Paul Krugman, Nobel Prize in Economics, is an open opponent of Bitcoin and cryptocurrencies. Far from raising the hackneyed arguments of the usual detractors, Krugman raises a skeptical doubt about the usefulness of Bitcoin.
Skepticism is an old philosophical tradition that goes back to the origins of the discipline in ancient Greece. The basis of skepticism lies in pointing out the lack of convincing arguments to take a position for or against a point of view. The moderation characteristic of skeptical arguments and their reluctance to easy answers makes them difficult to refute.
The argument of the Nobel prize is as follows: fiduciary money exists not for a purely arbitrary reason, but because it is the best solution that humanity found to the problem of trade. Following his line of thought, he explains that Bitcoin is an expensive technology to maintain, difficult to scale and has no anchoring in the real world, so what are the advantages of cryptocurrencies compared to traditional money?
The question forces us to leave the technical details aside and respond to a fundamental level why many choose to adopt this technology.
The origin of fiduciary money
To understand the problem we are going to have to make a brief and schematic reconstruction of the history of money. As I explained earlier, Krugman points out that the current monetary system, based on fiat money, is the best solution that humanity found to the problem of trade.
In principle, gold and silver became major trade vectors. They were used to forge coins, they had good durability and they were scarce. With the explosive growth of commerce since the Industrial Revolution, transporting sums of gold became a more complicated process. Then the market evolved to use notes that represented a certain amount of treasured gold in a bank. Then, with the creation of central banks, this system was adopted by the states. Until finally the gold was replaced by the current system of fiat money; today the money is no longer backed by a gold equivalent, but by a promise of payment (a debt bond).
Why, if there is already an effective solution to trade, fiduciary money, do we need to add a layer of complexity with a system like Bitcoin?
Deconstructing the cost argument
First, we can rethink the problem of costs: is bitcoin more expensive than cash? While this argument may be true in the context from which Paul Krugman writes, it becomes a bit diffuse from the perspective of less developed countries.
Let's look at the example, a little extreme, of our country. In Argentina, the government's embezzlement of public funds is one of the sources of the cyclical economic crises to which we are subject, together with the constant devaluation of our currency. From 1950 to here in Argentina there were five different monetary signs. The cost of cash, for us, is very high. But it is not enough to put a single example.
Let's see what happens with the rest of the world. If we are guided by the human development index (developed by the UN to measure the economic and social success of a country), we can consider "developed countries" to most of Europe, in addition to the United States, Europe, Korea, Japan, Australia, Russia and Saudi Arabia. The last of that group is Kuwait and in total they concentrate about 15% of the world population.
What happens to the rest of the 85%? The rest of the planet has, in general, serious problems regarding its economic and financial infrastructure. Cryptocurrencies are presented as an excellent alternative since they do not depend on the decisions of a government and anyone can agree to buy them with nothing more than an Internet connection.
It is complex to understand the real benefits of this new technology from the perspective of a "first world" country. However, there is no doubt that the current system based on fiduciary money has too many costs that are transferred directly to society and that mainly affect the most vulnerable sectors. A financial system based on Blockchain technology, on the other hand, enables all costs to be calculated and predictable and also significantly reduces operating costs.
Bitcoin as "digital gold"
Bitcoin is especially useful as a store of value or "digital gold". Let's review this analogy: gold has several economic attributes that make it desirable as a method of saving: it is scarce, it is difficult to mine and has a stable price.
Can Bitcoin occupy that role in a new economic system?
In developing economies, there is no financial infrastructure that allows each citizen to access a portion of gold as a method of saving. On the other hand, the sale of foreign currencies such as the dollar is often prohibited or restricted, as is the current case in Venezuela.
Bitcoin, on the other hand, is a system that can develop infrastructure in a very simple way and is accessible from anywhere on the planet, it is practically anonymous, scarce and resistant to censorship.
It can be a viable alternative to gold as a store of value. The only pitfall it faces is its volatility, unlike the price of metal, which is very stable. But many are confident that the growing adoption of bitcoin tends to make its price more and more stable.
On the other hand, in less than a decade, Bitcoin allowed the creation of a global infrastructure that supports its system and that of thousands of other cryptocurrencies. A silent revolution that started with hacktivists and cyberpunks using their computers to "mine" this first cryptocurrency.
Perhaps there is no definitive answer to the skeptical doubt of Paul Krugman. But for us, the citizens of the (not so) developed world, the cryptocurrencies -and the infrastructure that we are building around their ecosystem- are today a concrete alternative that allows us to overcome the limitations of the traditional financial world and create real tools and solutions to a single click away.