On July 31, Paul Krugman wrote an opinion piece in the New York Times titled “Transaction Costs and Tethers: Why I’m a Crypto Skeptic,” in which he criticized the very idea and future of cryptocurrency. The Nobel laureate economist has vocally objected to Bitcoin (BTC) and cryptocurrency in general, beginning with two 2013 opinion pieces titled “The Antisocial Network” and “Bitcoin is Evil.” In the new article, Krugman shifts his attack to transaction costs and the absence of tethering in the cryptocurrency space.
His argument is as follows: Skepticism of cryptocurrencies is deserved because they incur more transaction costs than modern fiat money and have nothing real backing their value. On the first point, the long history of money shows that it progressively reduced the costs of doing business and related frictional expenses. But cryptocurrency sets monetary technology back 300 years because it introduces transaction fees and mining costs. His second argument against cryptocurrency points to the speculative sentiments of its participants. While value may exist due to demand from black market activities, most of the lofty valuation is driven by hype and irrational exuberance. His final question is: What problem does cryptocurrency even solve?
I believe Krugman’s analysis of transaction costs is important. However, it is shortsighted in scope. Whereas he compares Bitcoin to ancient gold bullion and coins, cryptocurrency should be viewed as its own world. From first-generation Bitcoin and Litecoin (LTC) to second-generation Ethereum (ETH), cryptocurrency’s transaction costs have decreased. Newer cryptocurrencies like IOTA (IOTA) and Nanocurrency (NANO) strive to eliminate transaction fees for good. More cryptocurrencies are abandoning proof-of-work mining to switch to a more efficient and environmentally-friendly consensus mechanism. Finally, though Krugman unfairly compares Bitcoin to credit and debit cards, often times BTC and ETH are faster and cheaper to transact than wire transfers and payment apps like Zelle and Venmo.
I believe Krugman’s view on what he calls tethering is also misguided. Although he is correct that the value of the dollar is backed by the US government’s taxing power, that observation does not mean that cryptocurrency is not backed by anything. Cryptocurrency is backed by the demand for its utility. The illegality of cryptocurrency black market trades does not take away from its usefulness. Also, cryptocurrency has many legitimate purposes, including as a medium of exchange and inflation hedge in Venezuela and a tool for remittances across the globe. In a twist of irony, the transaction costs that Krugman decries serve as the tethering substance behind cryptocurrency. While it is true that nobody needs to use crypto, millions of people do want to use it. Users must pay with crypto in order to use crypto.
Krugman has expressed pessimism about cryptocurrency for five years and refused to change his mind after learning new information. He obviously dislikes the idea due to the libertarian bent of the community. Of course, crypto can also be used for progressive causes. To answer his question: Cryptocurrency helps the unbanked poor access funds, helps peaceful citizens transact privately, helps companies cut costs, helps institutions diversify their holdings, and holds the potential to secure electronic systems like storage and voting. Here’s to hoping Krugman realizes what he is missing.