I disagree. I think he's focusing on the economic fallacies of BTC and comparing them with the economic fallacies of a gold standard, while being dismissive of the libertarian drive behind BTC. You can dismantle the gold standard with some ECON101 thinking - at least, that is, if you're a Keynes/Smith free market economist. That's what the "bottles full of money" jab was about. Step outside of that framework, though, and the principle behind a gold standard or BTC is a revocation of central bank authority - "Let me issue and control a nation's money and I care not who writes the laws" as Mayer Rothschild said. I'd hypothesize that he's writing to his audience - Krugman readers in the NYT are likely to be middle-of-the-road center-left Democrats with mutual funds and maybe an eTrade account for dallying. To them, BTC is a commodity. After all, you can't do anything with it until you exchange it for dollars, and the central banks have shown reluctance to do that, making BTC much more like light sweet crude than FOREX. BTC arbitrage has a lot more in common with phone phreaking than it does with the bond market. To that end, Krugman's arguments are en pointe. Clearly, the true believers of BTC see it as an end-run around all other currency in which we stop trading in dollars or euros and do our transactions in a torrent economy. Really, BTC is a pirate currency whose speculative advantages are great enough that it's interested the daytraders. From a Krugman point of view, the "currency" aspects of BTC are much less relevant than the Adam Smith stupidity of the situation.
The more I've looked at it, the more I believe it will occupy a middle ground for some time to come. As long as the exchanges are more competitive than PayPal, bitcoin has a lot to offer as simply a ledger for online transactions. Coinbase + the bitcoin network looks a lot more attractive than PayPal alone. 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. Only after all of that, do I think bitcoin can start to supplant fiat currencies; and if that happens, it will be mostly because people will no longer recognize the difference between the two. The speculative bitcoin market is about as rationale as any other bubble market, and I think that Krugman is right to criticize it. 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. Perhaps he simple sees the innate limited resource aspect of bitcoin and thus throws out the baby and the bathwater. As you said he is attacking the principle. However, bitcoins may very well never need to be currency for the network to change the global economy. The principle behind bitcoin might not matter. IMO Krugman is making the faulty assumption that bitcoin will fail unless bitcoins are a real currency. His arguments might be on point to that extent, but bitcoin is much more than that. A few days ago I posted an interview a few days ago where Kevin Rose interviewed Brian Armstrong of Coinbase. What I thought was most telling, was how Armstrong only referred to price in terms of raising awareness of bitcoin. IMO from where he is sitting, he wants to see people use it to move 'real' money. Bitcoin might be the http of money, but not money. Krugman should see that. David Woo of BoA sees it. EDIT: Timothy B. Lee makes the same counterargument in the WaPo. It's no less fluffy as mine. I could be a staff writer.Clearly, the true believers of BTC see it as an end-run around all other currency in which we stop trading in dollars or euros and do our transactions in a torrent economy.
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. 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. 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. 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. Ain't nobody got time for that, yo. 40 minutes of Kevin Rose is 39:50 too long. Right. BoA sure called the housing bubble correctly. 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.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.
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.
As you said he is attacking the principle.
IMO Krugman is making the faulty assumption that bitcoin will fail unless bitcoins are a real currency.
A few days ago I posted an interview a few days ago where Kevin Rose interviewed Brian Armstrong of Coinbase.
David Woo of BoA sees it.
EDIT: Timothy B. Lee makes the same counterargument in the WaPo. It's no less fluffy as mine. I could be a staff writer.
Yes, it's the protocol that I am talking about, and as I mentioned, I do see adoption as a likely scenario. But, I am not talking about people holding onto BTC, or merchants either. The possibility that I see, is USD transactions using the bitcoin network for the ledger it is. Merchants using Coinbase can instantly convert BTC they receive to USD. Perhaps I could also instantly convert USD to BTC when I spend it? That's what Ripple is, and bitcoin comes without the pyramid scheme of Ripple Labs holding half of the XRP. The traditional transactional protocols for USD are convoluted and expensive. Bitcoin offers another means to exchange USD. For that to happen, it doesn't matter much if bitcoins are worth $3 or $3000 so long as the value is stable enough that an exchange can float the minutes needed to verify a transaction. I think Lee makes the point that mining doesn't just generate coins alone, but powers the tranasction protocol, which is the more interesting aspect of bitcoin that Krugman doesn't discuss. This, I believe was the takeaway from Lee's piece: Leading Bitcoin payment processors such as BitPay and Coinbase already give merchants the ability to price their goods in conventional currency. The dollar or euro price is automatically converted to the corresponding number of bitcoins (or fractions of a bitcoin) at the time of purchase. That makes Bitcoin's price fluctuations almost irrelevant for the thousands of merchants who now accept payment in Bitcoin. This is why Andreessen Horowitz is investing in both Coinbase and Ripple. They know that the next gen transaction protocol is coming, and they are hedging their bets. Only far down the line, if the bitcoin protocol wins universal adoption, do I see bitcoins themselves as possibly assuming some mantle of currency. But that's not why I find them interesting. There are a vast number of bitcoin fanatics that see it as some sort of revolution in currency. I don't. I see it as a ledger that can enable us to buy things without losing 3% (or worse) to middlemen.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.
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.
But the smart case for Bitcoin isn't as a replacement for the dollar. Rather, Bitcoin is best seen as an alternative, or complement, to conventional payment networks like Visa, PayPal and Western Union.
I'm probably being obtuse about this. Can you tell me what the advantages are for transacting in BTC? If there's dollars on either side, the only advantage to dealing in BTC is different (as opposed to lesser) transaction fees… and Square and others are whittling away at that already. Yes, the "traditional transactional protocols" are convoluted and expensive, but the Check 21 act eliminated their necessity in 2004. That's why Square can exist. It's an allegation, though, not an argument. I can go to Kinko's right now and buy a Square reader for $9. They'll give me a $9 credit. Now I can take Visa, MC, Amex, you name it. It's in dollars, it talks to Quickbooks, and it's cheap. More than that, if there's a dispute, there's someone to dispute it with: that's one of the real problems with peer-to-peer as far as consumers are concerned; something goes wrong with a BTC scam and it's between you and… well, there it is. Large organizations will still do wire transfer because of the security. Small operators will gripe over 3%, but they'll pay it. Because really, for the majority of transactions between individuals, the banking network absorbs the fees already. I don't pay a fee when I paypal a "gift." I don't pay a fee when I send a check. And I don't need a working knowledge of cryptocurrency. But this has become a roaming discussion - the argument for BTC is a lack of central authority. The argument against BTC is a lack of central authority. The argument for gold is a lack of central authority. The argument against gold is a lack of central authority. That, in my opinion, is the point Krugman is making… he's just omitting the arguments "for."The possibility that I see, is USD transactions using the bitcoin network for the ledger it is. Merchants using Coinbase can instantly convert BTC they receive to USD.
This, I believe was the takeaway from Lee's piece:
I see it as a ledger that can enable us to buy things without losing 3% (or worse) to middlemen.
One advantage is that rather than numerous closed networks, bitcoin offers a open distributed ledger. Like HTTP and SMTP, a standard protocol reduces costs of fragmentation, and lowers the barrier to entry. Fees of the bitcoin network itself can be near zero, whereas Coinbase currently charges 1% for buying and selling (currently for merchants, the first $1M is free). PayPal charges 2.9% + $0.30 per transaction. As the protocol is open and won't change quickly, others can easily get into the wallet game, and likely keep a downward pressure on these fees, perhaps like webmail; Hotmail couldn't get away with $20/yr for 20MB for long, it was just too easy to undercut. Another thing that could exert downward pressure, is that anyone can transfer BTC without a processor. For example, if you have a paywall, you can accept numerous BTC payments for free, and cash out to USD at the end of the day (or hour), running around any 'per-transaction fees', which most credit card processors include. On top of the advantages that come from letting anyone tinker with an open protocol, bitcoin has other built in functionalities such as m of n transactions whereby a transfer won't occur unless m of n parties approves the transaction. Escrow, arbitration, and pledge functionalities exist as part of the protocol. As one example, you could crowd fund a project, where the money only transfers if a certain total value is pledged. You can use the ledger for a notary stamp. This is part of the protocol. It gets even deeper, and my knowledge of the protocol is limited. However, the more I look, the more I find shit that is pretty compelling. The short version to the argument is that with bitcoin, you can have an internet rather than a bunch of intranets patched together. Techies can then go to work on that, and take it to the next level and the next. As an example, look at namecoin, using the bitcoin protocol, they are creating an ICANN-free DNS registry among other things; there's talk that this could be used for an verifiable voting ledger. At this point, I'm basically saying the bitcoin P2P network offers potentially transformative innovation and cohesion in the transactional space. There's a story under all this talk about bitcoins, and I think Krugman is remiss to gloss over it. Maybe he has considered all of these aspects of bitcoin, but as the dude said: I think it's likely he hasn't. BTW, I think Square is going public this year.I'm probably being obtuse about this. Can you tell me what the advantages are for transacting in BTC? If there's dollars on either side, the only advantage to dealing in BTC is different (as opposed to lesser) transaction fees… and Square and others are whittling away at that already. Yes, the "traditional transactional protocols" are convoluted and expensive, but the Check 21 act eliminated their necessity in 2004. That's why Square can exist.
By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.
I get that. The difference between you and me is I remain skeptical. Thanks for your reasons. Mine include: 1) The prices charged by existing networks are arbitrary, not fixed-cost. A viable cryptocurrency (let's just call it CC) exchange would definitely exert downward pricing pressure on Visa or Paypal. But then, it probably has. Target griped a few years ago that their biggest expense was credit card transaction fees; I've never seen Walmart say the same thing. Dollars to donuts Walmart stiff-armed Visa and MC. 2) Those with the most incentive to use a CC network are those most impacted by a 3% fee. Those most impacted by a 3% fee are the ones with the most leverage over a closed network. The small business owner benefits from going to CC because he has no leverage. The large business owner benefits from whinging to his banking network. 3) The allure of CC is in anonymity and a lack of central control; the allure of a conventional network is FDIC insurance and heavy regulation. In order to trust a traditional network, you need to know that the government insures it. In order to trust a CC network you need to have a more-than-passing knowledge of encryption and P2P. Bittorrent remains wizardry to the majority of the populace. 4) Your arguments basically boil down to "extensible marketplace" vs. "walled garden." "Extensible marketplace" is not necessarily an advantage; the App Store still does 4 times the business of Google Play. Combine that with the points above and no matter how awesome CC may be, no matter how many advantages it provides, it still could end up Betamax. It still could end up OS/2. Especially since the things a CC infrastructure offers over a traditional infrastructure are things the traditional infrastructure chooses not to provide, not things they cannot provide.At this point, I'm basically saying the bitcoin P2P network offers potentially transformative innovation and cohesion in the transactional space.
I think that you are letting an aspect of bit coins pass you by. Because of the rigid quantity of bitcoins, the more success it finds the less it will circulate. It's a deflationary currency, the more widely accepted it becomes the less of it will circulate. People will choose to hold bitcoins speculatively (you could argue this is pretty much the case already) rather than use them for casual transaction. I don't recall who's theory this is, but it's basic monetary theory. When there are two forms of currency people will horde the one that is more sound. A deflationary currency is always going to hold it's value better than an inflationary currency so people would always choose to hold their cash holdings in bit coins and spend USD or whatever else they use. I think this is going to be a problem for bit coins.
You may be referring to Gresham's Law. When there are two kinds of currency which are required by law to be honored at the same value people will prefer to spend the one that is perceived as inferior. Just like I spend a wrinkled old dollar bill first, people would spend a coin that had been clipped or sweated before a mint coin. When coins containing precious metals were replaced with coins made of base metal, but by law they had the same value, people hoarded the old coins. This does not occur if the relative price of the two currencies is allowed to float. Old silver coins are now worth more than their face value, and people do sell them. People may expect their bitcoin holdings to rise in value relative to other currencies because of the capped future supply, giving them reason to hold them. But if most people feel that way, it will drive the price of bitcoin up, giving people a reason to spend bitcoin. This is no bigger a problem for bitcoin than it is for any other commodity: classic cars, Picasso paintings, gold. The advantage of bitcoin over old Corvettes is that it is (practically) infinitely divisible.