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.