What Is Paul Krugman's Problem With Bitcoin?

Paul Krugman is a Distinguished Professor at the City University of New York Graduate Center and a winner of the Nobel Memorial Prize in Economic Sciences. He is published regularly in the New York Times and is known for his skepticism of cryptocurrency and blockchain.

Understanding Paul Krugman's Position

Paul Krugman bases his opinions and stance on cryptocurrencies on his years of economics study, teaching, and expertise.

In a 2018 New York Times op-ed titled "Transaction Costs and Tethers: Why I'm a Crypto Skeptic," crypto-skeptic Paul Krugman wrote:

“What problem does this technology solve? What does it do that other, much cheaper and easier-to-use technologies can’t do just as well or better? I still haven’t heard a clear answer."

The Nobel Prize-winning economist's sentiments haven't changed much since the 2018 op-ed he filed from vacation in Europe, a result of his pondering of bitcoin and blockchain while "hiking and biking in various parts of Europe."

That year, he stated that it set the monetary system back by 300 years when gold was the primary form of exchange and that there didn't seem to be a clear upside to this regression. Krugman still made the claim three years later:

"Because Bitcoin and its relatives haven’t managed to achieve any meaningful economic role, what happens to their value is basically irrelevant to those of us not playing the crypto game."

Multiple Strikes Against Bitcoin? 

Throughout his published op-eds, Krugman describes why more caution and regulation are needed for Bitcoin and cryptocurrency.

Costs

The transaction costs for gold are high because it's heavy and bulky and is considerably expensive to store. Fiat currencies incur lower, but still significant, transaction costs because they are paper-based. Subsequent shifts towards checks and credit and debit cards have further decreased the need and costs for paper-based currency.

In turn, this has led to them being widely adopted by countries around the world. That they are widely accepted provides further impetus for their use. In contrast, bitcoin has significant transaction costs in the form of its energy requirements. It is also not widely accepted, and that further increases the costs required to conduct practical commerce using Bitcoin.

Lack of Tethering

Bitcoin has a lack of tethering capability. In practical terms, this means there are no real backstops available to it as they are to paper money and gold. Government backing provides credibility to paper money. Gold has practical applications in jewelry and industry, which provide "a weak but real tether to the real economy."

Because of its digital and stateless nature, bitcoin has neither a physical application nor a central authority to vouch for its status as a medium of exchange. "If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, well, Bitcoins would become worthless," writes Krugman.

In a June 2021 op-ed, along with the opinion that stablecoins like TerraUSD start as a way to keep third parties out of transactions but eventually end up needing them to operate as a stablecoin, Krugman furthered his stance on a lack of tethering, pointing to TerraUSD's loss of its peg to the dollar and eventual collapse. As it turns out, the only way to truly be stable, pegged, or tethered is to hold an amount of currency (or an equal value of property) equal to the total intended value of the cryptocurrency (such as $1,000 for 1,000 tokens).

It's a Bubble 

To be sure, Krugman has maintained a steady position against Bitcoin. In 2018, Krugman said that the cryptocurrency was an obvious bubble. He said its prices were rising because "Early investors in a bubble make a lot of money as new investors are drawn in, and those profits pull in even more people. The process can go on for years before something—a reality check, or simply exhaustion of the pool of potential marks—brings the party to a sudden, painful end."

No Hard Evidence to Oppose His Opinions

He has argued in a similar manner in more recent op-eds, reiterating his belief that Bitcoin is a scam, bubble, and designed by people who don't understand the fundamentals of a fiat currency system. Many of his opponents respond with, in his words, "technobabble," which doesn't offer any oppositional evidence. Some of his main points over the years are:

• Ponzi and pyramid schemes excel where there is a strong narrative, and Krugman believes that the "narrative" is where crypto "really excels."
• Bitcoin has turned out not to be inflation-proof.
• Most investors buy cryptocurrencies through exchanges, which take their money and hold their keys for them, creating the need for trust in a financial environment designed to dispel the need for trust.
• Cryptocurrency has only gained its status through association with institutions and individuals playing on their trustworthiness.

The Bottom Line

Paul Krugman is a well-respected and award-winning economist with a strong stance against Bitcoin and cryptocurrency adoption and use. He makes many excellent and concerning points in his op-eds that are contested by cryptocurrency fans and investors and lauded by other skeptics.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author owns small amounts of bitcoin and litecoin.