I see bitcoin eating PayPal within a few years (which might include PayPal becoming a bitcoin wallet). It will also eat Square, then Visa and Mastercard.

Ahh, but grasshopper - do you see what you just did?

Paypal is a company.

Square is a company.

Visa is a company.

Mastercard is a company.

BTC is a PROTOCOL.

Each and every one of them could start honoring BTC tomorrow. They could move to BTC internally. They're not going to, though, because it's unstable and non-portable. They could trade in gold, too - hell, they could trade in Alcoa stock. They don't. They trade in currencies that are insured and regulated by central banking authorities.

That's the only barrier to admission for a large company like Paypal - fiduciary portability. That portability is the home court advantage of conventional currency. BTC may yet get there, but the methodology by which it shall do so is "brute force." None of the companies you mention would face a single penalty to accepting BTC other than its inherent volatility. If that volatility goes away, BTC is as good as cash. However, "that volatility going away" is more likely to be an outcome than a goal.

However, I would think a Keynesian could recognize that it might not be a matter of bitcoins as units, but the nature of the network.

The nature of the network is libertarian and outside of conventional economic theory. Granted, "conventional economic theory" has been decidedly wrong of late, which is a mark in BTC's favor. But then, it's no different than any other black market currency: subject to pressures outside of regulation, vulnerable to pressures within regulation.

As you said he is attacking the principle.

That's not what I meant to say. What I meant to say is that he's attacking the framework of BTC within conventional banking standards while the aegis of BTC is existence outside conventional banking standards. It's akin to a record exec attacking the MP3 algorithm without acknowledging the MP3 economy. Basically, he's an A&R man advising recording industry execs not to invest with the Freunhaufer Institute. He doesn't even get into the wonders of Napster.

IMO Krugman is making the faulty assumption that bitcoin will fail unless bitcoins are a real currency.

My read was that he was attacking the notion that just because it walks like a currency, quacks like a currency and shits like a currency it must be a currency. Considering how much time and effort MtGox and others put into the "WE ARE NOT A BANK" trope, I'd say he has a valid argument.

A few days ago I posted an interview a few days ago where Kevin Rose interviewed Brian Armstrong of Coinbase.

Ain't nobody got time for that, yo. 40 minutes of Kevin Rose is 39:50 too long.

David Woo of BoA sees it.

Right. BoA sure called the housing bubble correctly.

EDIT: Timothy B. Lee makes the same counterargument in the WaPo. It's no less fluffy as mine. I could be a staff writer.

Again, I disagree. The WaPo argument is that BTC mining should not be seen as the same as gold mining because BTC mining is just a way to incentivize people into providing a backbone for BTC transactions. Put into simple terms:

BTC transaction backbone = brick'n'mortar banking network

BTC mine = Brick'n'mortar bank branch

BTC miner = Brick'n'mortar bank teller

The WaPo argues that Bitcoin mining is parasitic, rather than opportunistic. It's a valid argument, and it underlines one of Krugman's (misunderstandings? Omissions? Hard to say) in the article. Your argument, on the other hand, is that an exchange is an exchange is an exchange. It's not. The transaction point between BTC and most currencies is "commodity" not "currency" which

A) makes sense

B) gives governments an incentive (taxation)

C) delegitimizes the fundamental principle of BTC (it's a currency, not a thing)

It's that discontinuity, right there, that keeps BTC volatile. There's no real way to know how portable it will be moving forward, and every government in the world has ample incentive to penalize it.

This is not Krugman's argument (in this column, at least). His argument is that it's like the Gold Standard, and to Keynesian thinking, money standards are dumb. One is reminded of the phone sanitizers in Hitchhiker's Guide, and their choice of "leaves" as currency, which led to massive deforestation in order to drive up currency prices.

I dunno. If I had money to invest, I'd put it in Square, not BTC. My wife ran $10k off a Centurion card two years ago and in one fell swoop saved $300 off what Visa or Paypal would have charged her. They're making that shit easy yo, and it's currency-agnostic. The legislation necessary to make that go happened uneventfully in 2003 or so. It's clear sailing for Square.

Bitcoin? BTC is one justice department finding away from oblivion - or worse, a burn notice. Thus I watch, but I do not invest.