Bitcoin Is Evil

by Paul Krugman

December 28, 2013

New York Times Blog

Itís always important, and always hard, to distinguish positive economics - how things work - from normative economics - how things should be. Indeed, on many of the macro issues Iíve written about it has been obvious that large numbers of economists canít bring themselves to make that distinction.


They dislike activist government on political grounds, and this leads them to make really bad arguments about why fiscal stimulus canít work and monetary stimulus will be disastrous.


I donít, by the way, think that this effect is symmetric: although people like Robert Lucas were quick to accuse people like Christy Romer of fabricating macro arguments to support a big-government agenda, this didnít actually happen.

But I come now to talk not about macro but about money - specifically, about Bitcoin and all that.

So far almost all of the Bitcoin discussion has been positive economics - can this actually work? And I have to say that Iím still deeply unconvinced.


To be successful, money must be both a medium of exchange and a reasonably stable store of value. And it remains completely unclear why BitCoin should be a stable store of value.


Brad DeLong puts it clearly:

Underpinning the value of gold is that if all else fails you can use it to make pretty things.


Underpinning the value of the dollar is a combination of (a) the fact that you can use them to pay your taxes to the U.S. government, and (b) that the Federal Reserve is a potential dollar sink and has promised to buy them back and extinguish them if their real value starts to sink at (much) more than 2%/year (yes, I know).

Placing a ceiling on the value of gold is mining technology, and the prospect that if its price gets out of whack for long on the upside a great deal more of it will be created. Placing a ceiling on the value of the dollar is the Federal Reserveís role as actual dollar source, and its commitment not to allow deflation to happen.

Placing a ceiling on the value of bitcoins is computer technology and the form of the hash functionÖ until the limit of 21 million bitcoins is reached.


Placing a floor on the value of bitcoins isÖ what, exactly?

I have had and am continuing to have a dialogue with smart technologists who are very high on BitCoin - but when I try to get them to explain to me why BitCoin is a reliable store of value, they always seem to come back with explanations about how itís a terrific medium of exchange.


Even if I buy this (which I donít, entirely), it doesnít solve my problem. And I havenít been able to get my correspondents to recognize that these are different questions.

But as I said, this is a positive discussion. What about the normative economics?


Well, you should read Charlie Stross:

BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind - to damage states ability to collect tax and monitor their citizens financial transactions.

Go read the whole thing.

Stross doesnít like that agenda, and neither do I; but I am trying not to let that tilt my positive analysis of BitCoin one way or the other.


One suspects, however, that many BitCoin enthusiasts are, in fact, enthusiastic because, as Stross says,

ďit pushes the same buttons as their gold fetish.Ē

So letís talk both about whether BitCoin is a bubble and whether itís a good thing - in part to make sure that we donít confuse these questions with each other.