Cryptocurrency Has Set Us Back 300 Years: Krugman

Cryptocurrencies have got a big critic in Nobel Prize-winning economist Paul Krugman. Despite the promising cutting-edge blockchain technology that underlies cryptocurrencies, he claims that cryptocurrencies have "set the monetary system back by 300 years." (See also: Nobel Winners Are Economic Prizes.)

In an op-ed written for The New York Times, the columnist attributes his cryptocurrency skepticism primarily to two factors: transaction costs and the absence of tethering.

‘Cryptos Make Transactions Difficult’

Raising his concerns about the high transaction costs associated with popular cryptocurrencies like bitcoin, Krugman compared their working with the traditional payment methods. Starting with precious metal coins minted of gold and silver, which required security as well as resources to produce, the friction was reduced by launch of banknotes guaranteed by central bank reserves. The flow of value was further smoothened with the introduction of checks, followed by credit cards and other digital methods of money transfer. The whole development of such monetary modes progressed to reduce the complexity and friction involved in transactions.

In Krugman’s opinion, cryptocurrencies are moving the opposite way as they are forcing multiple overheads for transaction processing. For instance, bitcoin payments require providing a complete history of past transactions. Resource-intensive mining methods that are integral to the cryptocurrency economy further complicate the process. Mining new bitcoins gets costlier with every passing day. These are some of the realistic use cases that Krugman believe is taking the “use of cutting-edge technology to set the monetary system back 300 years.”

The anonymous nature of authorities who issue cryptocurrency is another big drawback, as compared to real-world banks and governments who issue fiat currency notes. Individuals have a greater level of confidence in the purchasing power of their currency notes as compared to their crypto tokens which see wild price swings within hours. The entities involved in traditional currency dealings—like a bank offering savings account to deposit money—remain high on the trust level of individuals compared to a lesser-known firm holding and operating the cryptocurrency tokens in the virtual world. Based on these observations, Krugman asks, “So why change to a form of money that works far less well?”

‘No Reserves for Backup’

Krugman further cites the lack of suitable reserves for cryptocurrencies that creates the tethering challenge. If the bulk of crypto holders starts dumping their coins, there may be no end to the downward spiral amid a lack of suitable reserves. Despite large valuations and increasing adoption, cryptocurrencies are being held as speculative play instead of a medium of true value exchange offering real usefulness.

However, Krugman does not call cryptocurrency a bubble. He compares it with gold, which has been traditionally used as an effective medium of reserve instead of money but retains its value without being used as money. Krugman concludes by asking: “What problem does cryptocurrency solve? Don’t just try to shout down the skeptics with a mixture of technobabble and libertarian derp.” (See also: Is Paul Krugman Right About Bitcoin Being Useless?)

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns no cryptocurrencies.

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