Once again, the world’s first decentralized and the most popular cryptocurrency, Bitcoin, is popping up in the headlines on a negative aspect. One of the most honoured economists of the present times, Paul Krugman, has condemned the digital token in his article in The New York Times recently.
The article, named “Transaction Costs and Tethers: Why I’m a Crypto Skeptic”, is presented with a belief that the cryptocurrency not only fails to ‘shape’ itself as money but also, it could deform the innovations in the monetary system over the past three centuries.
The economist argues over the transactional cost involved in the crypto-trade. According to him, a ‘Bitcoin’ transaction contradicts the whole concept of ‘frictionless’ transactions, owing to its mandatory requirement of complete history of past transactions. Bitcoin could, therefore, never take us towards innovation and development, according to him.
Citing Paul Krugman,
“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.
In other words, cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back by 300 years.”
Highlighting the second controversy in the use of Bitcoin, Krugman brings forward “the absence of tethering” as a major drawback. In essence, the digital token has no ‘hidden worth’, like the prevailing ‘fiat currency’.
This is definitely not the first time, Bitcoin is being criticized on the possibility that it is merely an economic bubble. And hence, Krugman too mentions that the people would lose their ‘faith’, once the bubble bursts. Additionally, he talks about ‘gold’ and ‘silver’ as metals having a ‘store value’ apart from true applications in the practical world.
Putting it in his words,
“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.”