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Nobel laureate: Bitcoin may be worthless



Original Title: Paul Krugman: Bitcoin May Be Worthless

I'm still on vacation, hiking and biking all over Europe. I also more or less follow the news, but only occasionally and indefinitely somewhere and under certain conditions I write something and send it out.

Now is the time, I think I can express some ideas in advance, to warm up an activity that I will participate in after the trip. The specific situation is that I plan to play the role of Emmanuel Goldstein (the character in Orwell's novel "1984") at a conference on blockchain and so on in two or three weeks, which is The designated villain. If you're only talking to a friendly audience, you're not really challenging yourself, are you?

So let me explain here why I am skeptical about cryptocurrencies. This is related to two issues: transaction costs and lack of anchoring. Allow me to explain slowly.

Nobel laureate Eric Maskin: Too popular cryptocurrencies are worrying: news on May 16, recently, at the 2022 International Symposium on Government and Market Economics, the 2007 Nobel laureate in economics, the government Eric Maskin, co-chairman of the International Society for Market Economics, delivered a scathing attack on Bitcoin and expressed appreciation for China's ban on cryptocurrencies. According to Eric Maskin, money was originally invented to make it easier to exchange goods. Unfortunately, once Bitcoin came along, we went back to primitive barter. Therefore, Eric Maskin believes that as countries create digital versions of standard central bank currencies, the so-called advantages of Bitcoin will no longer exist. Not only that, but cryptocurrencies such as Bitcoin can be very harmful. Eric Maskin believes that its potential harm is reflected in two aspects.

The first is monetary policy, counter-cyclical monetary policy. Every responsible government uses monetary policy as one of the important tools available to fight recession on the one hand and inflation on the other. When the economy is struggling, the government will increase the money supply. That makes it easier to get credit, which helps the economy out of recession. But when the economy is booming, the central bank must shrink the money supply. Cryptocurrencies can interfere with good monetary policy. If people use cryptocurrencies such as Bitcoin, the impact of monetary policy will be correspondingly smaller, and it will become more difficult to get out of recession.

The other is related to the banking industry. Proponents of cryptocurrencies sometimes say it eliminates the need for banks, Eric Maskin said. People can send money securely without a bank and can deposit money without a bank. However, this view ignores the critical role played by banks in evaluating and extending loans to entrepreneurs. [2022/5/16 3:18:26]

If you look at the general history of money development, there is a clear direction over time that both the friction of doing business and the actual resources required to deal with those frictions are decreasing.

Nobel Laureate: Bitcoin Could Totally Destroy El Salvador's Economy: Bitcoin Could Totally Devastate El Salvador's Economy, Says Johns Hopkins University Economics Professor and Nobel Laureate Steve Hanke , because all the dollars in El Salvador could be emptied and they would lose their national currency. It is reported that Hanke has previously described Bitcoin as a speculative asset with "zero fundamental value". In April of this year, he tweeted: "Cryptocurrency is the future of money, but Bitcoin is not." (cointelegraph) [2021/6/16 23:40:51]

At first, humans had gold and silver coins, which were bulky, required a lot of security measures, and their production required a lot of resources.

Then came bank notes backed by fractional reserves, which were popular because they were much easier to use than bags of minted coins, and they also reduced the need for actual precious metals. This provides, as Adam Smith put it, "a kind of freight corridor in the air" that frees resources for other uses.

Nobel Laureate Sargent: Blockchain will change the face of banks and prompt banks to respond: Professor of Economics at New York University, 2011 Nobel Laureate in Economics, Thomas Sargent (Thomas.J.Sargent) In an interview, he said that blockchain technology is changing the way companies operate and manage. I think this is going to change the face of banks because the existence of these technologies will prompt banks to react and think about how to apply transaction technology in an effective way to reduce costs and improve efficiency. I think it's very exciting for an economist like me to witness and be part of it. (Guangming Daily) [2020/9/15]

Even so, the monetary system still needs a lot of physical currency. The ensuing central banking system greatly reduced this need, and private banks held deposits (rather than gold and silver) with the central bank as their reserves. The advent of fiat currencies almost completely eliminates the need for physical reserve currencies.

At the same time, people are gradually moving away from cash transactions, first paying with checks, then credit and debit cards, and other digital means of keeping accounts.

Voice | Nobel Prize Winner: The usage rate of digital currency will increase, but systems such as blockchain may not be widely adopted: Golden Finance Report, Nobel Laureate in Economics, Professor Robert Engle of New York University said that in the past ten years or so The global market has been in a low-risk zone for a while, and while the use of digital currencies will increase, systems such as blockchain will not be widely adopted. Asked about new types of money such as cryptocurrencies, Engle noted that while digital payments will pick up pace over time, he doesn't believe blockchain and other currencies that aren't regulated by governments will become mainstream. He also said that messages from social media and climate change do move markets. [2019/11/27]

So from a historical perspective, the mania for cryptocurrencies seems very odd, because it is completely against the long-term trend. Instead of moving toward near-frictionless transactions, it is expensive to do business because transactions in bitcoin or other cryptocurrencies require a full history of past transactions. The creation of these currencies is not as simple as clicking the mouse, but must be "mined", produced through a computational process that consumes a lot of resources.

Nobel laureate Stiglitz: I am in favor of stopping issuing banknotes and switching to digital currency: According to Nikkei Chinese website, Nobel laureate in economics Joseph Stiglitz (Joseph Stiglitz) talked about central bank issuance The trend of digital currency said: "I am in favor of stopping the issuance of paper money and switching to digital currency. Compared with paper money, it is more transparent. It will be easy to grasp economic activities and carry out macro management, but the only problem is that information is excessively concentrated in the government. Bad governments have the potential to abuse it.” [2018/4/13]

The occurrence of such costs is not accidental, and cannot be easily eliminated by innovation. As Marcus Brunnermeier and Joseph Abadi have pointed out, the high cost of creating new bitcoins or exchanging existing ones is the reason why decentralized systems The core of the credit-creating project in China.

Bank notes are accepted because people know the banks that issue them better, and those banks have incentives to maintain their reputations. Governments occasionally abuse the privilege of creating fiat money, but most governments and central banks are disciplined, again because they care about their reputations.

But for Bitcoin, if you want to believe that it is real without knowing its issuer, you have to rely on some digital means to confirm that it is a real transaction (equivalent to putting a gold coin in your mouth and biting it), so it produces The cost of bitcoins that would pass the test would have to be high enough to deter fraud. In other words, cryptocurrency enthusiasts are celebrating the use of state-of-the-art technology to set the monetary system back three centuries ago. Why would you do such a thing? What problem does it solve? I haven't seen a clear answer to the above questions.

Don't forget that traditional currencies generally perform their intended functions very well: transaction fees are low; the purchasing power of the U.S. dollar after a year is highly predictable, orders of magnitude higher than Bitcoin; The trust of the banks, and the banks in general deserve it, far more than those companies that hold crypto tokens. So why are we switching to this form of money that works so much less well?

In fact, 8 years after the invention of Bitcoin, the progress of cryptocurrencies in real business activities is still extremely limited. A few businesses accept them as a means of payment, but I feel like it's more of a posturing to see how cutting-edge I am than a practical use. Cryptocurrencies have huge market valuations, but the vast majority are held as speculative vehicles rather than effective mediums of exchange.

Does this mean that cryptocurrencies are pure bubbles that will eventually blow up? It is worth pointing out that there are other similar assets that are not as widely used as currencies, but people still hold them. For example, gold has not been used as an actual currency for a long time, but it still retains value.

It can be said that the same is basically the case with paper money. Although banknote transactions are common, their share of total transaction value is actually small and declining. However, the ratio of dollar cash holdings to GDP has increased since the 1980s, with the growth in cash holdings concentrated entirely in larger denominations such as $50 and $100 bills.

Today, large denomination banknotes are not often used for payments, in fact many shops no longer accept them. So what is the purpose of holding so much cash? The answer is well known: tax evasion, illegal activities, etc. In addition, much cash is stored outside the United States, and it is estimated that more than half of all US dollar cash is held by foreigners.

Clearly, cryptocurrencies are in fact competing for the same kind of business: Very few people pay bills with Bitcoin, but many use it to buy drugs, sabotage elections, and more. The example of gold and high-denomination banknotes shows that such demand can support considerable asset values. So does this mean that cryptocurrencies are not necessarily a bubble even if they are not the revolutionary technology their proponents claim to be?

This is where pegging, or more precisely, the lack of pegging for cryptocurrencies comes into play.

In everyday life, people don't care where the value of the green bill with the dead president's face comes from, we accept dollar bills only because other people accept it too. However, the value of dollar banknotes does not come entirely from this self-fulfilling expectation. Its ultimate support comes from the fact that the US government will accept banknotes as a way to fulfill its tax obligations—the government has the power to enforce the tax obligations of the people. You could even say that fiat currency has value because people with guns say it has value. And that means their value is not the kind of bubble that collapses when people lose confidence.

Plus, the value of a $100 bill sitting in a drug lord's lair, or anywhere else, is always pegged to the value of smaller denomination bills stateside.

Gold is in a similar situation to some extent. Most gold is idle, it holds value because people believe it holds value. But gold also has uses in the real world, such as jewelry, or as a material for dental fillings, etc., which provide a weaker but real anchor to the real world.

In contrast, cryptocurrencies have no backing, no anchor to the real world, and their value is entirely dependent on self-fulfilling expectations, which means total collapse is a real possibility. If speculators have a collective moment of doubt and suddenly fear that Bitcoin will become worthless, Bitcoin will become worthless.

Will this happen? I think it's more likely than not, in part because of the disparity between the messianic hype of cryptocurrencies and the far more mundane prospect of reality. Alternatively, there may be an underlying equilibrium in which Bitcoin (perhaps excluding various other cryptocurrencies) is used primarily for black market transactions and tax evasion. However, even if such an equilibrium exists, it is difficult to develop from the status quo to that step. Once the dream of the blockchain future is shattered, disappointment can bring the whole system down.

These are my reasons for being a cryptocurrency skeptic. Is there any chance I could be wrong? Quite possibly. But if you want to prove me wrong, please answer the following question: What problem is cryptocurrency trying to solve? Please don't just silence doubters with a bunch of technical babble and libertarian slogans.

This article is derived from the sharing of Mr. Paul Krugman, and is compiled by "Qiyuan Society". The copyright of the article and pictures belongs to the owner.


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