Paul Krugman Says ‘Cryptocurrency Has Set The Monetary System Back By 300 Years’
Nobel prize-winning economist, Paul Krugman, an open critic of cryptocurrencies has given a two-fold explanation related to the usefulness and future of cryptocurrencies. According to him, cryptocurrency, despite its cutting-edge technology, has set the monetary system back by 300 years.
He expressed his views in an article in the New York Times titled, Transaction Costs and Tethers: Why I’m a Crypto Skeptic. He highlighted the transaction costs. According to Krugman, the basic nature of Bitcoin, which involves gathering the complete history of past transactions, goes against the long run trend of moving towards frictionless transactions. He said,
Set against this history, the enthusiasm for cryptocurrencies seems very odd, because it goes exactly in the opposite of the long-run trend. Instead of near-frictionless transactions, we have high costs of doing business, because transferring a Bitcoin or other cryptocurrency unit requires providing a complete history of past transactions. Instead of money created by the click of a mouse, we have money that must be mined — created through resource-intensive computations.
His second issue with cryptocurrency is the absence of tethering. He argues that cryptocurrency doesn’t have an underlying value like fiat currencies. He believes that the value of cryptocurrency is just a bubble that will burst once people lose faith in it.
Cryptocurrencies (in comparison to fiat currency) have no backstop, 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, well, Bitcoins would become worthless.
He further compared Bitcoin and other cryptocurrencies to gold and silver. He said that gold in silver both serve as a ‘store of value’ and have real world applications as they can be used for things such as jewellery and filling teeth. He sees tethering as one of the biggest weaknesses of cryptocurrencies.
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