Nobel Prize-winning economist Paul Krugman has given a two-fold explanation outlining his scepticism regarding cryptocurrencies. He says that cryptocurrency, despite its cutting-edge technology, has "set the monetary system back by 300 years".
In an article in The New York Times titled “Transaction Costs and Tethers: Why I’m a Crypto Skeptic”, Krugman, a vocal critic of the digital currency, has highlighted the transactional cost it carries. According to Krugman, the basic nature of a bitcoin transaction, which involves furnishing the complete history of past transactions, goes against the long-running trend which has continually moved toward "frictionless" transactions.
“Set against this history, the enthusiasm for cryptocurrencies seems very odd, because it goes exactly in the opposite of the long-run trend. Instead of near-frictionless transactions, we have high costs of doing business, because transferring a Bitcoin or other cryptocurrency unit requires providing a complete history of past transactions. Instead of money created by the click of a mouse, we have money that must be mined — created through resource-intensive computations," he said.
"In other words, cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years,” he added
In his second issue with cryptocurrencies- the absence of tethering- Krugman argues that cryptocurrency, unlike fiat currencies, does not have an underlying value. According to him, the value of cryptocurrency is merely a bubble which will burst once people lose faith in it.
“Cryptocurrencies (in comparison to fiat currency) have no backstop, no tether to reality. Their value depends entirely on self-fulfilling expectations — which means that total collapse is a real possibility. If speculators were to have a collective moment of doubt, suddenly fearing that Bitcoins were worthless, well, Bitcoins would become worthless.” contested Krugman.
He further explained that even with gold and silver, in addition to holding a "store value" they have real-world applications as it can be used for things like jewellery and filling teeth. According to him, tethering is one of cryptocurrency’s greatest weaknesses.