Several weeks ago, economist Paul Krugman went on a “tweetstorm” attacking Bitcoin to promote Steven Johnson’s New York Times piece, “Beyond the Bitcoin Bubble.”
Krugman isn’t a fan of digital currency and has also written a full column, titled “Bubble, Bubble, Fraud and Trouble.”
While everyone’s entitled to their own guess on what impact blockchain technology will have on our information systems and the market value of various cryptocurrencies, Krugman ventured off into some factually untrue and misleading territory.
This is an attempt to better educate readers and unpack some of Krugman’s claims.
Krugman alleges that Bitcoin’s “price rise has been driven purely by speculation.”
What’s actually occurring is that people are finding value in Bitcoin’s use as a medium for exchange and as a way to store value.
While there clearly is some speculation in Bitcoin’s volatility over the past two months, with some investors jumping in due to the “fear of missing out,” it’s misleading to attribute Bitcoin’s rise as being “purely” the result of speculation.
Furthermore, real “miners” keep up a very real peer-to-peer network that empowers decentralized web hosting, applications, and a host of other services. They pay very real electricity bills and run an algorithm that solves complex encryption puzzles so that Bitcoin remains immutable.
Proponents of cryptocurrency argue that Bitcoin exposes a philosophical truth: humans determine value. Be it from utility, immutability, fear, or love, any two people may transfer or discover an exchange rate through negotiation.
“Dutch speculators who bought tulip bulbs in 1635 also felt pretty good for a while, until tulip prices collapsed in early 1637.”
Predictably, Krugman references tulip mania, but the analogy falls short. Bitcoin does not fit into the mania category because cryptocurrency has utility, and units in any given mania usually do not.
Charts with steep slopes don’t define when something is or isn’t in a bubble or if the underlying unit is suffering from mania and overbought. New utilities, like washing machines, cars, and electricity went through steep slopes known as an “s-curve adoption.”
Typically, mania forms a pyramid, hitting a high and tanking because the underlying unit has no use — no utility. Pokémon cards and Beanie Babies had value because they were limited but still suffered from mania because they had little substantive utility.
Additionally, nearly a decade old, Bitcoin has proven to have more user adoption and market value than the two-year tulip craze that was limited to a geographical group of speculators.
Furthermore, Bitcoin is durable, divisible, and fungible whereas tulips are not. And in the crypto space more broadly, there are numerous different digital coins that are seeing gains, unlike the singularity of tulips.
Krugman says Bitcoin is the “digital equivalent of $100 bills.”
Krugman argues that bitcoins “aren’t really digital cash” but more akin to $100 bills which store value but are rarely used in transactions.
First, Bitcoin and other cryptocurrencies are incredibly divisible. Imagine parsing a $100 bill into a million pieces and you get a clearer picture of Bitcoin’s reality.
Second, if his suggestion is that Bitcoin is a more of a commodity, well, that’s true too. Many people have lost faith in institutions that have pushed decades of monetary policy often seen as reckless and damaging. They’re looking to store their value in money and not currency — and there is a difference — and it’s why Bitcoin has been nicknamed the “gold reserve of all other cryptocurrencies.”
Krugman also attacks Bitcoin by alleging the utility is used for, “drugs, sex and other black-market goods.” It’s misleading to fear-monger with such an assertion by presenting the digital coin as being some sort of tool for carrying out illegal or illicit transactions. It also begs the question, what then is the U.S. dollar?
Sure, Silk Road primarily used Bitcoin and there was the Mt. Gox mismanagement that led to the theft of funds. However, where there is value, there will be theft. The market meltdown of 2008 is still very fresh in the minds of investors. It isn’t a problem with Bitcoin. It’s a problem with human behavior.
“Well, people who invested with Bernie Madoff also made lots of money.”
Krugman alleges that there are not only evildoers but suckers too.
Forgoing the fact that Madoff was a product of the fiat Wall Street system that Krugman is defending, Madoff was also the chairman of the NASDAQ stock market. Again, fraud is a product of our humanity, not new technology.
Bitcoin actually reduces fraud by taking humans out of part of the process and building a trustless system, without the need for centralized entities. With Bitcoin, we don’t need Madoff, Lehman Brothers, Bear Stearns, Enron, or the Federal Reserve to complete transactions.
Meanwhile, the currency is gaining high-profile allies like Jack Dorsey, the CEO of both Twitter and Square, who says Bitcoin is here to stay and believes it is one of our best hopes at reaching the unbanked and developing classes across the world.
Bitcoin has value for the same reasons that a dollar (or any currency) has value: it creates an exchange process for buying goods and services.
Curious readers and cryptocurrency enthusiasts alike deserve a factual analysis of both the strengths and shortcomings of Bitcoin and its cousins. And while Krugman would be better served to sit down with experts in the space and study, his tweet that Bitcoin is a cult, suggests his battle with cryptocurrency may not even be about economics, to begin with.
Ali Alexander is a political marketing strategist and crypto enthusiast. He can be found at @ali on Twitter.