Cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years, according to American economist Paul Krugman.
In his regular column for The New York Times, Krugman, who is currently Distinguished Professor of Economics at the Graduate Center of the City University of New York, asks: “Why would you want to do that? 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,” he writes. “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?”
“Indeed, eight years after Bitcoin was launched, cryptocurrencies have made very few inroads into actual commerce. A few firms will accept them as payment, but my sense is that this is more about signalling — look at me, I’m cutting-edge! — than about real usefulness,” he continues. “Crypocurrencies have a large market valuation, but they’re overwhelmingly being held as a speculative play, not because they’re useful as mediums of exchange.”
When the dream dies
Bitcoin et al, he argues, have no tether to reality. Their value depends entirely on self-fulfilling expectations, which means that total collapse is a real possibility. If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, Bitcoins would become worthless.
“Will that happen? I think it’s more likely than not, partly because of the gap between the messianic rhetoric of crypto and the much more mundane real possibilities,” Krugman comments.
“That is, there might be a potential equilibrium in which Bitcoin (although probably not other cryptocurrencies) remain in use mainly for black market transactions and tax evasion, but that equilibrium, if it exists, would be hard to get to from here: once the dream of a blockchained future dies, the disappointment will probably collapse the whole thing.”
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