A. New York Times, Paul Krugman writes that cryptocurrencies are a “great scam,” all cryptocurrencies are worthless. He even suggests that blockchains are part of the hype. “I think of the housing bubble and the subprime crisis,” Krugman wrote. “And if you ask me, it looks like we’ve moved from the Big Short to the Big Scam.”
Probably. If all Krugman argued that investors should be very careful, his comments would be somewhat unexpected but otherwise exceptional.
A comparison of the “Big Short” and the financial crisis of 2007-2008 suggests something else though. Some government officials are suggesting that cryptocurrencies could create systemic risks in the economy that could lead to problems such as the financial crisis. Furthermore, cryptocurrencies such as Bitcoin consume substantial amounts of electricity, increase the price of electricity and possibly contribute to climate change.
Some believe that banning cryptocurrencies is the best solution to avoid all these problems. China has banned its citizens from mining or owning cryptocurrencies. The United States can do the same. Whether Krugman agrees with this solution or not, no doubt some of his readers will.
Why is cryptocurrency not banned? A comparison between computers and the 1970s provides a telling story today.
Ken Olsen, co-founder and president of the Digital Equipment Corporation (DEC), famous (and so-called) said in 1977, “I see no reason why anyone would want a computer in their home.”
Given the computer of the day, it was a reasonable statement. Most computers require special space to cool to 65 degrees Fahrenheit. They were quite large and limited in power. DEC specializes in making mini-computers that were cheaper and less sophisticated to make, but still cost more than most homes.
Olsen’s statement did not last long. Useful microcomputers were produced in early 1977, the year Apple II was launched. Micro-computers quickly became ubiquitous after the introduction of IBM PC in 1981 and the creation of IBM PC clones by many other companies.
When PC was introduced, many doubted that it would contribute to productivity. Many thought that people would be more likely to use it to explore bulletin boards – the Internet of the day – and just to play games.
It didn’t work that way.
Today’s smartphones are 25 times more powerful than the supercomputers of the late 1970s. Anyone who has used a navigation program knows the value of a computer in hand or dash. The value of the Internet for a word processing program and such a writing can be measured within the reserved days.
What does this have to do with Bitcoin and other cryptocurrencies and cryptocurrencies?
First, it is difficult to know what these resources will be for the next 20 years or so
Second, it is a mistake to adopt current technology and assume that it will not change. It will change, as computer technology has changed. Under development, for example, there is a change in the Bitcoin protocol, Taprut, to enable Bitcoin to execute smart contracts.
Smart contracts, for example, can facilitate the transfer of assets under automatically stated conditions. These can be used when the contracting parties are anonymous, making it difficult to do anything without reliable automated execution. These are now used for some transactions and new uses may be found in the future
Krugman goes so far as to say that all stablecoins are worthless. Too bad he didn’t explore the USD coin, which is used for international transactions. Tether is used to settle many transactions on cryptocurrency exchanges, which is a circular justification for fixed coins. But still it suggests that it is useful: people are using it!
Krugman rightly points out that it is quite possible to lose funds kept in cryptocurrency in the hope of making a profit, or even to save a lifetime of savings. This statement can also be made about the company. If an investor puts his life savings in a fun company and the fun company goes bankrupt, the investor may lose his life savings. Putting one’s life savings in a cryptocurrency is not a wise thing to do, leave a cryptocurrency. One investment advice is to keep no more than one percent of the funds invested in cryptocurrencies. The rule is: “Diversify.” The rule is not: “Ban private companies from existing ones.”
Krugman even suggests that blockchain or at least blockchain courses have no value. It is simply unknown. Blockchains are nothing more than ledgers, but they can probably be very useful for faster transaction settlement than today. They can also be used for many other activities, for example to verify that someone has the educational credentials they claim.
Cryptoassets have a bright future. The provisions of the Lumis-Gillibrand Responsible Financial Innovation Act, published on the day Krugman’s article was published, are far more likely to provide a brighter future than banning cryptocurrencies, stablecoins or other digital assets.
Gerald P. Dwyer
Gerald P. Dwyer is a professor at Clemson University and a BB&T Scholar. From 1997 to 2012, he was director of the Center for Financial Innovation and Stability and vice president of the Federal Reserve Bank of Atlanta. Dwyer’s research has been published in leading economic and financial journals, as well as publications in the Federal Reserve Bank of Atlanta and St. Louis. He has served on the editorial boards of the Journal of Financial Stability, Economic Inquiry and the Financial Research Letter. He is a former president of the Private Enterprise Education Association and a member of the executive committee. He is also a founding member of the Society for Nonlinear Dynamics and Econometrics, an organization for which he served as president and treasurer.
Dwyer has earned his PhD. His MA in Economics from the University of Chicago, his MA in Economics from the University of Tennessee and his BBA in Business, Government and Society from the University of Washington.