold cryptocurrency tokens. So why change to a form of money that works far less well?
Transaction costs are high. Over 70% of the cows in Vermont are milked by migrant laborers. Laborers who are willing to endure long hours for the chance to send home the majority of their paychecks. Cryptos offer an opportunity to do so without Bank of America or Western Union skimming 3% off the top. Yes, the government secures the US dollar, but capitalism allows corporations to prey on people who are living hand to mouth. Bankers love instability. They make money coming and going. Witness the bailout. It is when they get cut out of the equation that they get twitchy.
My totally uninformed opinion on crypto currencies:
I do not understand the appeal of a currency that has no safeguards against manipulation, but as we have seen in the past having safeguards is not very useful for fiat currencies if the existing private and public watchdogs abdicate their oversight responsibilities and allow individuals and organizations to set their own monetary standards, as was the case in the events leading up to the 2008 real estate meltdown or the more recent LIBOR scandal.
Do crypto currencies solve a current monetary problem?
The only useful transaction I see for crypto currencies is as a medium to more effectively launder money. Specifically an international criminal cartel can move money between countries without having to use official exchange channels thus avoiding the scrutiny of local monetary authorities.
Finally, given its limited use, crypto currencies can only exist in conjunction with fiat currencies. However, much like credit and debit cards I do not see any reason where they cannot enter widespread use throughout the world’s economies, but the main problem with this view is crypto currencies would have to be adopted by the leading banking institutions, and would eventually wind up as another medium of exchange with national and international regulatory oversight.
In his tear down of cryptocurrency, Krugman comes to a very conservative conclusion.
In his piece he asserts that cryptocurrencies are too risky to the common person and have no tether to the real world. He claims that they are a bubble that will eventually deflate into nothing. Since he does not have much experience in the field his claims are simply incorrect.
Cryptocurrencies are a very revolutionary part of our ever changing society. They are allowing more people to join the upper class and quickly change our society. Cryptocurrencies are the new dollar and will continue to rise in success and are on par to join the dollar in the upcoming years.
They are the new wave and allow people to explore wealth while also enabling them to figure out how new markets work. However the reason many people are unable to understand the success of the new currencies is due to the ties the currencies have with the deep and dark web.
The reason many are failing to understand these new and upcoming currencies is because people are unable to accept the new changes the modern world are taking on. Once people lose their die hard love for the dollar the world will be able to advance itself into a much more modern society.
1
@Colin Buzza By going backwards?
Anyone with a fully technical grasp of Bitcoin, blockchain, and cryptocurrency technologies understands its emergence as a revolutionary phenomenon on par with or even bigger than the Internet itself. Those who fail to appreciate this fact can either opine in ignorance or undertake the more difficult task of learning and understanding something new.
Dr. Paul Krugman is a Nobel Laureate. He'll understand it when he wants to.
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@J.T. Wilder Sure any fool can see its benefits if only (s)he will try. Likely story. Why don’t you just insult me with your rhetoric?
"The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies."
PBOC Governor Zhou Xiaochuan - March 2009
https://www.bis.org/review/r090402c.pdf
1
@Hamish MacEwan If you remove global politics, it would work. As of now and for the long time, it will not work due to power struggle between No1 and No2.
1
Anyone with a fully technical grasp of Bitcoin, blockchain, and cryptocurrency technologies understands its emergence as a revolutionary phenomenon on par with or even bigger than the Internet itself. Those who fail to appreciate this fact can either opine in ignorance or undertake the more difficult task of learning and understanding something new.
Dr. Paul Krugman is a Nobel Laureate. The man taught economics at MIT. He's an Emeritus Professor at Princeton. Krugman will understand it when Krugman wants to understand it.
3
@J.T. Wilder For those who does not have engineering or science degree, it will be VERY hard to understand the cryptos technology. For me, I was accepted as a physics major at Berkeley so that I am above average intelligence and not in ComSi or Crypto major, but ind. engineering. But in order to self teach Bitcoin course by Princeton Univ., it took 5 repeated viewing of 12 parts lecture finally to see the lights. For Paul to understand the crypto technology will take much more as a economics PhD.
2
Here's a half-thought: the people who use Bitcoin have a lot of guns too...
1
@Gilles Diamonds are sure way of hiding money as well as art collection. But then there is a wine worth more than $30K if I remember correctly.
1
When asked about cryptocurrencies I sometimes compare the old 'three functions of money' - store of value, medium of exchange, unit of account - to show that they aren't a good idea. More an analogy than a precise explanation, but easily understood. They most closely resemble Rai stones, huge stone disks with holes in the middle that were used in Yap for money, the largest of which weighed more than four tons. These weren't carried around (duh) but ownership was exchanged and a careful history of ownership was maintained. Sounds a little like cryptocurrencies?
4
"So that’s why I’m a crypto skeptic. Could I be wrong? Of course. But if you want to argue that I’m wrong, please answer the question, what problem does cryptocurrency solve? Don’t just try to shout down the skeptics with a mixture of technobabble and libertarian derp."
This kind of seems like the story of modern capitalism. Quoth a character from The Social Network, our wealthy seem to find it easier to invent a job than to get one. So we've got all these people running around creating "solutions" to problems that never existed. Of course, in another sense that's what capitalism has always done (how much of advertising is based on convincing you that you can't live without this thing you'd never heard of before...)
Khrushchev said that politicians were always building bridges where there were no rivers. If he'd lived in a capitalist society, there are other people he might've said that of as well.
While mostly agreeing with Prof. Krugman's analysis, I would posit the following problems that cryptocurrency is attempting to solve: 1) Preserve value when a local fiat currency fails (e.g. Venezuela, Greece, Zimbabwe) 2) allow for factoring of fiat currency fluctuations, and 3) transportation of wealth from hostile local sovereigns to safe harbors. Yes, crypto-currency has high friction, keeps dark money dark, and wastes enormousness amounts of energy, but the concept that fiat currency derives its value from "men with guns saying it does" is not entirely accurate, that is just one factor in a currency retaining its value. However, it does point out one key consideration , namely one might argue that the price of supporting a multi theater thermonuclear armed force is in fact a 'cost' of the dollar retaining its value - and as such a friction at least as expensive as mining. While existing crypto-currencies fall well short of the above goals, that does not mean future innovations may make them more robust, efficient and appealing as a means of transacting everyday consumer business.
7
Isn't this the same Paul Krugman who had the following to say about the Internet in 1998? $3 Trillion of market cap would beg to differ with Dr Krugman's technology prognostication abilities.
"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."
10
One more Institution powerfully bank based money That "legal tender for all debts public and private" notation. That plus the courts which can reduce all obligations to money terms means money rules in any legal debt. Try paying off a judgement with Bitcoins. Not likely to sstop the acruing interest
1
THis post helped me and all sorts of acquaintances.
1
As a cryptocurrency writer and a fan of Paul Krugman, I applaud his candor. Dr. Krugman poses important questions that require satisfactory answers. Crypto is a complex and fast evolving area of development. Questions abound.
While crypto's potential is immense, its technical challenges are real. That said, these technical obstacles will be overcome. Hence, fixating on its temporary limitations, which nearly all experts believe will be overcome, may obstruct a view of the bigger picture.
Rather than launch into a lengthy analysis or counterargument, let me offer a few tips that might provide a more helpful framework and approach.
1) Ignore the utopian fantasies of anarcho-capitalists and crypto-libertarians. Their hype is a stumbling block.
2) Crypto "currency" causes more confusion than clarity. Crypto won't replace sovereign fiat currencies or central banks. It's how fiat will move online in the digital realm.
4) Bitcoin was the big bang of digital scarcity. A new asset class was born.
5) Crypto's properties have implications that go far beyond Bitcoin. It presages the advent of a Web of value, enabling new ways of encapsulating and exchanging value.
6) Crypto promises a new Internet paradigm with new open protocols. Say goodbye to data breaches on "honeypot" servers.
The big takeaway: something big is happening here. Whether you accept it and embrace it, or curse it and deny it, we live at the dawn of a new digital frontier.
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@J.T. Wilder No problem if it is minted digital currency.
As for Krugman's assertion that Bitcoin will likely entirely collapse, it begs many questions. For one, why have the vast majority of Bitcoins been solidly held for years and years despite enormous volatility and grueling market tests? If his assertion were true, wouldn't all those investors have had a sudden collective epiphany that the currency was actually worthless, liquidated and gone home by now? And yet the value of a single Bitcoin stubbornly persists in its upward climb. One must also wonder why many of the largest investment firms in the world are clamoring for regulatory approval to start moving vast amounts of smart money into this new asset class? Does institutional smart money typically throw itself into stupid worthless investments with no inherent value that could collapse at the drop of a hat? Generally not. Some of them, however, have fought like hell through spreading FUD and utilizing the 2018 futures market, to keep Bitcoin's price artificially suppressed until their SEC ducks are in a row to move into ETF's. So while people like JP Morgan Chase's Jamie Dimon may make similar apocalyptic claims predicting the perilous collapse of Bitcoin, it's not surprising to learn that during the quick market dips that have occurred after his widely broadcast assertions, Bitcoin addresses traced back to JP Morgan Chase have purchased large sums of Bitcoin on the dips. So on the whole, smart money understands that Bitcoin isn't going anywhere long term but up.
1
@Pen Name Did he not say that bitcoin value could fall to zero but not that it will do so. An important point was that the record so far shows that it’s value is not stable nor dependable. Other than speculators who wants that?
A crypto combine three characteristics: 1) It can be trusted that it will not be devalued by some fraudulent scheme. 2) Anonymity. 3) Safe and easy transactions between anyone. One should not take each in isolation to compare.
You argue that the US dollar can be trusted because it is backed by guns. Well, Trump holds that gun right now and just yesterday, you wrote a column about Trump’s “Supreme Betrayal”. Not very convincing. The German Mark was also backed by guns in 1920…
As for anonymity, sure, cash preserves anonymity, but not security. Try saving in cash for the washing machine when your husband has many girlfriends…
Electronic transactions are safe, but they are not anonymous. True, anonymity is helpful for criminals and tax evaders. But when criminals are also running the government, anonymity is highly valued. Electronic transactions are also based on a specific currency that must be saved, which brings us back to the trust issue.
True, the value of the Bitcoin is based on its demand and could collapse due to a bubble. But that is true of all currencies. At least, the collapse is not caused by the actions of fraudulent politicians, only to a well-defined demand and supply scheme.
The genius of the Bitcoin is that it manages to resolve all three problems simultaneously. Cryptocurrencies will thus stay. Whether the gains outweigh the costs is hard to say, but they do serve a real purpose for many across the globe that never existed before.
4
Like many of the comments, this one posits the optimal conditions for the use of cryptocurrencies: societal collapse. Not the most compelling investment thesis
2
Crypto is not anonymous since any crypto exchange open to us consumers now requires state id, ssn, and a webcam pic.
Once your identity is tied to a virtual valet, then anyone can track your transactions in a public ledger.
1
I was disappointed to read an article titled "Why I'm a Crypto Skeptic" only to find that many of its criticisms were directed specifically at Bitcoin. Sure, it is the cryptocurrency with the largest market cap, but it is also one of the least sophisticated cryptocurrencies out there. New protocols have done away with computationally expensive proof-of-work in favor of proof-of-stake and other ways to establish consensus without the need for "men with guns."
Also, the "Bitcoin is just for illegal things" argument is thin and worn out – crypto is being used for international remissions (where transaction delay is long), a wide variety of vendors are beginning to accept crypto payments, and companies are even paying their employees with crypto.
Of course, Krugman questioned why crypto is even an improvement in a world with trusted central banks and already low transaction costs, along with the inherent value of crypto. These topics are interesting and much more nuanced than this article lets on. At this point in blockchain development, the answers may be more subjective than objective.
I strongly encourage people to move beyond newspaper opinion articles discussing Bitcoin, as the quickly evolving world of blockchain is vast and not going away any time soon.
1
When it comes to cryptos, there is one thing we need to understand. And that is that no government in the world (especially the US gov) will surrender its ability to set and control monetary policy.
The gov will do anything and everything to undermine and cripple such a threat. We can only speculate why it hasn’t done it yet.
Perhaps letting the criminals dive into it so it could come after them?
1
It seems to me that cryptocurrencies are a massive fraud on the truly gullible.
1
The same might be said about the Federal Reserve or fractional reserve banking.
3
@Pen Name Well, the entire economy is based on fractional reserve banking. And all are bank notes are backed by the Federal Reserve.
@Dave Yes, exactly, which creates vulnerabilities in our economic system, and certainly fuels exploitations. The very fact that the Federal Reserve is a private organization that the government is beholden to, should indicate that something is off here. But many Americans aren't even aware of this fact. It was certainly not in the original plans of the founding fathers, and is just another historical example of how concentrated banking power can dominate democracies. Needless to say, the Fed isn't too happy about cryptocurrency challenging its dominance.
Frankly, I think too many commenters seem to misunderstand what Dr. Krugman was trying to say.
Is it possible to optimize crypto currencies to make them more efficient? Of course it is. The technology is indeed very new.
The real question is: between crypto currencies and, you know, *regular* currencies, which one would be cheaper, faster, and easier to optimize?
The thing is, crypto currencies (and the whole blockchain thing) make massive and *very* hard constrains. For example, they assume that all connections at all time with all parties can be compromised. When you think about it, that's a very dark view of the world, not to mention extremely expensive problem to solve. It is much easier, cheaper, more intuitive, and safer to mark some parties as reliable and trustworthy, like "men with guns." That simplifies the whole thing!
And, I think, that's Dr. K's point. We can solve most/all (legitimate) problems that crypto currencies set out to solve much easier using existing system. In fact, we have. As such, although there may be some niche issues, crypto currencies in general cannot sustain their hype.
This conclusion, I wholeheartedly support.
4
@Lam Luu, As a business owner, I deal with banks, and sometimes customs people (AKA men with guns) and I trust exactly none of them to do the right thing.
See the causes of the crash of 2007 if you doubt that this dark view is inaccurate. Indeed, forget human nature and invisible hands, it's a question of incentives being wrong, and inappropriate regulatory frameworks (us progressives believe in that, right?)
And so enter Blockchain technology. It's supposed to be trustless (you don't need to trust anyone) and was born directly out of those 2007 experiences. You trust the math, and only the math...
Not arguing those goals are met, agree it's early days for the technology. Simply (and sadly) disagreeing with your view of systems of trust.
Fred Wilson, echoing Chris Burniske, makes the following point: cryptocurrencies are the rewards given for taking part in the decentralized creation of a new technological infrastructure i.e. a new form of the internet. This new infrastructure is inherently valuable, and thus the assets backing it are valuable by extension. I like the logic but I am by no means a crypto expert.
1
1) As much as USD is backed by US Gov't, cryptocurrencies are backed by their respective supporters. It's presumptuous to assert that everyone 'suddenly' revokes their support.
2) What you gain by using cryptocurrency is an immutable ledger of ownership, safe from intervention from a third party. You surely know how governments can take your wealth? it's a really weird thing to support your Second Amendment and at the same time give blind trust to your government's IOU.
"It's a really weird thing to support your Second Amendment"
You must be new here.
Today’s banking systems are costly and require longer clearing times (as each transaction must go through multiple, disjointed centralized clearing systems). The costs of clearing a transaction on a Blockchain is negligible in comparison to the much higher costs associated with clearing a transaction using the traditional banking systems.
And on value: any currency’s ultimate value is a byproduct of the community that is using it: how much previous buyers paid for that currency, what’s the current demand, what’s the expected future demand, potential use cases, and the total available supply (quantity) of that currency. Regular FIAT currency is inferior to crypto currency as it relates to “available quantities”. Governments can print more bills and release them to the marketplace, where with Bitcoin the total supply is set, and can never be changed.
There are other issues that are of higher concern as it relates to crypto currencies’ future, than the ones mentioned in this opinion article: namely, crypto daily value fluctuatation, the uncertainty of its legal status (as governments have the ultimate power to declare it illegal to be used by their citizens), and the need to have better oversight on movements of funds to prevent use cases related to criminal activities and money laundering.
C'mon Dr. Krugman, by now you should know that 'libertarian derp', fantastical as it is, still will cause people - and governments - to behave in ways that are 'untethered' from real world logical outcomes.
3
My biggest problem with bitcoin and other cryptocurrencies is that from what I can tell they are nothing more than lines of code on a computer somewhere. I've heard the argument that in the modern world, bank deposits are also nothing more than lines of code on a bank's computer, but that's not true. With bank deposits those lines of code represent a balance in a deposit account, which represents the bank's obligation to pay the balance to the customer in accordance with the laws regarding bank deposits and the customer's agreement with the bank. In other words, it's a real liability of a real corporation with real assets and capital to back it up. Moreover, those corporations are heavily regulated to ensure that they do not engage in risky activities that would unduly compromise the ability of a bank to make good on its obligations. And in case that regulatory regime fails to keep a bank from defaulting on its obligations, the value of the deposits is guarantied (up to a certain amount) by a government insurance program. I'm not aware of any cryptocurrency that has any of these safeguards.
Rewind to the early 1900s. A heated discussion is in progress. What problem does the automobile solve? It cannot go faster than the horses, it cannot be used on hills or go around obstacles like horses can, it kicks up dust and smoke, it makes a lot of noise, it is a safety hazard and a physical threat to people, horses, and chicken, and so on. And what’s worse: it is extremely expensive, not only to make but also to run as it needs to be refilled constantly with this crude substance that has to be dug up from under the earth and purified using heavy equipment. In contrast, horses are not only “self-feeding, self-controlling, self-maintaining and self-reproducing, but they are far more economical...,” so opined a steam-energy expert in 1894.
All new disruptive technologies take time to understand and to develop. There are good reasons why some of the smartest brains on the planet are drawn to the blockchain space. And there are also good reasons why some of the smartest brains are opposed to this technology. In the end, the march of technology continues unabated. Our focus should be to develop wise responses to mitigate the ill-effects of bitcoin and other cryptocurrencies while leveraging their tremendous potential.
4
Not sure I've ever disagreed with Dr K before... and this time I agree with the conclusion, and even his reasoning, but not the facts behind the reasoning.
Transaction costs, incurred by mining, can be reduced to a reasonable level (that is, practically network traffic) through some sort of Proof of Stake consensus algorithm instead of Proof of Work. 'Some sort of' is a hand wave, and I've not convinced myself it isn't inevitably a compromise of security, but it will work and people smarter than me think it can be secure. Mining becomes just Validation.
You can create a BlockChain that tethers to whatever you want. It doesn't have to float on the market, it's just a Distributed Ledger. Sure, no one will be 'excited' by that, so it's not the same huge opportunity to Get Rich Quick, but you can do it. Actually, if Dr K were to want to think on it, making such a peg useful at a global scale would indeed be valuable work (and I'm not saying he should, just that his would be the skills needed).
Now for why I don't think it changes anything fundamentally... at least not in the current state of the technology:
Scale. The Visa network processes orders of magnitude more transactions than all the tokens and coins on all the blockchains operating today combined. This is where the rubber hits the road for it to be a payment solution.
Will these 3 problems (Dr K's 2 and my 1) be solved completely? Dunno, but for sure not today, not this year...
1
The only thing I can fully understand about crypto currencies is when they function as a hybrid cash and stock ownership. For example. Say that a company is going to start a jet rental company. They might seek large investment from companies that pay for jet rental and offer the following. If the jet renting company invests $500,000.00, they will receive a cryptocurrency that they can cash in for jet rental and will also represent an ownership interest in the company (with some formula that adjusts between the two). The same could be done with super computers, hotel rooms, heavy machinery or anything else that is rented. The SEC has ruled that transactions like that are subject to SEC rules.
2
I'm an engineer and mathematician, and having read a really good explanation of block-chain technology in IEEE Spectrum recently I at least feel like I understand how it works--pretty fascinating stuff, but just because you can doesn't mean you should.
Along with all the usual libertarian/anti-government/crime/money-laundering explanations, here's one more. I recently saw an anecdotal story about an elderly woman who was an early Bitcoin buyer and has now become a millionaire. You say "speculator," I say, "gambler."
What "problem" does Bitcoin solve? It allows anyone, anywhere in the world, to pretend they're in Monaco or Las Vegas playing with the Big Dogs. sure, there's lots of other on-line gambling opportunities, but right now Bitcoin is the big draw. Will it last? I'm with Dr. Krugman in saying I don't see how or why, especially once you understand how resource-intensive crypto-currency mining is. As a devotee of efficiency (that's what engineering is all about, isn't it?) I see Bitcoin as a scourge.
137
Thank goodness that the market will eventually decide if cryptocurrencies survive or not. It's great that people can bad mouth cryptos all they want, but can't actually stop it. That's the beauty of cryptos - no one can control or stop it. And yes, it is used for crime. Just like paper currency.
1
What problems do bitcoin and cryptocurrency solve & why are investors displaying intelligent foresight vs. gambling proclivities?
1) Bitcoin is a Global Economic Safety Valve
Krugman disingenuously pits Bitcoin against transactional currencies, when it's a global reserve currency that outcompetes precious metals in practicality. As such, it's helped citizens survive hyperinflation, currency collapse, and government corruption in places like Venezuela, Africa, Cypress, Iran, and China.
2) Endurance & Consistent Long-Term Returns
Bitcoin has persisted to grow despite a decade of grueling market tests, with average annual returns of 212% since 2012. This is not the pattern of a bubble, but the normal pattern of any new disruptive technology with expanding adoption.
3) Increased Speed & Reduced Costs
The 6th largest cryptocurrency, Stellar, can conduct 100,000 2-5 second international transactions for a single penny, leaving multi-day bank wires, Western Union, and currency exchange services in the dust. How's that for reducing friction?
4) Tethering
IBM, in partnership with the Stellar platform, is launching the Stronghold USD stablecoin, which will be backed by IBM's assets and bound to the US dollar's value.
5) Smart Money Expansion
Major financial institutions are seeking SEC approval to move vast sums of money into Bitcoin ETF's. They understand that Bitcoin is a long-term investment that isn't going away any time soon. SEC approval is expected this year or next.
Crypto currency allows dark money to stay dark.
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@Anthony no it doesn't. Cash does this. A public ledger means those dark transactions can be traced. If criminals used bitcoin, government agencies would have a lot easier time taking them.
1
This is a common misconception. Only true privacy coins such as Dash or Monero allow dark money to stay dark, as would U.S. currency in a briefcase. All transactions on Bitcoin and the majority of cryptocurrencies are recorded on a public ledger that can be viewed by anyone. If dark money were able to stay dark then the New York Times wouldn't have been able to report on the story of Russian election money flowing through Bitcoin. It was quite traceable. They would have been wiser to use U.S. dollars. So is U.S. currency also a bad thing because a small portion of people who use it wish to be anonymous?
@Anthony Blockchain is immutable such that nobody can alter the transaction record. And given time, if used illegally, gov. will catch up for such use. Proofs? There are companies providing such services already for police etc. The second largest(?) holder of Bitcoin is FBI from the bust of illegal activities.
CAUTION should be the default whenever parting with cash.
Cash can be easily converted to various assets, including gold -- where people can speculate and also maintain a hedge against financial system meltdown. (I have no gold.)
Why in the heck would anyone convert cash into crypto currency? Drug dealers. Oil men trying to avoid taxes. Oligarchs trying to launder the spoils of their corruption.
This is not a good group nor reasons for honest people.
Novelty could be a reason to start a Bitcoin hobby, but how did those numismatic coins and baseball cards work out? Those are actually tangible, though many neophytes lost 90% because they overpaid.
Crypto currency has nothing but warning signs:
1. Beyond the nefarious, GREED is the only driver.
2. It is intangible; it literally exists in an electronic ether.
3. Except for its creators and its manipulators, the people holding it are complete neophytes.
@Able Nommer so what you're saying is you don't really know what you're talking about and are just regurgitating the fear, uncertainty, and doubt you've heard from others.
1. You don't understand the potential use cases if that's all you think.
2. You completely don't understand how it works. Just because it's "intangible" doesn't make it any less useful for the purposes it exists for.
3. Wow. Just judging everyone on no basis whatsoever.
Cash is also a horrible thing to hold on to. It's a inflationary asset whereas most cryptos are deflationary. Please take a second to learn more here. https://www.investopedia.com/articles/investing/090715/how-inflation-aff...
1
Wow, so much ignorance in this comments section (the NY Times of all places) on what Bitcoin and cryptocurrency more generally means for the future of finance. The banks are terrified of this technology - they are being cut out of the picture and stand to lose untold sums of money in the process. Hence the desperate attempts to get a seat at the table and either develop blockchain systems themselves (centralization completely run counter to the purpose of crypto) or create exchanges and other financial vehicles for customers to buy and sell cryptocurrencies. The world is changing and you are either going to change with it or get eaten alive. Plenty of recent examples of that. And guess what? The OCC just gave FinTech companies the right to pursue a national bank charter. Yup, that's right - Google and Apple will soon be able to further disrupt and destroy the traditional banking system. Crypto may very well be the nail in the coffin. Oh and the whole money laundering argument is true for certain privacy coins like Monero and Zcash (almost complete anonymity) but Bitcoin is able to be audited like anything else (albeit on a reduced basis) which makes it even more attractive to regulators as an alternate means of currency. Lastly, not a single mention here of the value of ICOs, not just as a means for new companies to raise capital but for mature companies to tokenize and raise money. Evolve or become food for the evolved...easy choice to make for anyone with half a brain.
8
What problem does crytpocurrency solve? Illegal and untraceable exchange of value. It solves a problem for criminals.
If you want to make an illegal transaction, and not go through the hassle of money laundering, crypto works well.
It is very hard to hold my computer for ransom, and anonymously collect cash for it, if I am sitting here in NY and the hacker is in Russia or China or Macedonia. Crypto allows criminals to go global.
So I'd ask, how is the market for international global crime looking? Given that the Times reported that hackers have been taking on our electrical grid, I'd give international crime a rosy outlook. So my read: crypto stays strong. Kleptocracy is a powerful form of government.
3
Let's keep in mind, decentralized peer-to-peer cryptocurrency is the worst nightmare of central banks and governments, because it takes global economic hegemony out of their concentrated hands. They are now doing everything they can to play catch up and stick their foot in the door before the whole thing runs away from their control. The stakes are high and apocalyptic pronouncements about Bitcoin are all a part of the game. And for a moment, I have to wonder if Paul Krugman is in cahoots with other big money players to aid in such FUD-manufacturing schemes or if he is simply as ignorant as he appears?
Let's give him the benefit of the doubt and assume he's truly uninformed regarding the inherent value of Bitcoin. In which case, he should get up to speed with what constitutes value in the digital age. It has a lot to do with the secure transfer of valuable information along broad trusted global networks, which is something that grows with every block added to Bitcoin's chain, and which makes Bitcoin the most counterfeit-proof currency in the world. Hundreds of billions of dollars of Bitcoin market cap suggests there is some real world utility in that. Further proof can be found in the recent $120 billion dollar drop in Facebook stock, based on the violation of the security and trust in its information network. Apparently these inherent measures of value are worth something these days.
1
The clear utility of the Stellar cryptocurrency platform is backed by its partnership with the third largest tech company in the world, IBM, to create a new generation of global financial exchange infrastructure. At the moment, IBM, utilizing the Stellar platform, is teaming up with financial exchange giant CLS that processes $5 trillion a day in transfers, as well as Barclays, Citigroup, and seven other banking institutions to trial a blockchain network to cut costs by streamlining operations. So here we have some of the largest global players in tech and finance putting their energy, time, resources, and trillions of dollars in exchange behind the belief that cryptocurrencies and blockchain technology will revolutionize financial transactions by reducing friction. On the other side, we have Paul Krugman, who struggles to understand "technobabble" claiming that it won't. Who would you believe? Despite his Nobel Prize, I think Krugman may be out of his depth on this topic.
1
@Pen Name "So here we have some of the largest global players in tech and finance putting their energy, time, resources, and trillions of dollars in exchange behind the belief that cryptocurrencies and blockchain technology will revolutionize financial transactions by reducing friction". This sounds like technobabble. Largest global players are putting trillions of dollars...really? The US economy is about 14 trillion in size. How many trillions of dollars are these firms putting behind this? Do you have any numbers to back this assertion?
@Pen Name
Let me know when my local farmer's market folk take crypto.
I didn't say Trillions of dollars in assets, I said trillions of dollars in exchange. These are two very different things because exchanged currency has a multiplier effect. CLS processes $5 trillion in currency payments each day for global financial institutions. It's about how many cars move on its superhighway, not that it owns all those cars. And in this case, the superhighway is being constructed on a Stellar blockchain platform, which makes ownership of the pavement very valuable.
The source for these figures is Forbes.
https://www.hl.co.uk/news/2017/10/20/ibm-and-cls-move-blockchain-into-pr...
Don't creators/advocates of cryptocurrencies explicitly use gold as their model? So of course all this is intentional, and unsurprising.
I suppose this may have been pointed out already, but electronics after jewelry and finance is the third largest user of gold. https://www.statista.com/statistics/299609/gold-demand-by-industry-secto...
1
Agree with the commentary and logic around bitcoin as a new currency supported by the issue of transaction cost. However, what about those like xrp “ripple” that do seek solve the exact problem you described over history and lower transaction costs at wicked fast speeds?
Maybe you would put these under a different classification.
Did you mean to say: "And this means that their value IS a bubble that can collapse if people lose faith." Otherwise it's hard to understand this argument.
@outofstate The fiat currencies aren’t a bubble. They are backed by a nation that taxes its citizens and accepts the currency for payment.
1
Part 7
Moving on to the outdated claim that Bitcoin is only used by tax evaders and black market criminals, again, Krugman doesn't really understand enough about Bitcoin and this argument hasn't been relevant for many years. Every transaction is recorded on a public ledger that is very transparent and quite traceable. You could make this claim against privacy coins like Monero or Dash perhaps, but they only exist because they fulfill real world problems, whether he likes that or not. Criminals and tax evaders will always move through one channel or another, whether it be through cash, corporations, the Cayman Islands, or the White House. So, is the fact that some people do bad things using U.S. dollars, credit cards, or bank accounts also a good argument for abolishing these things as well? Once more, his argument falls down.
In summary, I would hope that Paul Krugman does more homework before heading off to that cryptocurrency conference or writing another NY Times Op Ed on Bitcoin. At the moment, he's only positioning himself as an ill-informed and out-of-touch mouthpiece for those who have trouble assimilating the digital realities of the modern era.
1
It is the force of law, not guns, that makes fiat money work. Leona Helmsley did not pay her taxes but it was not necessary to point a gun at her. She went to jail in the normal way. As likely, Manafort will...
The mining of cryptocurrency-to do nothing and get earned a money. Ha-ha)))) it is a dream for many people. Yet I agree it has not got a real value for real economy. So it is a likely babble.
Poor Krugman. He mistakenly believes that Bitcoin has no instrinsic value. Except: Bitcoin is like gold in several respects: its virtually indestructable, easily identifiable, easily divisible (known as shitokis), difficult to counterfeit, and is rare but not too rare. These attributes make it an ideal form of money, like gold. If this doesn’t represent intrinsic value, then nothing does.
@Healthguy
Intrinsic value in the context of money implies that the item has value outside its use as money, cryptocurrency does not while gold and other metals do.
2
Krugman is correct in saying Bitcoin is reminiscent of the monetary landscape before fiat money became dominant. It was also a world without instant information, electronic transaction processing and large easily auditable credit worthy groups.
Currency is highly liquid credit that trades at face value. In a world of currency competition the makers of goods and services will decide the value of the various currencies they will exchange and carry. The "quality of money" will be considered by the user because they will have a choice about which currency to use at all times.
What economist, what central bank, what bureaucrat can stop a maker of goods and services from announcing, "Always and everywhere we offer to exchange one smart phone, one self-driving car, one hotel night, one loaf of bread one micro-brew, one taxi ride for a set price in Bitcoin?
@Paul "In a world of currency competition"
Competitors to fiat money are unfairly hampered by taxation policy. Capital gains tax makes using alternatives like gold and bitcoin cumbersome.
Krugman makes some important critiques against Bitcoin (cost / speed of transactions), but it's important to remember it's not the only one of the cryptocurrencies (nor necessarily the one most likely to succeed longterm).
Also important - cryptocurrency is not the same thing as blockchain, though it's its best-known application.
Blockchain is still in its infancy; look for a wide range of new (non-currency related) applications that will benefit from the trustless, public nature of blockchain as technological issues of scale and speed are improved upon.
1
@Andrew Wheeler
You nailed it. Paul need to check out new development in crypto tech. in DAG such as Hashgraph, Byteball, Phantom, LondonCoin etc without the mining with 10K and up TPS.
1
You're missing the point. Crypto was not designed to be a form of payment, that's just the latest abuse that ignorants and speculants try to bolt onto it.
Crypto was designed to be a better reserve than gold, and it succeeds admirably.
Its value is driven entirely by belief and scarcity, and doesn't depend on trust in 3rd parties with agendas (states, banks). This causes the speculation and volatility, just like with gold.
Because it solves a lot of problems that gold actually has, it can be considered fiat gold.
Crypto is much easier (than gold) to mine, by everyone, everywhere.
Crypto is much easier to own, transfer, and exchange than physical gold. Transactions are cheaper and faster. The barrier to ownership and storage is very low.
Crypto is much safer than gold to own or transfer. Risks are distributed over a large heterogeneous network of actors which makes manipulation very very hard. Risk of theft is negligible compared to physical gold. Risk of loss of value is comparable or better than manipulation of markets in conventional finance.
Just like gold, crypto is not fiat, it doesn't rely on the stability and whims of a 3rd party (state, bank). This is a real problem, and the reason why gold and other precious metals/reserves are traded and held. It's just insurance against financial calamity.
Historically, gold has maintained its value while currencies came and went. I expect crypto to displace gold in financial markets in the long technological run.
@Rob Mueler No, you are wrong. Bitcoin was designed to be used in ordinary market transactions. The first bitcoin transaction was to buy a pizza.
It truly is what it was designed for. You can look it up. It is in the original Satoshi paper explaining " A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a
financial institution."
Saying it was not designed for commerce is incorrect. It just is terrible for that purpose. So people are re-imagining it as "digital gold".
Cryptocurrencies’ main use is tax evasion and criminal activities. That is the only basis upon which the transactional costs described by Dr. Krugman can be justified, by the taxes and penalties thereby evaded.
The value of crypto-currencies to consumers in every transactions is negligible. I have far fewer safeguards against fraud or non-delivery of services/goods for payment by conducting transactions in Bitcoin rather than credit card. The savings in credit card transnational costs currently borne largely by retailers could shift to consumers in the form of higher costs associated with miners or other related expenses.
One issue is the difficulty, or future not-difficulty, of generating new bitcoin. Right now, it gets harder and harder to create new bitcoin. For it to become mainstream, we need a lot more bitcoin than there is now. If we figure out how to create new bitcoin more efficiently (quantum computing anyone?) - that will reduce the value of each bitcoin as new bitcoin floods the market. These two sides of the same bitcoin make the future value of bitcoin unpredictable. Without predictable future value, its use is speculative, not mainstream.
@Bruce Maier That's not how Bitcoin works. The network is designed for the difficulty to be the same such that there is new Bitcoin created at a rate of about 10 minutes.
Dr. Krugman, I see your point. But I believe you are leaving an important point out, which is the idea of blockchain. Being able to track an item, being it a song, a work of art, or a pineapple, securely and objectively and on a worldwide scale, is a big deal.
In my opinion, that's where the inherent value of cryptocurrencies is: to be able to store and share information. What kind of information? Everything you can find on your computer and on the Internet: files, programs, websites, social networks, ...
This is the direction along which the ecosystem is evolving (consider for example the Ethereum and EOS platforms). I might be wrong, but I see Bitcoin and similar projects as a new type of thing, combining information (bytes, software and more) and value (in the classical, coin-like sense). Does this sounds completely wrong?
1
I agree completely, and I never agree completely with Krugman. Everything he says here is spot on. I might quibble about the inherent value of fiat currency -- after all, if government collapses or otherwise ceases to function, fiat currency will be worthless -- but on crypto he's summed it up to perfection.
The most often cited argument in favor of crypto is that it is not subject to manipulation by financial geniuses at central banks.
But then somehow crypto is impervious to manipulation by tech geniuses operating out of mom's basement.
At least the financial geniuses are constrained from ruinous manipulation in that it might destroy their reputations. Whereas ruinous manipulation by tech geniuses only enhances their standing with their peers.
2
@Mr. Anderson
The financial geniuses have demonostrated time and again that they will conduct ruinous manipulation without hesitation if they are brought to believe that it will enhance their reputations. 2008, anyone?
Yeah. I swear to God I will never understand the anarchist/libertarian fixation on how if we somehow remove all existing institutions from the equation, then... nothing new will replace it, and if it will it certainly won't be worse! We'll just have true democracy, or whatever.
It's the same mentality that drove Bush to overthrow Saddam and then not even plan for the aftermath.
1
Ever since its inception thousands of years ago it has always made it easier to conduct economic transactions but has also involved an element of faith by the users.
Commodity money, in the form of gold or silver, made transactions easier than barter but required that the value of commodity money be worth more as money than it's intrinsic value in making jewelry. As money evolved over the centuries the level of faith needed in the form of money rose but still never became built completely on faith as are the cryptocurrencies.
Even as we have made the transition to fiat money and bank deposits as basic forms of money today, there is an element of intrinsic value underlying this form by the government.
Fiat money( Federal Reserve Notes) is legal tender and must be accepted for debts while bank deposits are backed by FDIC as well implicitly by being able to turn deposits into currency.
Cryptocurrencies are built on faith alone.
3
I remember a time when my parents would find no use for a smartphone, be afraid of online credit card transactions or more recently whatsapp. They were wise enough not to say it was only for criminals. They later changed their minds once everybody started using these technologies.
Bitcoin is a new form of money, native to the Internet, that does not rely on central bankers or governments. In fact it is probably the only currency in the world that can survive a nuclear war. The average lifetime of a national currency is 27 years. The social, economic and geopolitical implications of crypto currencies are difficult to predict. Some Venezuelians teach Spanish online and get paid in crypto. Millenials priced out of the housing market by quantitative easing make great returns in crypto.
2
@Jerome given the massive EMPs from a nuclear war, it is highly unlikely that an electronic currency would survive.
Put another way, the US enforced contracts denominated in dollars. Will it enforce contracts denominated in Bitcoin?
Here’s one use case that Bitcoin makes possible: ransomware.
3
See bitcoin trajectory. Does not look good according to this chart. It seems it reached its highest peak back in December 2017. Like gold very unstable. Many people will lose their shirts by playing with this fantasy.
https://finance.yahoo.com/quote/BTCUSD=X/chart?p=BTCUSD=X#eyJpbnRlcnZhbC...
1
“Mining requires enormous amounts of computing power. According to some estimates, bitcoin’s power use already may equal 3 million U.S. homes, topping the individual consumption of 159 countries. The bulk of this mining goes on in China, where most of the electricity comes from coal, so this is a dirty business. The number of bitcoin in circulation is supposed to top out at 21 million; we’re approaching 17 million now. As the limit is approached, the coin-creating algorithms get more difficult to solve, meaning more computing power is required, and more carbon is generated. Even the most seemingly immaterial of things often have deeply material roots.” Doug Henwood, 12/2017
3
Actually the majority of bitcoin mining in China takes place in hydropowered ghost towns, where the electricity is renewable and extremely cheap. As mining difficulty increases, it will soon only be profitably carried out by free sources of energy such as solar.
And, keep in mind, that Bitcoin is displacing gold as a global reserve currency. Gold strip mining is responsible for the destruction of vast swaths of the Amazon rainforest, mountaintop erosion, the heavy metal and cyanide poisoning of rivers and drinking water supplies, child slave labor in Africa, and bloody resource wars. It takes 2-91 tons of earth being moved to produce just one ounce of gold. Because of this, South Africa has started experiencing man made earthquakes from the enormous volume of land displaced. So, given Bitcoin's reserve currency competitor, it may actually be a much more environmentally friendly and humanitarian alternative when looking at the big picture.
The actual quote from Smith goes as follows:
“The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air; enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase very considerably the annual produce of its land and labour’ ( WN II.ii.86: p 321).” In other words banking helps accelerate the use of productive factors. After all Smith correctly but only partially developed his value theory as he only considered labor as a concrete activity and not in its abstract dimension. Which is what ultimately is used in social exchange.
Anyway Smith is closer to reality than the libertarian fantasies of those who created Bitcoin who have no idea where value comes from.
1
In regards to tethering cryptocurrency, it's fitting that one of the comments below mentioned the intrinsic value of IBM as a company, because IBM is now utilizing the Stellar cryptocurrency platform to launch a "stablecoin" whose value is actually backed by the real-world assets of IBM. The coin, called Stronghold USD will be bound to the value of the U.S. dollar to provide a "frictionless digital proxy for fiat." This answers Krugman's questions about tethering, and is just another example of how cryptocurrency facilitates digitized value transfer. One could write a novel on all the real world issues that other forms of cryptocurrency solve in their own particular niches, from tracking global carbon offsets, to supply chain quality assurance, to valuation of social media content, and so on.
1
I think cryptocurrency is the future of trade payments—once it resolves its technical frictions. It has to, to keep up with automation, machine algorithms, and digital everything. The only problem is creating an autonomous, self-regulating, failsafe system that everyone can trust more than any central authority to ensure reliability and integrity.
1
Lets consider transactional cryptocurrencies that are actually appropriate to compare with cash or bank cards - as opposed to global reserve cryptocurrencies like Bitcoin, which are only appropriate to compare with gold. How do they shape up in terms of friction and do these cryptocurrencies solve real world problems? Let's look at Stellar Lumen, the sixth largest cryptocurrency in the world right now. Stellar can process 100,000 transactions for one penny, and currently takes about 2 or 3 seconds for transactions to go through, whether local or international. It's currently partnering with Tempo in Europe to create the world's largest cryptocurrency based network for global remittances, and its well-positioned as a universal fiat exchange token. Compare this with the 2.5-3% processing fees for credit cards, multi-day international wire transfers, or the high consumer fees of Western Union or currency exchange services, and I would say that this particular cryptocurrency definitely provides a leg up in terms of reducing friction. On top of this, part of Stellar's stated humanitarian mission is to resolve the issue of the 26% of the world's population who are currently unbanked. Once again, cryptocurrency is solving real world issues.
1
@Pen Name . You write well, and make fair points, but it is hard to take you seriously since you chose to be anonymous. And yes, there is a larger analogy here.
Actually, you can go to the Stellar.org website and see all the fine folks involved in the project, including a Stanford professor, the CEO of Stripe, and the founder of Wordpress. The identity of those behind it is much more transparent than the individuals behind central banks who are profiting from questionable fractional reserve policies. And this is the case for the vast majority of cryptocurrency projects. If you are railing against the token itself, then you are assuming Stellar Lumen is an anonymous privacy coin, which it is not. It is more traceable than cash. Your argument only really applies to coins like Dash or Monero, that were developed explicitly for privacy. Even Bitcoin is a public ledger where every transaction is permanently recorded and traceable in the blockchain. It is not an anonymous currency as many people mistakenly believe it is.
Everyone in the cryptocurrency world understands that each currency fulfills a niche, and Bitcoin's niche is as a global reserve currency not a transactional currency. I'm not sure how an economist can miss this enormous detail, which even those with a basic knowledge of cryptocurrencies understand. If you want to debate whether Bitcoin is a more useful global reserve currency than gold, then do so. But you would be hard pressed to build a solid case for that. And the people of Venezuela who are facing hyperinflation, the people of China who are facing currency devaluation, and the people of Cypress who had the government dipping into their personal bank accounts in 2013, have all rushed to safeguard their money with Bitcoin not gold. Why? Because it solves real world problems. Try turning a vault-held bar of gold into a loaf of bread in the middle of a currency collapse. And despite Krugman's assertion that "fiat currencies have underlying value because men with guns say they do," the men with guns backing the governments of Venezuela or Iran aren't capable of stabilizing their national currencies with bullets right now. With a single individual like Trump drunkenly steering the world into ever increasing economic chaos through impulse-tweeted trade wars, the vulnerabilities of government controlled fiat, as well as the vital importance of a sovereign global reserve currency should be more apparent now than ever. Bitcoin is a global economic safety valve.
@Pen Name Try turning a bitcoin into a loaf of bread when the power is out. Were any bitcoins moved in Puerto Rico after Hurricane Maria?
Your argument is a non-sequiter. I'm discussing the problem of currency crises in faltering economies, and you are jumping over into resource shortages after a natural disaster. The issue there was finding a loaf of bread period after Hurricane Maria, not having a viable currency that could purchase it. And there is nothing in my statement arguing against the utility of cash in healthy economies. Although to be fair, you may have had a much easier time accessing bitcoin savings through a generator-run community charging center and a cellphone, versus pulling atm funds out of a bank that's been leveled, or seeing if the paper money stored under your mattress survived the 155 mph hurricane winds, monsoon rains, and flooding.
As for the larger scheme of post-disaster relief, the local government has found that incentivizing cryptocurrency startups to come to Puerto Rico is helping them find solutions to fund the economic recovery of the island. The government hosted a conference with 800 start-up founders, hedge fund investors, and tech entrepreneurs - many of whom are interested in setting up shop in Puerto Rico. In addition, all proceeds from the conference went to ongoing disaster relief efforts.
The emperor's new clothes meets Vonnegut's granfalloon.
The Technorati envision the ultimate fate of humankind as "synchronicity" when humans merge with machine.
The coin of the realm when synchronicity is reached will be bitcoin.
Technology is as much a religion, a system of beliefs, as it is science, math and commerce. The Deus Ex Machina of technology is virtual value, which needs a yardstick.
The Technorati propose bitcoin as the yardstick except it's as virtual as what it purports to measure. Thus the role of faith among tech's true believers.
They bought the emperor's entire new wardrobe but now have nothing to show for it.
6
. . . except for a three fold or greater return on investment for everyone who bought the wardrobe at least a year ago.
@Pen Name, exactly. That's why I'm thinking about investing my tulip bulb profits in crypto currency. (Paula Ponzi here, using my friend RKC's subscription)
5
Perhaps they are actually sporting good fashion sense.
Whether or not Bitcoin is a good way to make money or store value or whatever, it functions like in-person cash transactions in cyberspace. I am not sophisticated enough to set up a shell company nor am I rich enough to afford actual privacy. In a world of targeted ads, Facebook, data brokers and all the rest, I find value in being able to conduct transactions anonymously. I do not do anything illegal. I just resent having my every transaction recorded, machines reading my emails and third parties following my IP address and browser fingerprint around the web just to make a bunch of people who aren't me rich. What do I get in return? Great, I can waste time for free on Facebook and have Google searches tell me what Amazon thinks is the best way to separate me from my disposable income.
I grew up in the Silicon Valley of smelly hippies soldering breadboards and the ethos has stuck with me. I probably belong to such a tiny minority that our behavior doesn't even make a dent compared to the speculators and passionate libertarians, but privacy and anonymity aren't just for black markets and criminals. Some of us just find intrinsic value in being able to be left alone to do our thing. TOR is sketchy --- but if I want to sandwich a rented server between two VPNs, it completely defeats the purpose if I pay for either using a bank account attached to my identity in meat-space.
1
The value of cryptos is the sum of 1. Technology+2. Business Model+3. Community.
If designed correctly cryptos can have intrinsic value as well as low or no transaction fee, which will come from good understanding of technology and business model which can wipe out the existing industries especially one with heavy back office jobs.
1. Technology is moving from 1st generation Blockchain to 3rd generation DAG such that 3rd generation DAG ones need no mining as transaction speed exceeding those of VISA's 56,000 TPS, and DAG can bring up to 150,000 TPS(Transaction Per Second)
2. Business models is evolving such that cryptos to generate profits which gives the intrinsic value by itself as well as backed by gold to make more stable than any fiat currencies in the world.
3. Community which supports or owns cryptos is as valuable as any parameter such as technology or business model. At the beginning of Internet era, a subscriber was valued at $10 one time. Sine cryptos involve actual money, the value of such community should be more than $10 per community member.
There is a good introductory Bitcoin courses by Princeton Univ., and without understanding intrinsic concept of Bitcoin commenting or blaming about it is rather unprofessional.
4
The paper you cite is focused on PoW, which is clearly too expensive. The goal of PoW is too randomly select a miner from an unknown set of participants. There are other ways to do this, and ongoing research on less costly consensus algorithms. Your point about tethering is also backwards looking. If something useful is put on a blockchain, then that will be the tether that gives the crypto currency value. People are speculating that something will take off. I don’t know it could be, but it’s possible. It’s not cryptokitties.
We all have a instinctive distrust of things supported by those we normally agreed with. However, I feel that regarding Bitcoin, you've allowed your distrust of libertarians to cloud your judgement. (I write this as a progressive Democrat who overcame such skepticism.)
Throughout this piece, you reveal that you have a limited understanding of how Bitcoin transactions occur, the cost of transacting in Bitcoin, and the potential for real world use cases. I hope that you read more before you engage at your upcoming conference.
5
@Gary Gorski I meant to say disagree with
In 2013 Dr. Krugman in these very same pages penned his opinion that 'Bitcoin is Evil'. Since that time Bitcoin has crashed twice and currently sits at a price 10 fold higher and a market valuation nearly 15 times higher.
The explanation as to why Bitcoin is valuable and will continue to be so is obvious to those of us who understand economics as explained by Austrian school economists such as one of Dr. Krugman's fellow Nobel prize winners Ludwig von Mises.
If Dr. Krugman, or anyone else for that matter, cares to know the answer I suggest they put aside their Keynesian biases and start reading works from this Austrian economic school. You may just learn something and drastically increase your wealth in the process. Alternatively, one is free to follow Dr.Krugman's advice and miss out on possibly the greatest wealth transfer in your lifetime.
4
Me: I just created this currency and have decided to call it wack-a-doodle. I have a million of them, so that means I’m a wack-a doodle millionaire!
You: Hey! I want to buy all of those from you as I want to be a wack-a-doodle millionaire too.
Me: Ok. What do you have to offer for them?
You: Well, I have two million wack-a-moles. Does that work?
Me: Sure! That will make me a wack-a-mole millionaire, which I’ve always wanted to be.
You: Great! Let’s do the transaction and we will both be millionaires!
Me: We are both so rich, I can’t believe it!
You: By the way, do you have $20? I need to buy gas for my car.
Me: No problem. I got you covered. Millionaires have to look out for each other.
6
In response to your question, Paul, Bitcoin addresses a critical flaw in fiat currency. A flaw that has been the bane of every government issued currency for the past 36 years.
Bitcoin allows a government to disengage from the business of monetary policy, and thereby gain the trust and respect of consumers, businesses, creditors and even foreign 3rd party transactions. It takes away the ability of transient politicians to use a printing press to retire debts, build a rocket ship or pay for a war without the necessary resources or credit to cover expenses. It forces national governments (and especially the US as “reserve custodian”) to balance their books and demonstrate the same fiscal responsibility that is required of every individual. enterprise, ngo, state and city. Governments can still tax, spend and enforce tax collection. But if they lack the resources to wage war or for a big public works project, they will need to find creditors who earnesetly believe in their ability to repay—just like the res of us!
In response to your NYT article today, I have posted my take on the issue: https://goo.gl/nF2Skw
~Philip Raymond
3
What you’re saying also applies to the gold standard. Which has as its major drawback total inflexibility, thereby exacerbating the impact of an economic downturn.
12
A key concept in finance is intrinsic value. Essentially the value of what u get in return for your investment. A share of IBM for example tends to sell for the present value of the stream of future dividends that you can expect to capture. A house, the value (roughly) of the rent payments you are avoiding by buying it.
What’s the intrinsic value of a Bitcoin? It gives you nothing in return. It’s value at any given time simply depends on a hunch re what it will be worth in the future. Hence it’s wild swings.
5
Coincidentally, IBM is currently developing a USD tethered stablecoin cryptocurrency that is backed by the company's own wealth reserves.
The difficulty of this article is that your negative points about Bitcoin are mostly correct; it really is an inefficient system. Leaking valueout to electric companies. But you seem to assume there isn't an alternative design that works; in an efficient and scalable way. That assumption is incorrect. BFT can be achieved without any significant leak of value.
I agree completely that crypto currencies are a fanboy exercise and will likely vanish soon. I do not agree with a premise of a tangential part of the argument, that the only reason one might want to use forms of payment that aren’t traceable (cash, mostly) is criminal activity. (To be clear, this isn’t impacting the main point of this piece, which, as I said, I agree with.)
2
The ignorance and hostility so abundant in the comments here suggest that a major problem the crypto-world has to solve is how to educate people about programmable money.
4
@Nullius
I haven't seen ignorance or hostility, just assertions back and forth. The link someone posted to the use of blockchain in Jordanian refugee camps was interesting. The suggestion is that, with iris scanners and other biometric authentication hardware, that blockchain/crypto is a decent way to quickly, cheaply, and effectively build the economic infrastructure of monetary exchange when they no longer exist due to war (in Syria) or governmental incompetence (in Venuzuela.)
But such incompetence is not likely to strike the vast majority of civilization -- and if it did it would likely take the telcos down with it.
So the operative puzzle is a familiar one: how do I get someone to use view this 'thing' as money? The old law is 'bad money drives out the good.' Less stable money is used for exchange, Successful money has three properties: a store of value, a means of exchange and a unit of account. ALL of them depend on stability vs real goods.
No crypto has demonstrated that outside of places where fiat currencies backed by government have failed. Will any crypto?
If you, now, hike and bike, I all time alike jump and turn. In response to NYT, I was interested in the topic most seriously for the first time, when Tim Woo (name?) at Columbia U wrote an opinion piece about the Bitcoin; in order to comment on which, I did instead reply to David Brooks for some reasons, I remember. Around that time, there were several informative and good pieces about the subject matter on NYT. The columnist also wrote one about a link between criminal activities and the crypto currency. **** Yes, the idea behind is anarchical. Also, the currency’s authencity is artificial and requires ceaeless promises for digital realities to be real as if materials. Systematically, the structure is comparable to the Ponzi scheme, as the columnist said once. **** If anything very useful in its circulation for certain people, the ultimate aim would be to create a digitally projected world, independent from the traditionally authentic monetary system. There, investments matter in accordance to the size of the currency’s market, based on the number of digital transactions. Once deeply in, therefore, one might not easily get out of, in facing the perspective of inevitable loss. **** It depends on the degree of the involvement, but, the perceivable risk with urgency may be analogous to that which might be felt by one, who, for example, is about to discover one’s life-long pastor was a total fraud regarding the ticket to Heaven.
1
What problem did bicycle solve when it first appeared?
None!
However, it was a brilliant invention. It turned out that you can ride two wheels and keep your balance.
1
@John Bitcoin fanatics keep searching for the killer app for bitcoin. If a great use is found, then like your bicycle analogy, it may well be wildly successful. But if there is not a thing that it is good for, then the expense is an Achilles heel.
I believe the bicycle was developed as an amusement. And many people still ride purely for pleasure. It also does have utility as very inexpensive and versatile transportation.
@votingmachine Think wider. Bicycle, motorcycle and so on.
"It turned out that you can ride two wheels and keep your balance."
@John You are refuting yourself, not me. The invention was followed by widespread utility. Whether the purpose of the invention was to solve a problem or not, the bicycle DID solve some problems. I think my comments on the bicycle already encompass what you say.
If a great use for bitcoin is discovered or developed, then yes, bitcoin will solve a problem. But it does not currently fill any need.
I don't particularly see the need to analogously connect bitcoin to some other successful invention. Or any failed invention. It is what it is.
Don’t give me crypto-currency,
To bit-coins I say no,
Since I can’t take it with me
Better pay me with real dough!
7
The answer to your question is very simple, Paul. I have currency which is easy to move, and free of any bank or government. My bitcoin ( I jumped in a few months ago and bought exactly one) is entirely safe, and I can give any percentage of it to whomever I want, whenever I want, without concern for that transaction, and with the only transaction fee going to the people who actually keep the system running (no other middle-men). No bloated do-nothing bank is taking a cut of my coin. I LOVE that. More critically, I could be a citizen of a country like Venezuela, with a massively inflating currency, but I wouldn't be concerned about an out of control economic policy destroying my wealth overnight. Or I can be me, reassured that regardless of what clown the Republicans install into power, and his reckless trade war, my bitcoin will retain the value that thousands of independent node operators around the world ensure presents itself to every other bitcoin owner. I am no longer at the mercy of any government or economic zone. A community of node operators has decided to create the first truly global, nation-free, bank-free, virtual currency. I have some concerns, of course, that the system might not survive dozens of years down the road, but I have optimism and faith that this is a forward looking innovation that benefits humanity as a whole.
4
@Caleb Davis
And exactly how do you access your wonderful money without the digital grid, which is at the mercy of the government?
1
The newest Nobel poet once sang, "To live outside the law you must be honest." Cryptos are the effort to prove him wrong.
1
Bitcoin solves the same problem that gold does, but arguably in a more efficient way.
The above ground value of all the gold in the world is estimated in the range of $7.5 to $8 trillion. Gold is prized for jewelry, but its more core use is to act as a kind of trustless currency that maintains value across borders, oceans, timeframes and government regimes.
Ask yourself why gold has retained a store of value for thousands of years. Ask yourself how many different currencies and governments and empires gold has seen rise and fall.
It's easy to dismiss gold when central bankers and governments appear to have control, and quite fashionable to do so. But central bankers can lose control. In the sweep of history they do so regularly.
So a reliable, globally branded, fungible and divisible trustless currency (gold) is useful as a kind of backstop. If the fecal matter hits the fan you can find some value in gold, and you don't have to worry about it not being accepted internationally.
This is why central banks still maintain large stores of gold reserves by the way. Ask yourself why central banks have foreign reserves in the first place, and why a not-small portion of those reserves is in gold.
If you see the value of gold as a kind of stateless, trustless currency that is a form of crisis insurance, crossing time and borders and regimes, you can then see the natural argument for Bitcoin -- which is a form of digital gold.
9
Everyone understands that blockchain and crypto currency are related but distinct things, right?
Cryptocurrency is one application of blockchain technology. And it is how many blockchain projects have chosen to economize their services. But is largely irrelevant in terms of the usefulness of blockchain.
I am not going to outline the problems that blockchain solves. That is an easily googled answer.
So before anyone decides to label the entire crypto world a scam, please do some research.
Surely, the majority of crypto projects are going to fail. Many even may be scams. But just as many are using blockchain to solve problems that people in highly developed nations might not think about... for instance, blockchain and crypto allow the “unbanked” to store assets without a bank, and to be able to access those assest from anywhere. This is extremely valuable to people in places like... Venezuela.
I also recommend reading an article in the MIT review about how non profits are using blockchain to feed and help refugees for a faction of the cost of using fiat currency. The savings allow these ngo’s to provide millions more meals to hungry people in need.
https://www.google.com/amp/s/www.technologyreview.com/s/610806/inside-th...
9
@TJ
Unless you can hook up with the virtual world you can't access your money anywhere. You seem to have enormous confidence in the lack of vulnerability of the grid while being concerned about government failure.
1
i bet that bitcoin will be worthless in then 10 now 9.5 years (OK I bet Noah Smith one pizza but that's a tether to the real world).
However, I think there is a problem solved by blockchains (which can be exploited with fiat cryptocurrency issued by states and backed by ordinary fiat currency).
The system creates a neutral third party, the block maker, who is not known to contracting agents when they write their smart contract. I think this is useful. The block maker can't be bribed (no one knows where to send the bribe until it's too late). Also parties have an incentive to reach agreement if the result of disagreement is that the crypto goes to the block maker.
Smart contracts can be simple and standard and not allow prolonged renegotiation (if parties agree it is recorded and final, if they don't agree (and say so) by time t, then all the crypto goes to the blockmaker).
This solves a game theory problem. I am pretty sure it will appeal to no-one and block chains will be a passing fad. But there is a problem which they solve.
1
It's solving a pretty big problem in Venezuela right now: http://reason.com/blog/2016/12/08/venezuela-bitcoin-socialism
1
I read your stuff in my MBA program long ago, but you are showing your age with this article.
First, transaction costs are lower now than they have been in crypto, and getting lower all the time. The current cost in some things like burstcoin is very, very low. There is no reason to assume technology will not make this a non-issue.
Secondly, the tokenization of assets possible through other cryptos does, in fact, provide something to back those assets. Additionally, decentralized exchanges will further legitimize additional cryptos.
Finally, bitcoin is not the best place to hide your transactions. If you want to discuss that, talk about privacy currencies - and yes, those will thus also gain some legitimacy over time.
Sure, most of these things are going to zero, but the capitalization of the crypto market is going to literally blow up...it is too tiny right now to serve the needs it will eventually fill. To get there, you are going to need a large inflation of value.
2
@Jim Why do you need an inflation of value? The circulating currency does not matter. Most people use the dollar for accounting. We say Jeff Bezos is a "billionaire", but he owns some 82 million shares of Amazon stock, each with a market value of about $1800. He does not need to have $140 billion in cash in his wallet.
If dollars went out of fashion and were replaced by bitcoin, Bezos would have the SAME ASSETS and same net worth. If Bezos was to try to liquidate into physical dollars, he would hold over 10% of the US printed money (worldwide about $1.2 trillion of coins and bills exist). But that does not mean that if bitcoin was to replace the dollar the bitcoin ledger has to have $1.2 trillion in print value.
Bitcoin has a net market value if about 10% of the US dollars in circulation ... $0.133 trillion. Presumably, bitcoin should be the basis of about 10% of the economic activity of the US.
It isn't. It is a lot of speculation.
@votingmachine
You have fundamental misconceptions here. Could he liquidate into T-Bills? Yes. Are those backed by dollars? Yes. Would he even dent the market? No. They are really part of the circulating currency.
Bitcoin is Bitcoin. There are no T-Bills sold that represent Bitcoin, there is just Bitcoin. Bitcoin may go to zero, but given that governments have essentially green-lighted crypto based assets, there is no stopping it at this point.
And YES, capitalization matters. If you want to be able to transact in CoinXYZ, you need to be able to hold substantial CoinXYZ or derivatives. For example, if I want to buy 100 Boeing jets with CoinXYZ, I need to hold Billions in CoinXYZ. Currently, acquiring those billions would move the market substantially. It is not feasible. BUT, it IS inevitable, imo. Thus, it must become feasible.
@Jim If Bitcoin replaces the dollar then there will be bitcoin mortgages, and bitcoin bonds, and markets for equities in bitcoin. Bezos could not, practically speaking, liquidate and convert into physical cash. His bank balance might show $140 billion, but it would be electronic money.
It is USEFUL to have an appropriate amount of circulating currency. It is not necessary. Certainly bitcoin fans mention the hyperinflationary events when adequate stable currency did not circulate. Simply saying that a thing is useful also does not mean the same thing as saying that it will happen.
I'm not fully in disagreement. If Bitcoin was the new dollar, I think it would need to be changed to allow more net value, and more transactions. But it is one tenth the dollar physical presence now. That seems wildly high if you want to declare the currency total valuation should match the total needed for current utility.
Electronic Frontier Foundation has a good article highlighting how the blockchain ecosystem, as they call it, has changed significantly. The business of crypocurrency is increasingly centralized among a few corporate intermediaries. The article mainly speaks to the responsibility that these startups have to protect users.
I would think that the increased centralization takes away from the whole point of having crypotcurrency in the first place, which should affect the value of cryptocurrency.
https://www.eff.org/defending-users-initial-ideas-cryptocurrency-exchang...
Crytocurrencies may well capture much of the seigniorage revenue that now flows to the US Treasury. Specifically the seigniorage revenue that comes from the black market - drug deals, tax evasion, etc. By providing a better product for this market (one that does not rely on protecting and moving physical items like gold or $100 bills) the existing market can be captured, and its size dramatically expanded. As with any asset (think JP Morgan during panics), the large holders have a vested interest in stabilizing the asset, to make it more attractive and the market for it larger. Sure there will be large market fluctuations, but that doesn't mean that in the long run cryptocurrencies will not succeed.
1
It solves the problem that drug lords and other criminals need: not-government currency.
2
On this issue, D. Krugman obviously is right: the problem that cryptocurrencies solve is "How do you hide ill-gotten gains?" in a world where nations, with their vast resources, are becoming increasingly desperate to capture every stray dollar or Euro to fund their massive, creaking welfare states?
I wouldn't bet on their surviving for more than a few more years.
If you’re looking for a buy signal on crypto, you just got it from Prof. Krugman. He admits it’s as useful as cash or gold for transactions, and it’s electronic. There’s the answer to his question: it doesn’t need to solve something new; it solves something very old in a new way.
3
@Pete Prokopowicz I dont understand any of this stuff, but it seems to me that I have near effortless, fluid transactions with my digitally encoded credit card and my smartphone. Crypto doesn't solve any problem of mine.
9
Topline Notes:
Most problems referenced here (inefficiency of mining and transaction time/cost) refer to limitations on bitcoin specifically, which are being addressed with newer systems.
Problems solved:
1. Micropayments. Ability to digitally buy things for a dollar or a penny or less.
2. Banking the Unbanked. Ability to connect anyone with internet access to financial services. (EST 2 billion unbanked worldwide.)
3. Automatic Settlement. With use of smart contracts connected to digital payments, ability to auto-settle against pre-agreed conditions, dramatically lowering business overheads for appropriate commerce.
4. Transaction cost and settlement time. Can be dramatically reduced, just not with bitcoin (see lightning network as a possible solution for bitcoin here).
5. International remittance. Eliminating need for 3rd party arbiters.
Lots of problems being addressed.
26
I agree with you on #5, but the rest has already been happening with regular currencies for over a decade.
1
@paul
Point #1 hasn't been addressed by existing currencies or systems to my knowledge? In my mind it's actually the biggest potential there is for crypto currencies. It would at a stroke allow any online website to start accepting micro payments from anyone in the world and could finally lead to a change in how most online sites are funded i.e.a move away from advertising as the primary income source for websites.
Yup, and without those third party arbiteurs, you’ll never know where the contents of your crypto wallet went to, after it’s hacked by someone screaming “liberty to your crypto currency!”
Right now I’d sooner speculate/gamble in classic cars. At least I get a title with the purchase and something pretty to look at.
Several months ago the NYT Magazine had an article about blockchain, which mentioned bitcoin as one use. As I recall many other applications were described, such as giving people control over their data and improved data security. I'm curious whether Professor Krugman sees applications of blockchain that are not related to bitcoin. Thank you!
1
Please, tell us how the conference goes.
2
In other words, the best cryptocurrency already exists and it's called the US Dollar and it's backed by F-16's.
10
“If you like, fiat currencies have underlying value because men with guns say they do. And this means that their value isn’t a bubble that can collapse if people lose faith.” - That’s where you’re wrong Kiddo.
1
If enough people lose faith, indeed. But that's a large number. If we get to that point, we have bigger problems. As I've said for a while, if we have a zombie apocalypse, I don't need to stockpile food, water, gold, etc. If I've got guns, I can take that stuff from you...
The interesting point of Dr. K's argument is that, when you get right down to it, it's the "men with guns" who are valuable. Like for all of human history. So much for our progress.
10
@random It’s never the “zombie apocalypse” free-for-all of every man with a gun for himself. That almost never happens. What’s far more common is a massive amount of people lose faith in one group of men with guns and hitch their ride to another. The lone man with a rifle on his homestead never stands a chance. Its a fantasy.
@Sasha
- That’s where you’re wrong Kiddo.
Umm. No.
You may lose faith in the fiat currency -- but if the guys with guns enforce the rules, you'll still use what the guys with guns tell you to at a value they enforce with bullets. Russians have had very little faith in the ruble -- but it still gets used for transactions when the guys with the guns are watching. You may lose faith in the guys with guns -- but so long as the guys have guns and are willing to use them, the value of the fiat currency isn't going to go to zero like Bear Stearns stock.
Only when the guys with guns no longer enforce the rules -- like the Nazis at the end of WWII with the reichsmark -- does a fiat currency flatline. Faith has nothing to do with it -- fear and trust more than a little
I have some old gold fillings, a few silver dollars in
a jar and 20 dollars in my pocket. I'm good with
that.
2
Mechanics of block creation are straightforward...
> For checksum, a hashing algorithm - usually one developed decades ago, used for more conventional cryptography
> Protocol for chaining blocks simply ensures that everyone keeps the entire distributed ledger on hand
This leaves the three things that give cryptocurrency its patinas: legitimacy, sustainable value store, and secure ownership...
> The legitimacy and sustainable value store are no more or less than buying artifacts within a multiplayer online game...Platinum-plated left-handed meteor hammers are worth what the supply/demand balance says they are - with the game producer being in the same position as the Fed...To add or drain PPLHMH's from the system, vs some metric...A large element of branding
> Sustainable value store and secure ownership go to some sort of "incorruptible level-field" process for producing cryptocoins...No more complex than hunting a species with a limited population...You keep what you catch or kill - but only so many out there...
> Secure ownership - and custody/transfer of same - is where crypto crashes down to earth...Having caught a number of wild horses, how to store...Small paddocks or central farms...How to protect from horse thieves, or the animals jumping the fence...
....
In the end, the dollar only survives because of multiple levels of tethering as a...
> Hub-spoke for unit transactions
> Fungible reserve for excess wealth
> Policy - and mischief - tool for reserve bankers
4
Perhaps cryptocurrency solves the problem of intelligence gathering from persons suckered into trusting it, much as the invention of religious confession served the power of Popes and Princes long ago in a time of less knowledge, lower effective I.Q., and minimal technology. Its origin story sounds suspiciously pat in this golden age of knowledge, unearthly I.Q.'s, and high technology. By the way, gold is a needed element that space pirates may be expecting to collect from primitive Earthlings on their relativistic return. Fun speculations. Happy vacation.
2
Biggest myths going:
Cryptocurrency is secure.
Cryptocurrencies can't be gamed.
I recently retired after decades as a software engineer at a handful of large telecoms and network security companies. "Swiss cheese" (full of holes) is the adjective I choose to use to describe most software, and recently hardware (meltdown and spectre). Spend a few minutes to peruse the CVE database. I do not now belong to, or will ever will sign up for any social network site. Email and a subscription to NYT is about as far as I will 'trust' the internet. I trust the internet about as far as I could toss an IBM 370 mainframe.
37
What problem does this solve? Well, of course, Paul Manafort's problem. Money laundering.
6
Just a reminder: the same way that pornography gave rise to the Internet, which is used for many things besides pornography (so they say :)), so cryptocurrency has led to widespread use of blockchain technology, which is extremely useful and disruptive in all sorts of applications. Don’t throw out the baby with the bath water.
1
@Mark Roderick: the blockchain is a slow, and expensive database. It is useful as a small ledger for tracking something valuable. It is useless as a database for anything else. The current bitcoin blockchain is maintained at a cost of 12.5 bitcoins (about $100,000) paid every 10 minutes. And the database being updated and maintained adds 1 megabyte of data as a new block each 10 minutes.
And the data is unreliable if the block is not paid well. The 50% consensus rule means that anytime the mining and node network decides to retire computation, then it is easier to assert control by control of 50% of the computation.
There is almost no benefit to the blockchain that balances the cost of the blockchain. It is possible to use it as a public record, but the same effect can be achieved with a public notary for a few dollars.
The blockchain is nothing without a secure payment system to incentivize the miners to process each block.
2
What problem does it solve? I thought it helped everyone launder. If you are an arms dealer, drug dealer or human trafficker, don't you want bitcoin so you can clean at least part of your money? Isn't it easier than laundering all that cash through businesses, construction and dirty banks? And don't the crypto guys take a smaller cut than traditional money launderers?
15
@E Every bitcoin transaction and conversion is recorded in a vast distributed ledger (that anyone can look at) making Bitcoin probably the most traceable currency ever invented! So its a pretty bad idea to launder money with it.
3
“...what problem does cryptocurrency solve?”
I know! I know! Pick me! Pick me!
Cryptocurrency solves the problem of integrating “dark money” into the economy. Think of bitcoin as a mobster with legitimate business interests that straddles both worlds.
2
man, that european trip is doing wonders to ur writing and subject matter. more of this dear sir, please.
3
There's a sucker born every nanosecond. Somewhere, P.T. Barnum is having a good laugh...
2
(3)This data storage and manipulation works because the block producers give people who “stake” EOS coin a proportional amount of data and ability to manipulate it. “Staking” coin essentially means burying it underground and promising not to touch it. Technobabble here but you don’t need to know it. The implication is important tho: to make applications on the blockchain you need to go out and buy EOS and bury it underground, creating a(n imminent) demand for EOS. That is its tether.
Sure ethereum has the same tether, but ethereum’s not infinitely scalable, and instead of staking coin you “burn” coin, destroying it, whereas with EOS you can unstake your coin and get it back. So EOS is instantly a hell of a lot better than ethereum.
Why hasn’t anyone heard of EOS yet? Cause it was released about a month ago. It already has more daily volume than ethereum and is catching up to bitcoin, poised to replace it. Imo buy buy buy.
@Bennett Foley Hmm... 12 month chart of EOS seems to indicate it has been out longer than a month.
okay it's been trading for a while but the mainnet only went live a month ago - you couldn't build dapps on it till a month ago
If the price for electricity was to be continually deducted from each crypto coin, what would the value of that coin then look like? I suspect it would be much more obvious that it could only function long-term as a pyramid scheme.
The demand for the electricity necessary for keeping cryptocurrency active is real and constant. That this cost is not factored in makes me wonder about who is actually paying for the electricity to maintain cryptocurrency systems. Is this cost being socialized to benefit a few? What does this mean for our electricity bills for homes, businesses, hospitals, etc if crypto significantly increased demand for electricity?
2
So just to be clear: we like the people with the guns collecting taxes over the computers with the algorithms running math code, got it, and also inflation is definitely not an issue worthy of anyone's concern, ok https://www.nytimes.com/2018/07/23/world/americas/venezuela-inflation-cr... and the transaction costs definitely aren't being improved upon here: https://lightning.engineering/ and the whole thing is tethered to nothing as evidenced by this map of the global computing network here: https://bitnodes.earn.com/
4
A few of the arguments in favor of cryptocurrency boil down to a conflation (sometimes honest, sometimes not) of words that have similar meanings in computer science and regular English.
It's decentralized: The misconception here is the fact that ~the algorithm is written so that the *code* doesn't care who's executing it and *data* doesn't have an authoritative master copy~ (both true) somehow implies the English meaning(s) of "decentralized" would also apply - they don't.
For example, "the bank doesn't have authority over your money, the community does"
- Will there be accountable institutions to write and maintain that code? (the algorithm doesn't address this)
- Will it be possible for a few actors to concentrate execution and storage? (yes)
- Will central authorities control exchange? (also true)
It's trust-less: True in a computer-science sense, in that the algorithm treats every node the same, but you still have to trust (English) the people that wrote and gave you that code, are executing the code on your behalf (exchanges), or are performing any action that's not embedded in the code.
The fact that it's computationally near-impossible to change a Bitcoin (or supply-chain management, or property deed blockchain) transaction after the fact in no way prevents anyone from simply not shipping you the physical thing you paid for in the first place, or putting records onto the tamper-proof property/supply-chain ledger that simply weren't true to begin with.
1
#Crypto solves the problem of cross border payments in real time at a fraction of the costs. Crypto solves the issue of settlements. No more T+3 how about 3-5 seconds and again it SAVES MONEY and TIME. Should I keep going? The TOA ( Tokenization Of Assests and a Token Driven Economy is the real game changer and what DLT can do. The costs will come down on BTC and some Blockchains cost next to nothing in transactions fees at speeds of 3-5 seconds (Stellar Network) - I would encourage you to maybe take some time while on Vaca and learn up on what IBM and the Stellar Network are doing on Cross Border Payments, TOA, and the like and maybe you will see the light...
2
I think the fact that politicians haven't embraced cryptocurrencies for contributions says all you need to know. Think about it... they are used for all types of hostage takers.. when people hack into computer systems and so forth, for example. Their beauty for those examples are the inability to trace the transfer. So if politicians don't embrace these to hide where their contributions are coming from, that tells me a great deal.
1
Correct me if I'm wrong, but big crypto transaction don't trigger a CTR, currency transaction report. It's great for crime.
4
We’ll know cryptocurrency is truly valuable when you want to use it to buy an apple at the corner store. So long as it’s mostly used for drugs and blackmail, I will remain a skeptic, too.
4
Banks, as state regulated intermediaries for money transfers are necessary for the enforcement of international sanctions against Russian oligarchs, rogue states and other bad actors. Banks hold money in accounts in which the owner's identity is known. That's not true of most cryptocurrencies, which is why they are so attractive to criminals and money launderers.
Banknotes (and gold coins) can be smuggled across international borders but this is difficult and risky because banknotes are physical and must be hidden from customs and this becomes impractical for large amounts of cash. Because cryptocurrencies are not physical they can be moved across borders without going through customs, in unlimited quantities and without the ability to trace the actual owner, which could be a rogue state like say North Korea.
Trading cryptocurrencies for other assets such as dollars opens up the strong likelihood of market manipulation of prices. Because the identity of the owner of a cryptocurrency is at best uncertain, all of the problems associated with trading other assets such as stocks are made much worse with cryptocurrencies. Pump and dump schemes that are used to manipulate the prices of penny stocks can also be used to manipulate the price of cryptocurrencies. It's likely such market manipulation has been going on for some time and could possibly even involve state actors such as North Korea or Russian hackers hired by Russian oligarchs.
1
@Doug Rife
"Because cryptocurrencies are not physical they can be moved across borders without going through customs, in unlimited quantities and without the ability to trace the actual owner, which could be a rogue state like say North Korea."
You have heard of the NSA, right? You do understand that the internet started as DARPAnet, right?
The Mueller investigation traced bitcoins used in the attack on the 2016 election back to FancyBear et al. Where there is a will, there is a way to trace internet traffic. You can bet your bottom dollar that should the need arise to sniff the internet for traffic that involves the bitcoin blockchain that such traffic will be readily identified, traced, tracked and probably decrypted. The blockchain is public. You can SEE the size of transactions, and SEE which two parties (yes their tokens only, but still) did an exchange. You can track a bitcoin through every transaction it ever makes -- and eventually trace the WHO behind a transaction of your interest, if you have the resources -- which governments do.
what problem does bitcoin solve? It is censorship-resistant money.
Ask Julian Assange, Venezula, Iran, Russian, anyone that has been banned from the US dollar. It is money that the government can't take from you by force. If you default on your student loans or go bankrupt, the government can garner your paycheck or go after your bank account because the system in place allows this to happen. But it would be near to impossible to access to your bitcoin wallet or even confirm it exists if you control and protect your private keys.
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@theendcomesquick
LOL. EVERYTHING can be taken from you by force. Raid your home and take all the thumbdrives you keep your bitcoin on. Spearphish you and take them from your computer or keylog the passwords you use to access an online wallet. Deny you internet access by physical incarceration. Your employer may agree to pay you in bitcoin, but wage garnishment happens BEFORE your paycheque gets cut by your employer. The guys with guns will take everything from you if they get the go ahead from the folks in charge. That's life. Always will be.
And then -- suppose like that fool convenience store owner in Texas whom bad guys discovered didn't like banks and kept cash at home instead, people find out you have a fortune in bitcoins in cold storage at your home and business?
Banks exist for good reason, not the least of which is keeping violence from visiting you in person.
@theendcomesquick
Bitcoin gets stolen and taken by force all the time.
Thefts of Bitcoin by hackers are so common it's become a running joke; almost every Bitcoin exchange that's ever existed has been hacked and lost all its customers' money. I also read an article a while back about armed gangs tracking down people who own lots of Bitcoin and violently forcing them to give up their keys. Try to get away from government and you end up getting confronted with all the reasons government was created in the first place.
"Don’t just try to shout down the skeptics with a mixture of technobabble..."
But it seems the one hole in your argument may be that technology can't solve the problem of the expense of verification. You are a brilliant economist, but no technocrat.
However, we Americans who work for dollar symbols should be very opposed to virtual currency. The international belief in the dollar has a great deal to do with the success of our economy, even if its success started it in the first place- back when our economy and industry really did rule the world.
Now we are like the Wizard of Oz of nations with a printing press that spews out fairy dust that we exchange for manufactured goods and resources to make our own.
And Donald thinks we are being duped by the Chinese!
1
Transaction costs on bitcoin are very high. Currently most are paid by the creation of new bitcoin in the transaction handling process. But transactions are slow, and expensive. For most purposes, there is no benefit to using bitcoin in a transaction ... both sides of the transaction are better off using almost any other method.
Bitcoin's main support derives from loony Anarchist-Libertarians, who are wildly anti-government. Bitcoin solves no problem, and is an inferior currency.
2
The argument that the cost in kWh of Bitcoin gives them inherent value seems to me to be completely bizarre. I could pay the Fender Custom Shop a large sum of money to build a guitar of my own design. I could ask them to make it exactly as I specify. It would cost a great deal to make, and be a terrible guitar, because I cannot design guitars. Would my sunk cost give this guitar inherent value? Absolutely not. It would be basically worthless, even though I could only have created it by spending a great deal of money.
7
No mention of digital contracts?
Huge potential for crypto currencies.
1
IMO, every so-called crypto-currency is a scam, as there is nothing, no possible way, to stop the founder(s) of any crypto-currency from issuing to themselves as much of the currency as they choose.
1
@LBL yes, there is.
1
Seems to me that Crypto is for techno nerds with Gold Bug tendencies. At least Gold has intrinsic value in both art and manufacturing.
Then factor in the outright theft of Bitcoin on numerous occasions. If your imaginary money can vanish, what good is it?
Finally, some argue that it takes currency out of the hands of the banksters and governments and the manipulation associated with it. No it does not. Anything can be gamed- it is just a matter of finding the point of attack.
Crypto is a 21st Century Tulip bulb.
1
@David Gregory It's worth noting that the thefts you mention were attacks on vulnerable exchanges, not any attack on Bitcoin intrinsically. It's a bit like blaming the Fed for the design of the vault at Wells Fargo. You can avoid those risks by keeping your coins off of those exchanges and away from the internet (aka "cold" storage).
To be fair, there ARE plenty of examples of other cryptocurrencies falling victim to 51% attacks, etc., but those are few and far between and are generally instances of poor design and implementation in a nascent field.
1
“I’m still on vacation, hiking and biking in various parts of Europe.”
Hey Paul, I’m still working in the gig economy unable to even afford a staycation. Please don’t torture the proles like me with info on your actual life.
Nice column however.
Cryptocurrency solves exactly one problem: the problem of how to hold and transfer value via digital channels if you hate government so much you don't want to use any of its fiat currencies or allow any or some part of your economic life to be under its regulatory supervision. This is a highly niche problem limited to criminals and extreme libertarians, but it's still somebody's problem, and I expect that will be enough to keep at least one cryptocurrency around for the foreseeable future.
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@Iris This is a key observation. The enormous amount of money involved in tax evasion, drug running, gambling, and activities like prostitution, all of which are "illegal" but extremely popular, creates a huge demand for something like bitcoin. Right now there are entire swaths of the legal and real estate industries which exist, effectively, only to facilitate the money laundering process. These industries are the ones that bitcoin, etc, are going to disrupt. Governments will always have their ways of collection taxes if they wish to. Cryptocurrencies offer a lower cost method of money laundering, as such, they are a "real" thing in some sense, tethered to an actual market need.
The problem is that, despite the best efforts of all the casinos, race tracks, and investment advisors, there is still so much money out there not yet parted from its owners.
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Sir, with all due respect, evolution is inevitable, digital currency is inevitable, the ones we have now may not even exist decades from now, but the technology is here inevitably to stay. There are obviouslly many many many imperfections, and that is why mass adoption is necessary, we find problems! Issues! Things that are not okay, simply to FIND SOLUTIONS FOR SOMETHING THAT IS INEVITABLE. #Opinion
1
Prof. Krugman's points on crypto currencies are valuable and clarifying, but their value comes from clarifying why they are mistaken.
First, on value through mining Bitcoin. Krugman is right that this is extremely wasteful. But there is nothing in the idea of a digital currency or blockchain that requires such mining.
Value can be created in the same way as any fiat currency, by a government's designating it a legitimate way to pay taxes. This has been done with 'community currencies' (usually paper, and not crypto) by some local governments in Brazil. Non-reproducibility can be created by many cryptographic means.
Second, Krugman decries the cost of verifying transactions through blockchain. But the cost of *constructing* a particular blockchain is ledger record is trivial, a byproduct of the underlying transactions. What would be very costly is trying to *falsify* such a blockchain record. Seen in this way, costliness of falsification is not a bug but a feature.
Local blockchain currencies, should be interesting to economists for at least two reasons. First, they are a way of stabilizing 'common knowledge' as a pathway to credit creation, similar to reputation in traditional honor-bound societies. Second, they give local governments a low-cost and reliable form of money creation, with large possible benefits.
Isn't the tax money that goes into our defense establishment, including much of intelligence gathering and border protection, a huge transactional cost for our present fiduciary structure? The hidden costs of enforcing the faithfulness of our contractual relationships seems to endanger our system also, especially these days, though perhaps not as much as crypto-money does.
2
If you are looking for earlier forms of the bitcoin, the closest is the bill of exchange, which was I think what Smith is really referring to in that quote about "the operations of banking" creating a "waggon-road". Long before Smith's time, there was no necessary tie between a bill of exchange and a merchandise transaction. They were discountable, they were to a large extent independent of government though there was a sort of universal jurisprudence concerning them, they could be the object of speculation and as short-term instruments, they were treated as cash. They were probably the biggest near-money instruments around in the 18th century. There's an immense literature about them as you know, one recent entry point is a article by Flandrea, Galimard et al "Monetary geography before the Industrial Revolution" in the Journal of Regions, Economy and Society (2009).
It's not about frictionless payments. It's about the ability to store wealth in a money-like thing that can't be arbitrarily inflated or confiscated. Demand for this will not only never die, it is unlikely to ever stop growing!
The real long term trend is towards integrity in money, and bitcoin is the end game.
1
@Alex, google "bitcoin theft". Or the lengths the Winklevoss brothers go to to avoid it. Bitcoins are highly susceptible to hacking. The very anonymity and digital nature of cryptocurrencies makes them the perfect target. If that's not "arbitrarily confiscation", I don't know what is.
The problem is it's just cons all the way down. Most people "own" bitcoin in the same sense that they "own" digital movies. They have signed up on a website somewhere, transferred some money, and they have an indicator in their account that they have a balance. Whether they'll ever be able to cash out that balance is another question altogether.
1
That makes absolutely no sense. You hold the keys to your bitcoin.
The banks hold your dollars. And they can deny you access when they please. See a recent nyt article about the kansas couple and bank of america.
Cryptocurrency. Quantum Physics. Sure, the words are in English, but I still don't understand them. Alas.
Does it matter where, or by whom, cryptocurrencies are being mined? I recall reading a few months ago that China was creating server farms, and presumably subsidizing or outright paying for the resources required for the computing resources required to create cryptocurrencies.
Does China (or North Korea or Russia - you get the idea) benefit in some way by creating cryptocurrency, whether Bitcoin or the handful of others that are popping up? And, if somehow the use of cryptocurrencies expand, how does that affect US national security?
2
@Matt Cryptocurrencies are simple.
1. Consider two checking accounts at a common bank. You write a check to the other person. The bank doesn't go move dollar bills from your box to theirs. They move the money in an accounting ledger from your account to theirs. The bitcoin blockchain is that ledger, with all the bitcoins in the common "bank ledger".
2. Transactions are processed by "miners". They process the previous 10 minutes of transactions in a "Block". What miners do is take the new transactions in a datafile (including time and pointers to the prior block), and find the answer to math problem that can only be arrived at by trial and error. A problem along the lines of: what number ending in 5 zeroes can be included in the datafile, multiplied by the datafile and subtracted from the datafile, to result in a prime number between 1-1000. That answer is then easily verified, and if 50% of the nodes see the newly published block, and say it is correct, it IS the new ledger.
3, The software the miners run, and that the nodes run have self-adjusting factors to keep the trial-and-error problem one that takes about 10 minutes to solve.
4. Included in any new block is a single allowed payment transaction, of 12.5 new bitcoins to the miner presenting the solution.
There is a lot of security stuff to make the ledger secure. Encryptation of accounts, etc.
2
@Matt There is a lot of computing power needed to create the blockchain transaction blocks. In China the price of power is very low, because of an abundance of coal and coal-based power plants. Also labor is cheap. So, the computing is often made by "miners" in China. All iPhones and lots of other products are made in china for similar reasons. This is just global economy works, so this does not affect US security more than global trade. A lot of cryptocurrency software is made in the US and the cryptos still cover just a very small fraction of transactions in general. Cryptos may enable countries to bypass sanctions, but that blockchain is pretty much a log of all transactions, so it is very hard to change back illegal crypto money into real money without anyone noticing. In Europe e.g. all bitcoin exchanges are under scrutiny for money laundering, so you cannot transfer money to Iran anonymously without serious criminal efforts.
There is a huge risk in the possibility that bitcoins will be bundled into financial derivatives. Such derivatives might combine futures positions in bitcoins with tangible financial assets or other currencies. Such structures are vulnerable to crashes, and the financial consequences could be grim.
I have seen a number of articles that Russia is investing heavily in blockchain technology. Although not stated explicitly, the clear intent is that having a monetary system that is largely outside the reach of international banking regulation would allow participants in that monetary system to avoid international economic sanctions or asset freezes. This is basically the illegal trade/black market use case but on a nation state scale. Not sure if that is enough to sustain the technology but enough big bad actors that support the system could give it some air of legitimacy, for a while at least.
8
(1) I know of a cryptocurrency with a (real, tangible) tether and that doesn’t waste electricity like bitcoin and can handle an infinite number of transactions per second (because it’s scalable). I’m a imminent UChicago grad getting a degree in CS interning in the crypto field. Do I have your attention? Good, because it’s going to require you to listen to some technobabble. I’ll keep it to a minimum. This new currency is called EOS. I need to explain some things about bitcoin to explain why EOS is so much better and to explain what the tether is (it’s a real tether to tangible assets!).
Bitcoin essentially works in much the same way as your credit card company keeps track of your purchases: it’s like a big ledger. The revolutionary part about bitcoin was the keeping up of that ledger in a decentralized fashion. Bitcoin keeps up the ledger through miners, requiring them (for technobabble reasons to prevent double minting) to do arbitrarily complex mathematical problems at the same time, wasting tons of electricity. EOS is able to keep up the ledger without any arbitrary complex mathematical problems and thus doesn’t waste electricity: all the block producers (EOS’s version of miners) are only keeping track of the ledger, nothing else.
3
The other way that EOS is better than bitcoin is its tether. Essentially it’s like this: what if the ledger that the block producers are keeping track of was… anything? Kinda trippy, right? Confused? Well imagine this: a product exactly like Facebook, except for one crucial difference: there’s no central authority with ownership of your data. Instead the data is encrypted on the blockchain, and you have the key. You’re essentially the owner of your data. What used to be a ledger in the case of bitcoin is now much more flexible and can store tons of different kinds of data. Anything can be kept track of on the blockchain. A game of tic tac toe (where the data on the blockchain is the information of the state of the board) can be on the blockchain. A game of space invaders can be on the blockchain. What I’m saying here is that this is a new kind of app store, it’s as big as the introduction of the iPhone/Android app store! We call them “dapps”, or decentralized applications.
there are two more parts to this! you should read them!
This has nothing to do with cryptocurrency, which is also not as anonymous as some people seem to think it is, but it makes me crazy when people make the argument that anonymity means illegality:
"So what’s all that cash holding about? We all know the answer: tax evasion, illicit activity, etc.. And much of that is outside the U.S., with estimates suggesting that foreigners hold more than half of U.S. currency."
Average citizens in many countries around the world use high denomination US bills as a store of value and a hedge against their own countries' unstable currency.
This is a potential benefit of cryptocurrencies as well-- if they ever stabilized. For an American, nothing seems as stable as a greasy buck, but in other countries, even ones who's abuse of their money creating power was a generation ago, the memories stay fresh for a long time.
1
Bitcoin and similar “blockchain” technologies are essentially ledgers that cannot easily be repudiated or falsified. They represent a form of digital rights management, with the record of the transactions serving as the content.
There are many parts of the economy that would benefit from this level of record-keeping, such as medical services and the billing of centralized insurance agencies.
Any place where there’s fraud, basically, which suggests that the applications are pretty close to unlimited.
1
@Global Charm It is too expensive of a database for those uses. Try looking at Electronic Medical Records systems and the data involved.Then compare that to the Bitcoin Blockchain, which costs 12.5 bitcoins every 10 minutes. And only can handle a small amount of data.
1
Good exposition of cryptocurrencies. I would add one more point: crypto suffers from the same problem that the gold standard did, viz. changes in the supply of the currency don't match economic growth, which makes the value of the currency fluctuate in unpredictable ways. Fiat currencies minimize the mismatch because issuing governments manage the money supply. For cruptocurrencies to function as money, they will have to be stable in the short- to medium-term. Which requires government intervention and faith in the issuing government ("men with guns"). To echo Dr. PK, what problem does crypto solve?
6
@Shiv you are wrong about this. Gold supply fluctuates in unpredictable ways. Bitcoin’s supply is fixed. One new block is mined every 10 minutes. It doesn’t matter if there are 100 miners or 1,000. Predictable inflation is actually one of the most appealing features of Bitcoin in my opinion.
@Craig Campbell
Bitcoins supply is ultimately fixed -- but economies grow so bitcoin will ultimately be deflationary with all the immense ills that come with that. And while bitcoin supply may be predictable, bitcoin demand is anything but -- which has led to the dramatic gyrations in valuations in comparison to more fungible assets. That is not appealing in something that is to be used as a method of exchange.
For something that is meant to replace the existing currency, people holding Bitcoin seem awfully obsessed with how much of that existing currency their Bitcoin is worth.
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Dear Mr. Krugman. If you are going to a conference on blockchain, you should be prepared to talk about the usefulness of the ledger aspect of the technology and not the value of cryptocurrency. Not many people that I talk to that are advocates of blockchain are high on Bitcoin as a monetary asset.
That being said, isn't Bitcoin (1) easier and less expensive to mine; (2) easier to transact with and (3) easier to safely store than gold? And if gold has no value as a hedge against fiat currency, why does our government have 8,133.5 metric tons of it (or 75% of its Forex reserves)?
As an aside, the real question here is why the US government doesn't eliminate $50 and $100 bills.
5
@twinkletoes
1. Gold as Krugman explained has some limited utility value.
2. It's been around as a perceived store of value millenia.
3. You're also perpetrating a logical fallacy. Just because gold is relatively irrational (as Keynes pointed out long ago) doesn't magically make Bitcoin rational.
9
@John
Is it irrational to believe that fiat currency could suddenly lose a lot of its value? How many times has that happened already? The USD untied to gold, has been around for less than 50 years. A blink of the eye in time. Meanwhile the people in charge of our government feel that the right thing to do is run a Trillion $ deficit, rack up debt to GDP in excess of 100% with no solution in sight. Is it really IRRATIONAL to think that it makes sense to hedge, even a little? Are you a Dick Cheney / Deficits don't matter guy?
@twinkletoes Most people ARE hedged. If I look at my net worth, I am using dollars for accounting the market values. But I am really worth: a house, partial ownership of some corporations (via stock), some cars, etc. I have some "dollars" in the bank, but I also owe some "dollars" to the bank (mortgage). I have some marketable skills.
It would be irrational to have absolutely nothing other than a pile of greenbacks as assets. Bill Gates owns Microsoft Corporation, not dollars. He could if he wanted resort to accounting for everything in MSFT's. Say that his house is 1000 MSFT's, and his car another 50 MSFT's. The only time one is obliged to account in dollars is for purposes of income tax reporting.
I don't know if you should hedge with bitcoin. I would say that if you have so much money that you worry about hyperinflation, buy stocks in multinational companies with good management.
1) Tether (USDT) is a cryptocurrency whose value is tied 1-for-1 with the U.S. dollar.
2) "created through resource-intensive computations" For Bitcoin and other proof-of-work coins, yes, this is true. But there are far more efficient consensus algorithms now - Ethereum's proof-of-stake, proof-of-authority, etc.
3. "What problem does it solve?" The main problem it solves is the centralization of assets by a third party that the public has to trust to carry out its functions with integrity. At a certain point it isn't about libertarianism, it's about the simple fact that computers make fewer errors than humans. While I wouldn't go so far as to say that blockchain has entirely solved the issue of trust, it's going in a direction I certainly think is worth exploring.
3
@Lauren
So who in control of these computers ?
And youu clearly don't understand the concept of tethering that Krugman described. Suggest you re-read.
1
It will be interesting to see what happens to the value of the dollar (vs. cryptocurrencies) once the current mismanagement of the U.S. tax system blossoms into huge deficits. Those deficits will metastasize from "Libertarian derp" to real world pain and sacrifice when they have to be covered by borrowing or spending cuts denominated in dollars.
1
@Steve Scaramouche
It is --telling-- that you didn't really list all the ways that the current insanity in the federal tax system will eventually have to be dealt with.
First and foremost is tax increases. Failure to tax today means taxing more later. Second is to simply keep rolling the debt over, paying the interest and letting inflation render the principle negligible over time. Third is to cut spending while maintain taxes a current rates. Fourth is to monetize the debt by printing money to pay the debts.
Funny that you left a couple out. The first is really what will happen. The fourth is usually disasterous
Paul, I'm a fan of yours but I'd suggest that current fiat transactions are NOT inexpensive since a set number of banks control many transactions and attach a percentage fee versus a flat rate for transactions. Cryptocurrency removes the middle man with the percentage fees. Second, gold is not really any different from cryptocurrency in your example. How difficult is is to move gold around versus crypto? Much more difficult. I forecast that it is here to stay and fulfills a niche, maybe not in its 1.0 version but in its 3.0 phase like many technological solutions. Now go enjoy your vacation!
3
Have you ever used google pay? PayPal? Venmo? These are all immediate and free- the only charges come from credit card transactions (so basically loans made to you).
I can think of a couple uses for cryptocurrencies:
1. If someone wants to transfer money from the U.S. to Thailand, it will cost about $50 and take about a day for the transaction to complete. Transferring bitcoin in this case has a slight advantage.
2. If someone wants to transfer money from the U.S. to North Korea, then cryptocurrencies are the only feasible solution.
However, I am a skeptic because of the lack of tethering. Of course, a tether could be created by linking a fiat currency to a cryptocurrency. Let's call it bitDollar. If bitDollar equals $1 USD and banks worldwide accepted it, then there may be some use for it, especially in scenario 1 where international transfers are slow and expensive. I could convert $1000 from a U.S. bank to 1000 bitDollars, which I could then deposit immediately into my German bank account.
4
Credit instruments -- like clay tablets or sticks with scratches -- may be older forms of payment than coins. Just an historical quibble. PK's main point makes sense to me. Bitcoin's claim to fame is that it is beyond the control of any government. That's true until you convert bitcoins to government currency so you can buy, say, real estate. This could be a choking point. Suppose that the G7 countries moved to restrict such cashing in ...
1
I watch shows where they point out that a $100 bill costs the government 13¢, while a Bitcoin costs about 250 kilowatt hours of electricity, so (they say) the dollar's value is ephemeral, while a Bitcoin has permanent value. However, any US currency is legal tender for all debts public and private, so it must almost always be accepted by law, while Bitcoins are not legal tender. Of course, Adam Smith's Law of Supply applies since Bitcoins are limited to 21 million (and the cost of mining goes up as one gets nearer the theoretical maximum), so one has an item of strictly limited supply? Or not, given all the other block chain currencies competing. So it appears that blockchain coins are not really limited in supply and are not legal tender, so how can they retain value?
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@Michael the argument that the supply is not really limited because there are competing coins is not really the correct way to think about it. That is like saying that the supply of gold will increase as a result of new silver, bronze, or copper being discovered.
Each coin has its own ledger and its own network. The public will decide which networks are the most secure and most valuable and those will be the ones that win in the end.
Imagine a company like Facebook. Just because a bunch of new Facebook competitors pop up does not mean that people will stop using Facebook. It doesn’t work that way since most people are already tied into the Facebook ecosystem and their friends are there. The best technology does not always win.
Basically it seems to me that you are saying the needs of the black market determine the underlying demand for bitcoin, and today, since speculative demand is much so much greater, a market collapse is very possible.
However, just like the size of the copier market ended up being vastly greater than the size of the carbon paper market, the size of a black market based on non-physical items (gold or hundred dollar bills) could vastly larger than today's. How does the potential growth of the black market factor into your predictions for a market collapse.
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Paul Krugman has hit the nail on the head. And based on the comments below, even crypto backers basically admit its a niche hedge against countries that through their own mismanagement fall into hyperinflation and economic collapse.
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@CarpeDiem64 Hanke and Bushnell in the journal Studies in Applied Economics, December '16, verified 56 episodes of hyper inflated govt currency in the monetary nationalism era (only one in history before in France 18th century), Venezuela and Zimbabwe are only the most recent examples. It might be a bigger issue than you think, esp if you are or had been one of the millions who potentially starved or faced other adverse conditions as a result of these so-called-"niche" episodes.
1
@Dan Smith
Money: A store a value, a unit of account, and a means of exchange.
In a third-world collapsing hyperinflated economy, a high-tech solution is not likely to be a solution at all. In the end in Zimbabwe, folks resorted to gasoline as money. Everybody had some use for it, it was measurable, tangible, fungible, divisible and relatively durable.
Crypto is not really ANY of those things. And as a result, it is unlikely to ever become a widely used means of exchange
Governments establish and maintain the values of their currencies by: 1) Adjusting interest rates. 2) Limiting the amounts of currency issued to prevent excessive inflation. 3) Prosecuting counterfeiters. And most importantly, 4) requiring that taxes be paid in their currency.
Issuers of crypto-currencies have none of these value-control options available to them. You’re better off investing in tulip bulbs.
2
What problem do crypto currencies solve? If you're a radical libertarian, they solve the problem of needing to have a state to have money. In my (albeit limited) observation, blockchainheads seem mainly to come from that perspective (as did, interestingly, the progenitors of the credit card system). A few years ago, it might have seemed delusional and absurd to think we need money that can be validated without centralized finance authorities. But the rise of radical right nihilist political leaders actively undermining their own central banks and treasuries makes this premise for crypto currencies a bit(coin) less loony.
13
Crypto IMO is unlikely to collapse totally: unless and until governments develop an effective way to defeat its substantial utility for tax evaders and other criminals, crypto will retain market value, even though its social utility is negative. But one can hope that the speculative bubble, which looks to me like a Ponzi scheme, bursts soon.
3
People that I know of that have an interest in bitcoin and its related activities mostly see a future in the ledger aspect, not in mining. Cryptocurrencies themselves will likely die out, maintained in an alternative world of criminal activity, while the ledge has been taken up by many as a way of maintaining accuracy in transactions, not necessarily monetary.
4
My thinking on the matter as described by Mr Krugman and the comments, is that the huge investments made in higher education in "business" schools and training has created this silliness out of shear boredom and child-like playing with their designated toy, the morey that the rest of us value so obligingly and reverentially. It is like an undisciplined child who casually tips over a tray full of glasses just because he can and in order to see where the pieces fly and how it disturbs other people. Because we value the child so much and have invested so much of ourselves there, we give him more leeway and leniency to "do his thing", as the entitled one we have sent away; the one from much is expected but who shies away from the difficulty and uncertainties of real, disciplined learning and applied values.
You’re going to get far more than two minutes of hate.
And I suspect that the Bitcoin folks will rent a particular American political party and get them to allow Bitcoins for payment of tax liabilities before they allow their Bitcoins to become worthless.
1
Let's not complicate matters. People believe in cryptocurrencies because they've gone up in price, spectacularly. The arguments made about crypto now are similar to the arguments that people made about the US housing market prior to 2008. That is, a pre-existing concept becomes attractive because it's making people rich, causing its admirers to build rational structures around it to give it legitimacy.
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The Guardian and other sources have reported on the energy consumption of crypto currency mining and transactions.
See: https://www.theguardian.com/technology/2018/jan/17/bitcoin-electricity-u...
Rough calculations suggest that these activities consume as much electricity as all (global) solar power produces.
7
As with so much “tech” it’s often as much about disruption as anything else. The end user doesn’t matter, especially following the beta round until it has matured or collapsed. Practical integration is usually held off until trendy uses appear. And all along, it too often feeds a bro culture.
4
Another problem with cryptocurrencies is fungibility. Can you imagine the whopping costs of blockchain creation if everyone used bit coins to buy coffee and donuts? A pack of gum? Yes that micro-nano coin cost an ever increasing number of hours of computing time for every transaction. It is the epitome of taking an argument to its radical extreme. The main reason behind the bitcoin hype is to give the current holders a way out by exchanging their crypto for some real cash, because Johnny needs a cup of joe.
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Personally, though I've read quite a bit about bitcoin at this point, I always end up feeling like I don't really, really understand it (which I'm sure would make all those wild investors and self-proclaimed techies feel quite superior).
What I see is something, which seems to consist mainly of algorithms, being "invested in" at enormous costs likely by many folks who don't understand any better than I do (but think that they are getting in on "something big"). It bothers me that I don't know who created this system (and am asked to simply trust that it runs the way it is purported to run). It also bothers me that the 'control' over the system consists of these blockchain transaction history things (things which I can neither truly understand nor, indeed, even see).
Yet, beyond that there is the little fact that one is supposed to 'buy' bitcoin with good old dependable real-world money, but cannot then actually do anything with that expensive bitcoin except hold onto it (I use the last advisedly because there is really nothing identifiable to hold) hoping that it all somehow increases in value (without understanding how that will be). No thanks.
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I am old school, and probably will remain that way until my last breath, clutching my gold. ( I jest )
It's funny that just like our tax system ( where those at the top pay little or no tax), it is the same with transactions where money is concerned.
If you have a basic amount (usually high) in your bank account, then you pay no transaction fees. If you are moving large amounts of stock in the stock exchange, then there are no transaction fees. (generally) If you use cash, then there are no transaction fees.
Have a low amount in your bank account, use a check, use your debit or credit cards, do almost any business transactions and there are fees. Fees make the world go round and keeps the bankers fat.
Cash is still king and will always be.
11
The primary purpose of money is as a store of value. Volatility makes a currency a poor store of value. As someone who has lived in a country where the value of the currency halved in the space of 6 months, it's horrible to see people who saved for years to buy a house and then, when they are getting close, their savings lose half their value.
So, I can't see Bitcoin or its ilk becoming a currency used in day-to-day transactions unless it becomes stable, which would make it an investment with no return. To be stable, more currency needs to be issued to meet demand and who is going to issue it? Do you trust the man minting the money? That's exactly why central banks were invented.
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@SAO
I disagree. The primary function of money is as a medium of exchange. It is a relatively poor store of value because of inflation.
A superb deconstruction of the whole Bitcoin scam (and that's without getting into ICO fraud). There are now apparently some 1,600 cyber currencies in existence which is a tribute to continuing gullibility of mankind. Naturally some hedge funds have jumped into speculating in them seeing a ready supply of suckers.
Sorry Bitcoin is not money and never was. It's not a store of value, it's not a unit of account and it's not an acceptable method of payment (outside a narrow and often illegal universe).
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As a follow on, consider the thoughts of Peter Neumann: https://www1.icsi.berkeley.edu/~nweaver/papers/cryptorisks.pdf. He looks at cryptocurrencies from a mostly logistical perspective, and sees nothing good. Most telling, he points out that rather than having the decentralized authority structure much desired by libertarians, the mining operations, and so the control over the ledger, rest in the hands of a very few big players.
3
A few points are worth looking at and one of the challenges would be the near finiteness of the bit coin supply, as the difficulty factor rises with higher demand to produce more bitcoins, something that is completely opposite to what the central banks do, keep supplying more when the demand rises.
This takes us to the question that the value of money when the supply rate zooms through central banks actually goes down (marginal value goes down always) while that for crypto currencies is just the other way.
This is the very reason it is far more appealing as a concept.
2
“What problem does it solve?” is always a pertinent question. It is rarely asked nowadays, even tough it should probably be asked first.
23
Solutions in search of...
@Richard Jacobson Gov't printing $$$ and deflation as a result of that
It should really be called klepto-currency since it is most useful in avoiding detection by the law.
21
@Mike Wilson If you think bitcoin is good at advoiding the law, wait till you see how easy it is to use cash for crimes. Not even a blockchain to HELP law enforcement.
For all the well-reasoned points Dr. K. mentions, crypto-currencies - at root - seem to be just another manifestation of Alt-World for a crowd of Libertarians, etc., created by some speculators who appealed to prejudices against 'bigness', wrapping their Snake Oil concept in 'disruption' buzz words.
That the technology is usable for subverting elections, and a preferred vehicle of criminal under-world elements should be the warning flags that drive off normal people.
It is too often forgotten that the first rule of a Con Game is determining what it is 'a mark' wants to hear - also a basic tenet of the sales industry.
Caveat emptor !
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@R. Law - You're right about how to run a con. Robert Redford and Paul Newman did it masterfully in "The Sting." They told Robert Shaw exactly what he wanted to hear and they emptied his wallet.
1
@Charley - We're at a point in American history where the Grifting Class has been able to purchase politicians and is trying to foist their ethos on the rest of the country (again) pretending 2008 never happened; and certainly not within living memory.
Were it not for Citizens United, no politician would touch this bankrupt philosophy with a 10-foot pole.
The absurdity of the same old clap-trap trickle-down voodoo derp dogma still being spouted is only fully appreciated by remembering back to the days that the NYSE couldn't keep the lights on at the casino without tapping the full faith and credit of Jane/Joe Sixpack, as immortalized in the words of the last GOP'er prez:
"This sucker could go down."
https://www.nytimes.com/2008/09/26/business/26bailout.html
1
@R. Law Snake oil. Perfect descriptor of bitcoin.
1
Philosophically, I can't argue any of your points. Why is probably answered by roots similar to "Whiter Shade of Pale", simply a fever dream. But transaction costs in some alternate coins are better then Visa's. Maybe reducing friction in traditional transfer systems will be the end result. Still holding my lottery ticket...
The cryptoderps put Bernie Madoff to shame. Bitcoin and the other pseudo-currencies are nothing more than a massive Ponzi scheme cloaked by some very good PR to dupe the unsuspecting out of their money. Oh, and the right-wing lunatics who think that Agenda 21 is real and the UN is going to take away all of our golf courses as well
The bizarre run-up in the value of Bitcoin was fueled by, as you note, tax evaders and drug lords shovelling bushels of cash into the crypto because it was a way to hide their ill-gotten gains. The price collapsed when governments said they were going to investigate and regulate coin offerings and the dark money was pulled out 'lest the "owners" be discovered.
When I read or hear people touting cryptocurrencies I am reminded of the Popeye character Wimpy, who kept saying "I'll glad give you a dollar tomorrow for a hamburger today."
Or maybe P.T, Barnum pegged it better when he said, "There's a sucker born every minute."
50
Fun fact: Wimpy Burger is a fast food chain in the U.K. Yet they make you pay when they serve your order.
Another thing to consider is that the US dollar has value because of the US government: its policies, institutions, and a well-funded, whopping big military to defend its interests. I would submit that if it weren't for our military might, and our willingness to use it, the dollar would not be the reserve currency of choice for the world.
Currency is only as valuable as people think it is, and trust in its ability to be exchanged with a total stranger for goods and services is what allows it to function so well as a medium of commerce.
Crypto-currencies and other pretenders won't last because there is no statement to the fact that its value is "legal tender for all debts, public and private". And we have guns, lots and lots of guns, to keep it that way.
7
Most interesting part of the commentary is this:
"Yet the value of a dollar doesn’t come entirely from self-fulfilling expectations: ultimately, it’s backstopped by the fact that the U.S. government will accept dollars as payment of tax liabilities"
Meaning that the tax dollars themselves are not necessary to fund government expenditures. Only faith that the country issuing the currency is going to create new wealth.
See e.g., Modern Monetary Theory.
@CL
MMT is another fantasy long ago taken to pieces by Krugman.
2
And then there are the public resources consumed in bitcoin mining: the server farms set in remote locations that need roads for even just a handful of people; the water and other energy required to keep the servers in operation and cool. Often, I understand, the server farms are set in deserts, not just deserted regions.
1
Cryptocurrency may become more important to corporations and the 0.01% than to the rest of us. As corporations and the 0.01% struggle to slip the bonds and chains of nation states, they will need to have money that is not controlled by national governments. Cryptocurrency may fulfill than need. Bitcoin off-shores money more or less permanently and hides it from taxation forever.
I'm not talking conspiracy theory here. Such use of Bitcoin makes sense if Bitcoin is controlled by private banks trusted by the 0.01% and their corporations.
11
What problem does cryptocurrency solve? Krugman knows the answer held by many people: it undermines government. If cryptocurrencies replace currencies, one of the strongest leverages of government would be eliminated. People are losing faith in government. Why? Because people are losing faith in government. Consider Trump: when he criticizes government the military and law enforcement, no less!), his popularity rises. People are being conditioned to lose faith in their government. That serves the interests of a few special interests, and a few ideologues (such as self-styled libertarians). What these misguided people forget is that order and stability are necessary for individual liberty. Without order and stability, it's the law of the jungle, survival of the strongest. Other commenters indicate that people have lost faith in central banks. You know, the central banks that pulled us back from the abyss.
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@reaylward - Au contrare. Other than the fringe of the already-fringe Trump supporters, exactly which people are "losing faith in government?" All but his most die-hard voters are realizing the president is no more than another Wizard of Oz hiding behind a curtain. ANd that government can actually help them, if only the president and Republicans in Congress would get out of the way.
3
@reaylward The Fed pulled us back from the abyss by throwing money at investment banks. There was another way to do it, by taking the banks over. This was advocated in one form or another by Krugman and many other economists. It is likely that by preserving and enlarging the big banks the Fed set up the system for a bigger crash next time. People have little faith in central banks because they obviously have the interests of the banking industry uppermost. Government has the capability to do things differently.
Central banks also serve to continually concentrate the world's wealth and power into fewer hands, leading to a shrinking middle class and a global economic setup that many economists will tell you is unsustainable. Dig deeper into history, and you will find that countless wars - whether fought with guns or economics - have served the interests of central bankers. Whether they have pulled us back or plunged us into the abyss is debatable at this point.
I'm a cryptosceptic myself, but I want to point out the one thing that speaks strongly for the future of crypto-currencies: even if the transaction cost are low, banking as of today is very expensive. The finance industry is spending ridiculous sums on infrastructure, buildings, wages, IT and it pays billions to shareholders - in an admittedly silent and frictionless way.
What makes blockchain a brillant technology is, that it creates a technical solution for transactional trust while reducing security and documentation of e.g. 138B US$ bitcoin market capitalisation into a single, public 173 gigabyte file which fits on a 40$ hard disk and can be downloaded when needed. Phone payment incoming.
So even if there is speculation and a lot of shady actors cryptos may provide an alternative for countries with weak currencies and hyperinflation.
6
@Philip
Banking isn't particularly expensive in relation to the TOTAL volume of transactions which encompasses everything from you paying for a bottle to the hundreds of trillions in Derivatives trading.
5
@John you are absolutely right, good point. Considering software development, blockchain peer review, and power used for mining, bitcoin is not cheap either and not meant to be cheap. There might be other crypto systems that are cheap on transactions but won't get traction because they generate no scarcity. If any crypto would compete with fiat money based transactions (which bitcoin isn't by some orders of magnitude) the profiteers would be miners, software developers ... and of course bank shareholders again. Because banks would immediately step into that business. Krugman may be right and "public" cryptos are either ponzi schemes or simply non-starters.
The primary purpose of cryptocurrencies is to not have a central bank. They're an alternative when people have lost faith in the central bank or strongly disagree with its policies. A lot of people who strongly support cryptocurrencies do not like bank bailouts or fiscal stimulus or a central bank deciding monetary policy. It's like a virtual alternative to gold. Bitcoin is probably doomed because it's supply is too limited and that situation is only going to get worse over time. But the notion of the government not being in control of money is appealing to a lot of people, and a cryptocurrency could facilitate that better than gold.
5
Any money manager who "invests" in Bitcoin should be fired.
Bitcoin has failed as a currency. It now fits the definition of a pyramid scheme. From investor.gov:
"The primary emphasis is on recruiting new participants"
That is how Bitcoin is now marketed.
We better hope that the promoters are wrong about institutional investors coming in in a "big way", because that is pension funds and endowments--our money at stake.
9
@Jon
That one sentence does not define a Ponzi scheme, it could be used to describe any business or market, all of whom have a goal to recruit new participants (e.g. customers, or newspaper readership).
I see your point about being afraid of institutional investment though. Fund managers may start to invest in crypto without the desire from their customers. But that is also a market - if customers don't like what the fund manager is doing, they will move their funds to a different manager. I think Inst. adoption will be slow and small for that reason. It will more likely be explicitly marketed as a bonus from fringe fund managers, while big target date and pension funds may never invest in crypto.
@Nick
Workers with their retirement savings in a 401(k) can't just up and change fund managers. And once fund instruments are sold and invested is something shady, recovering the funds becomes more difficult.
Perhaps if cryptocurrencies are hard to mine, the answer to "the question, what problem does cryptocurrency solve?" is inflation. Governments can't just print more. So it serves a similar role to gold, which is also hard to mine, but you don't have to pay storage charges for cryptocurrencies.
Gold still has inherent value even if faith, in its use as a store of value, is lost. Gold is prized for jewelry, but, also has industrial uses. Gold is one of the best electrical conductors of natural materials, second only to silver, and does not tarnish like most metals so is great for precision contacts for example. This means there will always be a demand for gold beyond just a store of value. Bitcoin, however, has no inherent use, other than as proposed currency, therefore if you pull the carpet out from under and people lose faith there will not be much demand to maintain its value.
16
@temmoku Should take a look at the new generation cryptos without mining like DAG algo.
@Bill but there is so much gold hoarded for currency/investment purposes, that if it were all put into the industrial and jewelry markets, gold would be practically worthless. And the inherent value has almost no relationship to the current price.
A truly secure cryptocurrency could close the divide between the digital world and the physical one by reducing the gatekeeping privileges of incumbent financial institutions.
On the eve of quantum computation though, it does look like a buggy-whip bubble.
4
Cryptocurrencies are considered a digital asset just because people accept it as a store of value similar to the way that people buy and hoard gold or other precious metals.
However if I were a citizen of a country with hyperinflation (which still occurs in some places in the world) then I would have more faith in a cryptocurrency like bitcoin than the domestic currency since it is much more difficult for ‘miners’ to generate bitcoins then it is for a desperate government to debase the local currency by just printing more and more paper money. Besides there’s a cap on the number of bitcoins that will be generated (expected to be reached by 2040). So a major problem with bitcoin's use as a currency may be that it imparts a deflationary bias that can hinder the growth of an economy.
4
It's simple, Paul. Cryptocurrencies are based on blockchain technology, which removes the need for intermediaries like banks that charge huge fees just to move money from one area of the world to another. They offer the potential for a world without the types of financial manipulation that triggered the 2008 financial collapse. And that's just the start. It takes a lot of reading up on the tech to understand the potential, and it does sound like you have some research to do. Just read up a bit on blockchain ledgers and how they work to get educated.
1
But you haven't responded to some issues here. Crypto-currencies involve costs. Nor is it a store of value considering its varying worth. In addition it doesn't serve as a unit of account or a means for transactions. I don't see how it is different than other speculative assets like gold. Also having shifted funds from one part of the globe to another I am curious about these huge fees. How huge is huge?
24
There is a difference between traditional banking services like accepting deposits, holding money, and facilitating transaction to disperse the money (services that Bitcoin wants to supplant) and the other side of banks which is speculative investing. It was the later that led to the 2008 financial crisis with the added problem that many banks carrying out traditional banking services where the same ones speculating. Thus the too big to fail and bail-outs. The Government could't let the banks go under and risk savings for millions of people. But, the traditional banking services were never a problem; so, again what does Bitcoin really offer? If you are worried about bad behavior by big banks then switch to a community bank or credit union instead of speculating on Bitcoin and thus do the same thing big banks were (are) doing.
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@Mitch
I have more trust in elected governments, which can regulate financial institutions, than I do in non-representative cryptocurrency producers.
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One other problem with cryptocurrencies. Mining them requires huge amounts of electricity. Something like 18,000 kilowatt hours for a single bitcoin. For anyone who gives a damn about the environment, crypto is simply dreadful.
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@Tone
On that note - if we adopt a carbon tax would that not significantly affect the value of a crypto-currency because it would significantly raise the cost of mining them?
@Tone A study last year showed that Global Bitcoin miners are estimated to consume an estimated 8.27 terawatt-hours per year while production of cash and coins consumes an estimated 11 terawatt-hours per year, while gold mining burns the equivalent of 132 terawatt-hours. https://www.bloomberg.com/view/articles/2017-12-07/bitcoin-is-greener-th... http://blog.zorinaq.com/bitcoin-electricity-consumption/ This doesn’t include armored trucks, bank vaults, security systems and all else directly/indirectly involved. It's not ideal but I'd venture to say it's a potentially more ideal scenario than the current state. Not to mention the idea that power plants could be made more efficient and economical a la using excess power that already gets generated but is not demanded to mine btc and effectively buffer their operational costs.
2
@Dan Smith - Given that there’s 2,000 times as much regular currency in the world than crypto, it seems that cash and coins are remarkably more energy efficient.
About half the worldwide stock of gold is tied up in jewelry, not the monetary system. But your point is a well taken case for fiat currency.