Why Economists Are Right to Hate on Bitcoin

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Nobel Prize winning economist Paul Krugman

Economist Paul Krugman is not one to shy away from a good fight, but he may have vexed his most passionate opponents yet last week with a blog post titled “Bitcoin is Evil.”

Krugman’s title is tounge-in-cheek. He doesn’t actually believe the cryptocurrency, which has captured the imagination of so many, is immoral or depraved. But he doesn’t see it supplanting the dollar anytime soon for the simple reason that it fails the test of what economists call a “store of value.”

According to standard economic theory, a successful currency has to be both a medium of exchange, meaning a something that is easily transferrable, divisible, and universally valued, and a a good which maintains its value reasonably well. And while Bitcoin has proven to be a pretty great medium of exchange, it’s value has swung wildly over the course of its history.

In a recent blog post at The Verge, Adrianne Jefferies questions whether this really is a problem. She writes:

“If Bitcoin is successful, it could prove that money doesn’t need to function as a stable store of value — the price of Bitcoin could jump around constantly, and in the age of the internet it’s trivial to program prices of goods and services to fluctuate with it.”

In other words, since computers programs can easily adjust the price of goods along with the value of bitcoins, the currency doesn’t have to maintain a stable store of value. But this ignores the risk businesses will take by accepting and storing their wealth in bitcoins. Businesses invested in commodities or which deal in international trade know what a pain it is to deal with the risk imposed by the rising and falling values of commodities like oil or wheat, or even small swings in the value of foreign currencies. And the price of oil or the dollar-yen exchange rate have nowhere near the volatility of bitcoins.

On December 6th and 7th of last year, the value of one bitcoin fell from $1200 to $600 in the course of 48 hours. If your business had been storing its revenue in bitcoins at that time, such a decline could have a potentially destabalizing effect on your business. Of course, businesses could decide to accept bitcoins and then quickly change them to dollars to avoid the currency’s volatility. But then this raises the question, why accept bitcoins at all?

Jefferies goes on to posit that bitcoin’s success as a means of exchange could eventually lead to its being a good store of value:

“If people believe that they will be able to buy things with Bitcoin and exchange it for other currencies indefinitely, that could convince them to use it as a store of value. Many early adopters have already put their savings into Bitcoin. And if the technology is sound and the user base is (eventually) global, that doesn’t seem that insane.”

Indeed, some theorist argue that a currency’s stability follows from being a widely used means of exchange. But this gets us back to the question: what will motivate the vast majority of users to abandon dollars and adopt bitcoins? Sure dollars slowly lose value over time through inflation, but this isn’t a problem for most of us, as it happens slowly enough that any wealth we hold on to for very long time horizons can be stored in other investments like real estate or government debt. Secondly–and most important–national governments demand we pay taxes in local currencies and back up those demands with the threat of force. As a decentralized payment system, bitcoin will never hold this same advantage.

Bitcoin is an elegant technological innovation that may find a future in niche applications, like as a means for transferring money cheaply across borders. But economists are right to be skeptical of those who hope it will supplant government-controlled fiat money. Bitcoin enthusiasts simply have not posited a believable scenario where the vast majority of us will abandon fiat money for their virtual coins.

(MORE: How Does Bitcoin Work?)

116 comments
coreychambers
coreychambers

The Mathews article is a setback for Time.  Like most so-called journalists, Christopher lacks the background that is necessary to report on Bitcoin.  Obviously, no serious economist would say "Bitcoin is Evil."  If Krugman or Mathews knew the first thing about economics, they would know that inflation of the dollar IS a problem.  It takes money right out of our pockets, giving it to the government to finance unnecessary wars.  For many people and businesses, the 5% real inflation of the dollar is the difference between success and failure.  Add the other 5% of real credit card costs, and we have a very expensive problem of up to 10% loss.  Krazy Krugman and his mad follower Mathews both appear to be completely unaware of this huge 10% problem.   Fortunately, money does not listen to Time.  Money chases value and efficiency.  If money sees that there is a 1% efficiency to be gained, money moves automatically to gain the 1%.   Ultimately Krugman and Matthews arguments will be ignored while more and more fiat money continues to move to the more efficient peer-to-peer digital currency model.


Corey Chambers, The Bitcoin Blogs

jblaker
jblaker

I think everyone is missing just one point. World major bankers (pressed hard by their governments) may simply outlaw conversion of BitCoin into their currency. Poof... there goes BitCoin. In order for this not to happen, BitCoin should achieve a significant "market penetration", i.e. most businesses should accept it. Believe me, as soon as BitCoin will become a major contender to governments' issued money, that will be the day you will notice a bunch of laws being passed either forbidding completely, or limiting severely the ability to convert into a particular currency. Also, governments may start requiring to pay a hefty tax on conversion into their native currency. Just wait and see, this will inevitably happen.


If you have any doubts about that, just keep on dreaming.

seqeatee2013
seqeatee2013

Hello,


I thought the article was interesting because what Krugman speaks about is well, the dollar (dollar's performance,) but as I read some of the comments, as many attempt justifying Krugman's argument still speaks about the dollar (dollar's performance, rather lack thereof.) Bitcoin performs like a precious metal, it's an investment holdings against inflation; though it's secondary performance, like a silver coin (quarter, whole dollar coin, five dollar coin) is that, it can perform like monetary currency. Quite frankly, Bitcoin is guaranteed against an executed transaction, meaning once a transaction is executed, so is the transfer of (current) value. I for one certainly went to Bitcoin; Hm, let's see $1 is worth $1 traded (really 12 cents traded,) but 1BTC is $948.02 dollars traded. Wonderful performance!


If you don't like it, you can always put $100k into treasuries and get that 1% annual ROI (lol) for 35 years. You'll get your principal back...well, your descendants will, but hey!


Do you want your money to perform now, while you're alive or like Krugman, who thinks money should perform long after you're dead.


Thank you. 

JohnBailo
JohnBailo

Bitcoin isn't so much a criticism of nationally issued money, so much as it is a criticism of money itself.

You yourself write "since computers programs can easily adjust the price of goods".   Well, computers can also evaluate one good in relationship to another.  

That is, using computers, we can barter for each and every item, but not have to use the go-between of money.



MegaCandyMan
MegaCandyMan

"Hate on."  Aren't you proud to live in a country where a major magazine uses Ebonics lingo in their headline?


mrbomb13
mrbomb13

Excuse me, but does the title really say that economists can, "hate on" Bitcoin??

"Hate on??"  How old are we?  13?  14?

Grow up, already.

JohnDavidDeatherage
JohnDavidDeatherage

What makes BitCoin preferable to the dollar over the long run?  A limited predictable supply not controlled by a central bank.

StockDoc
StockDoc

The value of tulips is going up fast. You better get yours soon. 

MichaelHardy
MichaelHardy

If bitcoin reaches the point of mediating a large steady flow of commerce (which may be only a microscopic proportion of the world's business), then those markets could overwhelm the current speculation-driven bitcoin markets and eliminate most of the volatility.

MortimerAdler
MortimerAdler



I especially love how a big part of this Moron's condemnation of Bitcoin and praise of Dollar rests on the fact that "people have to pay their taxes in Dollars." Ohhh... durrr... okay... so since the government tells me they only accept the money that they print, then by defacto, their currency must be the best standard, and so much more legitimate than a currency based purely upon mathematics.     Maybe that's why our fabulous US Dollar has 2% of purchasing power since taken off gold standard.


GregSimon
GregSimon

Christopher, by focusing too intensely on the monetary value of bitcoin you are completely missing the non-monetary value of bitcoin. The non-monetary utility of the bitcoin protocol is the most exciting part. Bitcoin is unique in that is not a currency, at least not like any currency that has ever existed before. Bitcoin is a technology. It is the first technology to incorporate peer to peer networking, digital signatures and hashing algorithms in the form of free open source software. Much as the HTTP protocol facilitated the sharing of digital information more efficiently than anything that existed before it, the bitcoin protocol facilitates the sharing of wealth more efficiently than anything that existed before it. What previously required bulky and capital intensive banking institutions to execute and verity financial transactions now requires just a guy behind a PC.


As you can see by incorporating this protocol into the global economy we can significantly improve operating efficiency. The immediate result would be us received the same economic good or service at a lower cost than before But that is just the beginning. What makes me most excited about this protocol is what it can do for people who currently have little or no access to financial services. It has been estimated there are about 6.5 billion people on earth without a bank account. I am not sure of the validity of this number but I would guess it would be in at least the billions. These people are simply too poor for the capital intensive financial organizations using the legacy infrastructure to service them without a loss. Bitcoin requires no centralized organizations at all. It is peer to peer. A guy in Zambia with a smartphone can do business directly with a guy in Kenya or Japan directly, instantly for the cost of $0.10 or sometimes less. 

Also, there is the example of remittances. In 2102 there were approximately USD$540 billion of global remittances. Much of this total are from migrant workers overseas sending their wages home to their families. These remittances can often require fees of as much as 25%. I live in Nicaragua. Remittances are 10% of the $10 billion GDP. The per capita income is about USD$1500. To a family making USD$1500 receiving wages sent home from overseas a USD$7 fee on every USD$100 sent is a lot of money. Buy using the bitocin protocol as a pipeline and a cash-in cash-out service attached to both sides of that pipeline we can replicate this same service for pennies per transaction. The lives of hard working poor people can be improved dramatically. How awesome is that? Isn't this technological breakthrough something we can all get excited about?

This is the non-monetary utility of the bitcoin protocol. The value of this utility is the same regardless if the price of bitcoin is USD$1 million or USD$1. This is why I often say the price of bitcoin is irrelevant. I also would add that since bitcoin is a free open source peer to peer technology it's fate will be similar to bitTorrent BitTorrent is a free open source peer to peer file sharing protocol. Bitcoin is a free open source wealth sharing protocol. If the central planners attempt to stop the latter they will be about as successful as they were at stopping the former. 

TonesNotes
TonesNotes

If you understand the bitcoin protocol and payment network then you understand that it will do for financial transactions what the internet did for communication.

Hoping that all people gain access to a global, lowest cost, fast and secure payment network that is beyond the control of the rich and powerful is not a libertarian thing. It appeals to all honest, generous, and thoughtful people. Like the internet, it has the potential to make the world better.
There can only be 21 million whole coins, so you ask yourself what volume of the worlds economic activity would benefit from bitcoin? It's a big number. Much bigger than 10 billion. Which means the value, per coin, will rise as people buy (and sell) a steadily increasing volume of goods using them. Speculators see this and so the value rises ahead of the anticipated activity. If governments resist the temptation to do the equivalent of outlawing the internet, then there is an equal opportunity for all people to benefit from this run up in value. But this no more the point of bitcoin then is the value assigned to Google or Facebook the point of the internet.

keremtibuk
keremtibuk

The first premise correct, but the rest doesnt follow.  Or you could say it is just the opposite.

Yes for something to catch on as money, it has to be a store of value.  Which means that thing shouldn't lose purchasing power while you are holding it.

And if you follow this true premise you can easily say that the US dollar, and many conventional currencies fail miserably against the Bitcoin. The dollars value is going down against Bitcoin since Bitcoins inception, and quite spectacularly at that.

So we could say that US dollar, since it is not as good a store of value as Bitcoin will in time cease to be used as money.

DerekPater
DerekPater

Bitcoin and other crypto-currency are great, because its the power of your average person who will make it expand,

the more people who use it the better, (The Internet is the great Leveller) that's for sure, 


governments will save big money printing money, now its done by solving maths problems, and

is controlled by the open source code, 21 million bit-coins, but hey PEERCOIN could still take the throne this year, see what happens, 

albert___
albert___

Saying that just because there is a lot of volatility on the bitcoin prize it means that bitcoin is doomed is a huge misunderstanding.

The volatility is big but it doesn't mean it will here for ever; it is here for issued that will be eventually solved. Businesses can sell their bitcoins as soon as they get them and hence not be too worried about the volatility.

Businesses that hold some bitcoins anytime from Bitcoin's creation to now are very happy they did! they got a 10 to 100 fold return!

You can get your hands on your first bitcoins for free here / http://freebitco.in/?r=163799

This is a lottery very well done and very easy to use.“You can come back and play every hour to win free bitcoins each time!” You win some bitcoins everytime you play

If you want to get to learn how it works and win your first bictoins for free; go there : http://freebitco.in/?r=163799 and play until you get the first prize

http://freebitco.in/?r=163799

kazigath
kazigath

No one with half a brain is suggesting that Bitcoin will replace fiat currency.  If anything it may make fiat currency more liquid and less prone to whimsical money printing by the various central banks.  It's really quite simple.  If you don't like Bitcoin don't use it.  Don't comment on it.  Don't waste your time with it.  If you like it then continue to use it and watch it grow.  It really is that simple.

EdWapole
EdWapole

BeefjerkyDOTcom accepts bitcoin for beef jerky.  That is one real-world example of a business taking some extra risk to acquire new customers.

coreychambers
coreychambers

@jblaker The government can also outlaw alcohol, and there it goes Poof -- Oh, it already tried that and failed.  The government can outlaw mathematics, and there it goes Poof! --  Oh, I guess the math will still exist and continue to be used even if it is outlawed.


jblaker is obviously wrong about government "Poof" theory, but he does have a point that is true.  The government will fail to have much control over Bitcoin due to the decentralized nature of digital currency, but the government will likely extend its powers to get more of our personal financial information, and the government will eventually figure out how to take advantage and grab its share of digital currency.


Corey Chambers, The Bitcoin Blogs

chubbybuta
chubbybuta

@JohnDavidDeatherageGood point but a detriment. 


1) As production of bitcoin declines over time, transactioners who get rewarded for mining in a few years will lose incentive to continue mining as the declining output of mining end up costing more in hardware, maintenance upkeep. Eventually transaction cost will occur because someone has to pay the piper and it will get passed onto the bitcoin consumers.


2) Assuming price-exchange stabilizes in a few years or so, economic usage of bitcoin will hit its limit due to limit quantity of bitcoins (due to lower quantity output over time). In order for more users to get on board...well deflation should occur to lower the price and therefore the "amount of bitcoins" would allow (I didn't say entice) but would allow people to join the bitcoin crowd. Unfortunately nobody likes deflation because it entices people to wait until there are more discounts and maybe wait a bit more...and wait another bit more for prices to deflate.


Bitcoin is OK to use in a limited sense...hopefully in the bitcoin world, there are no loans or securities being done with only bitcoin, otherwise you would need a central bank to save the economy of bitcoin.

pa2013
pa2013

@StockDoc Are tulips divisible to eight decimal places, indestructible, impossible to confiscate, transmissible to anyone anywhere instantaneously and for free, with no gatekeeper or intermediary?

nikolay
nikolay

@MichaelHardyBitcoin is not doing well at all in commerce - all its "adoption" is cheap PR. Nobody shares any numbers are they are very disappointing. For example, over 80% of the Coinbase wallets were never used for a purchase. All Bitcoin is good for at the moment is speculation (if you have the trading skills or have been patient and did not panic or didn't buy above $1,000), tax evasion and money laundering, buying drugs and guns online, political assassination (yes, there's a website for that), funding political campaigns anonymously, gambling, and other highly respected commerce niches!

DeweySayenoff
DeweySayenoff

@MichaelHardyThe operative word in all of these statements that makes people like me (technophiles) look at Bitcoin and wonder why people are delusional enough to support it in any way other than a purely speculative investment, or to conceal illegal activities, is "if".

  • If bitcoin reaches the point of mediating a large steady flow of commerce
  • If people believe that they will be able to buy things with Bitcoin
  • If Bitcoin is successful
  • If your business had been storing its revenue in bitcoins at that time, such a decline could have a potentially destabalizing effect on your business
There's WAY too much if there to trust.

Coinspring
Coinspring

@keremtibuk I thoroughly disagree. (Believe it or not). 


Fiat has a place in your pocket. 

So you can hand it to someone should the unthinkable happen and a face-to-face transaction occurs. Please don't be so naive to think you will always be both powered-up and wired to the internet at all times.


Don't over look that.

You can't hand anyone a bitcoin.


Physical currency in whatever form it takes will always have value - as long as its accepted as currency somewhere.

jeff.st.12
jeff.st.12

@DerekPater"the more people who use it the better, (The Internet is the great Leveller) that's for sure


Bitcoin usage is limited because there is a limited number of bitcoins that will ever be created. I don't recall what the number is but it is quite small. So for usage to become widespread, you would have to have either massive deflation in the price of goods and/or massive inflation in the price of bitcoins.


chubbybuta
chubbybuta

@DerekPaterThe more people, the limited amount of bitcoins available for each consumer since mining output decreases by half every few years, unless service/retail decide to reduce their prices altogether which would entice more users to get on board with Bitcoin -- aka deflation.


As well, transaction cost will have to increase to pay the miners. They bought the hardware and are using the electricity to run the mining...someone has to pay the piper eventually after the mining output wears thin.

chubbybuta
chubbybuta

@kazigathTrue about the fiat currency liquidity but to a limit it makes it more liquid: Because bitcoin's has a liquidity problem in the future as more bitcoin users climb on board and production output gets halved every few years. If people want to climb on board to using bitcoin, they'll have to pay a higher exchange price, but the return would diminish as their cup of coffee they use increase in bitcoin price. This becomes a gold-standard problem like in the mid-1920's with the Germans and Brits vs the French (just ignore the impending economic downturn that started later). 

Coinspring
Coinspring

@EdWapole They are not risking much at all. The bitcoin transactions are converted to USD immediately after the sale. They are just smarter than their competitors so far for taking 20 minutes and opening an account on coinbase. com. 


*Disclaimer: I have no affilation with coinbase - just here to spread common sense.

JohnDavidDeatherage
JohnDavidDeatherage

@chubbybuta @JohnDavidDeatherage


 you make no sense.  you say "Eventually transaction cost will occur because someone has to pay the piper and it will get passed onto the bitcoin consumers." As the growth in the supply of Bitcoin slows (everything else being equal) prices should rise. So which consumers are you talking about? Those that own bitcoins or those who want to buy?


I have no idea what you are trying to say in (2) and I don't think you do either.



DeweySayenoff
DeweySayenoff

@pa2013@StockDoc 

No, but they don't lose their value from moment to moment, no one can scan a code or just hack an account to steal them, they're acceptable to most everyone everywhere and if they ARE stolen, they're relatively easy to find.

The ONLY advantage Bitcoins has is anonymity.  That's great for the criminals of the world and those who are clinically paranoid and delusional enough to risk their money for the sake of some false sense of security.

Because what was made by man can be unmade by man.  Bitcoins may be secure today, but if there's a financial incentive to crack them, that isn't going to last.

fcLundberg
fcLundberg

@Coinspringyou are wrong. multiple reputable people mint bitcoins and can be traded like paper pieces if you are into that

reopentainment
reopentainment

@Coinspring I hear you can actually have a print copy of your bitcoins much like you can have a print copy of stocks that you own. I don't believe in bitcoin but just thought that was an interesting point.

JohnDavidDeatherage
JohnDavidDeatherage

@jeff.st.12 Over time it gets harder to mine bitcoins, that means the growth of the supply is reduced.  Everything (demand) else being equal, prices of bitcoins will rise. Transaction costs are reflected in the price now and will be in the future of slowed growth of supply.


The demand for bitcoin can fall for a variety of reasons, failed security, government intervention, etc.


The appeal of BitCoin is to have a storehouse of value that is beyond manipulation by the government such as Quantitative Easing.

rspeed
rspeed

@DeweySayenoff "No, but they don't lose their value from moment to moment"


Yes they do. Try selling someone a tulip after a few weeks.


"no one can scan a code"


The only way you can steal bitcoins by "scanning a code" is if it's stored in a paper wallet. If you had your bank account information written on a piece of paper it would be the same problem.


"or just hack an account to steal them"


You can steal any currency held in an electronic account by hacking an account. Does the Target data breach ring a bell?


"they're acceptable to most everyone"


We're still talking about tulips, right? You're arguing that people will accept them as payment.


"if they ARE stolen, they're relatively easy to find"


Compared to what? What makes tulips easy to find?


"The ONLY advantage Bitcoins has is anonymity"


* Low/no transaction fees.

* Quick transfers.

* Nearly instant notification.

* Fixed rate of supply increase.

* No chargebacks.


And as someone else already pointed out, Bitcoin itself isn't directly tied to your identity, but it isn't actually anonymous. You can take extra steps to *make* it anonymous, but the same is true of any currency.

jeff.st.12
jeff.st.12

@DeweySayenoff@pa2013@StockDoc"The ONLY advantage Bitcoins has is anonymity.  That's great for the criminals of the world and those who are clinically paranoid and delusional enough to risk their money for the sake of some false sense of security."

Bitcoins are NOT anonymous. There are records kept of the transactions from wallet to wallet. The NSA can figure out who owns the wallets.


Coinspring
Coinspring

@fcLundberg @Coinspring How would you know if you were holding a chunk of nickel or a real currency? (Hint: private key) You see, this is a digital currency sir. Outside of a digital environment, it has no value. There will always be a default currency.

Please have a good look at my username and understand my position here is as a proponent of crypto in all of its forms. Natural selection will decide the winner here between all of the crypto-coins out there, but at the end of the day, fiat, and more precious currencies will always have a place.

My suggestion was to not lose sight of that. Too much hype about bitcoin replacing govt backed currency. Its just not going to happen.

hud88s
hud88s

@tom.litton @Coinspring @EdWapole 


Considering we are heading into total economic collapse on a global scale which the the world has never seen before, the foreseeable future is an understatement. Your USD and EURO will be worth as much as it can burn my friend. Hedge your bets in something other than fiat. 

Coinspring
Coinspring

@tom.litton @Coinspring @EdWapole Same thing if you were doing biz with EUROs though Tom. Then you need to factor in bank fees and possible credit card fees....do you EVER think if you accept a dollar online you receive a dollar? Have you ever done biz online? 


The whole point in this exercise is that bitcoin and crytpo currency in general is overall a faster and cheaper way to do business. That is a fact....not a "What if" ...which is apparently all you have to go on here dude.

More to the point...when has there ever been a problem selling bitcoins? Anyone who actually knows? I have never heard of such a thing. 


You understand the bitcoin market is much bigger than the US (its pretty new here in fact) and definately bigger than China right? That crash you heard of never happend....that was a spike.


Do you think the Chinese have any problems selling their bitcoin?

tom.litton
tom.litton

@Coinspring@tom.litton@EdWapoleIt doesn't matter if the prices are set in US$  If a company is accepting BitCoins, then they have to sell those BitCoins in order to get the equivalent US$ (or whatever currency they wish to have).  With BitCoins there is no guarantee of a seller.


The risk is that they can not get rid of the BitCoins, at least not at the price they expect.  


It's a little like doing transactions with stock options.  Just because the last bitcoin sold for the price of a box of beef jerky, doesn't mean the next one will.