On July 31, the New York Times published an opinion piece by economist Paul Krugman 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 has long 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 focuses his attack on transaction costs and the absence of tethering in the cryptocurrency space.
His argument is as follows: Skepticism of cryptocurrencies is deserved because they contain 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 frictions. But cryptocurrency sets monetary technology back 300 years because it introduces transaction fees and mining costs. On the second point, the prices of cryptocurrency depend on animal spirits and emotions. 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 asks what problem cryptocurrency solves.
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 entity. From first-generation Bitcoin and Litecoin (LTC) to second-generation Ethereum (ETH), cryptocurrency’s transaction costs have decreased. Newer cryptocurrencies like IOTA (IOTA) and Nano (NANO) strive to eliminate transaction fees for good. Furthermore, many cryptocurrencies are abandoning proof-of-work mining to switch to a more efficient and environmentally-friendly consensus mechanism. Finally, while Krugman unfairly compares Bitcoin to credit and debit cards, BTC and ETH are often faster and cheaper to transact in than wire transfers and payment apps like Zelle and Venmo.
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, the observation does not mean that cryptocurrencies are not backed by anything. Cryptocurrencies are backed by the demand for their utility. The illegality of cryptocurrency black market trades does not detract from the currency’s usefulness — a concept that should be obvious, given the U.S. dollar’s criminal utility.
Additionally, cryptocurrency has many legitimate purposes, including as a medium of exchange and inflation hedge in countries with rampant inflation, like Venezuela, and as 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 and investors diversify their holdings, offers companies a new way to securitize assets and holds the potential to secure electronic systems like storage and voting. Here’s to hoping Krugman realizes what he is missing.