According to American economist, Paul Krugman, bitcoin and other cryptocurrencies are erasing over 300 years of economic evolution and they are likely to experience a total collapse in the near future. He writes in his regular New York Times column about this. In the past he has published several articles like that, labeling bitcoin as “evil” and giving reasons why his continued skepticism towards the entire cryptocurrency industry is justified.
The Nobel Prize winner gives two reasons why all cryptocurrencies are bound to fail: their transaction costs, and the lack of tethering.
So how is bitcoin taking the economy back by 300 years?
Well, according to Krugman, money has gradually evolved toward people transacting with less and less friction. That evolution has led to this moment in history where almost the entire monetary system is centered around credit and debit cards and other types of digital payments. These forms of frictionless transactions allow people to easily carry out transactions without having to jump through various hoops.
How is bitcoin any different?
Krugman says that bitcoin introduces friction in the form of costs that are associated with mining transactions and validating the blockchain history. Because of that, it represents a 300-year evolutionary regression.
I do agree with Krugman on the points that he made about the governments doing a good enough job when it comes to making the conventional banking system as efficient as possible. However, the heavy centralization of money does give the governments the power to abuse the privilege of being able to create fiat money. But overall, the governments have been doing a good enough job.
However, when it comes to bitcoin, people assume that it is a very volatile cryptocurrency. But as we reported in our previous article, most people just see the progression of bitcoin on a linear scale. If you see it on a logarithmic scale, you will notice that bitcoin has seen a consistent rising trend just like any other fiat currency out there.
The other argument that Krugman makes is that cryptocurrency has no ‘Tether’. What he means is that when it comes to cryptocurrencies, people are able to hold cash in large denominations and are still able to carry out transactions. According to him, large denominations are mostly used for criminal activities like money laundering and tax evasion.
While the USD, on the other hand, has a tether. People wouldn’t be able to just walk into a store and use a $100 bill to purchase an item, because most of them do not accept $100 bills. That, according to Krugman, is the key advantage over bitcoin. The value of fiat currencies is “tethered” to the value of smaller denomination bills, which “have underlying value because men with guns say they do.”
So does this mean that if people ever doubt the value of bitcoins, the world’s most valuable cryptocurrency would suddenly become worthless? It is probable, Krugman says but it is also possible that bitcoin might be able to survive as a black market asset.
Me personally, I think the decentralization aspect of bitcoin and all other cryptocurrencies is the main attraction point here. Of course, we are moving into a new era and these digital assets do not follow the traditional rules that fiat currencies have followed over the years. But this also means that we are developing and changing.