As crypto markets were reeling in the aftermath of FTX's collapse in mid-November, Nobel Prize-winning economist Paul Krugman used his New York Times column to criticize crypto assets — yet again. Despite his impeccable academic credentials, Krugman perpetuated a common misconception in his attempt to comprehend crypto assets by conflating Bitcoin with other cryptocurrencies.
Amidst being the oldest, most valuable, and best-known member of this new class of digital assets, Bitcoin has a distinct use case that sets it apart from the rest. Choosing an asset with more tangible utility as your starting point makes more sense to understand this asset class as a whole. Filecoin, for example, acts as a decentralized storage service for digital files, similar to Google Drive or Dropbox.
This network enables users with excess storage capacity to rent it out to others for a fee. This fee is paid with its native token. This example is far more representative of most digital currencies: a network that offers monetary incentives for services in a decentralized manner, with increased efficiency and lower costs due to the absence of intermediaries and central counterparties. However, Bitcoin is an exception.
But exactly what is Bitcoin? This is another gap in Paul Krugman's understanding. Bitcoin's technology has evolved over time, with updates to its functionalities and its most prominent investment thesis. According to his own column, Krugman sees Bitcoin (and, of course, other crypto assets) as a form of payment. That was, in fact, the stated purpose in the white paper that initiated Bitcoin in 2008, and it remained so in the years following its publication.
This thesis, however, has evolved over time. Most notably, a heated debate erupted within the Bitcoin community in 2017 over whether to prioritize its functionality as a means of payment or its properties as a store of value. The will of proponents of the store of value won out, and the dissidents created Bitcoin Cash. Since then, the general consensus has been that Bitcoin should strive to be a substitute for gold rather than fiduciary currencies, with the added benefits of greater portability and seizure resistance.
Given these character traits, Bitcoin has become highly sought after in extreme situations, such as the Ukraine war and Venezuela's hyperinflationary crisis, by ordinary people rather than criminals, as Krugman incorrectly suggests. Evidently, Bitcoin has a long way to go before it can truly establish itself as a true store of value, with the first step being greater price stability. There are also additional use cases in the works. The required scalability advancements, which would allow it to thrive as a payment method, have been assigned to layer-2 solutions such as the Lightning Network.
In September, one of Bitcoin's most recent updates allowed for the creation of tokens within its network. Although cryptocurrency has evolved, Krugman remains fixated on the 2008 white paper. The failure of Bitcoin as a means of payment would not spell the end of Bitcoin, let alone all crypto assets.
Undergirded by this misunderstanding about the general nature of assets and, in particular, Bitcoin, Krugman reaches conclusions that, while coherent in their own right, are completely incorrect, such as his claim that the crypto industry would not survive increased levels of regulation. When discussing a comparable topic, Krugman incorrectly stated in 1998, "By 2005, it will be clear that the Internet's impact on the economy has been no greater than the fax machine's." His bias against crypto assets may lead to predictions as inaccurate as his now-infamous quote about the potential impact of the internet.
The vast majority of industry participants welcome well-designed regulation for companies that provide services related to crypto assets. It is viewed as a development that will foster the investor confidence required to propel this technology toward mass adoption. Furthermore, many of these companies services are financial in nature, and as the year's events have demonstrated, contagion effects exist. This alone shows the need for increased regulation. In the first line of his op-ed, Krugman was correct when he said that recent events have made clear the need to regulate crypto.
The FTX crisis is likely to prompt regulators worldwide to step up their efforts, assisting in consolidating crypto assets and blockchain technology. Just as Krugman's incorrect predictions did not result in the demise of his reputation, this crisis is not the end game for cryptocurrency.
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