Paul Krugman's 10-Year History of Being Wrong About Bitcoin

Why is it so hard for him to just admit he was wrong?


Nobel Prize–winning economist Paul Krugman is one of the most influential individuals in his field, which means people listen when he talks about bitcoin. Unfortunately, most of what he has had to say about the cryptocurrency over the years has been misguided, uninformed, or just plain wrong.

It's sometimes difficult for the average person to understand what economists and politicians are talking about when they debate policy, but the value proposition of bitcoin can be easily understood by anyone through its NgU technology (NgU is an abbreviation of Number Go Up and is a meme based around bitcoin's deflationary monetary policy). While Krugman has stated that his 1998 prediction that "the Internet's impact on the economy [would be] no greater than the fax machine's" was supposed to be a fun and provocative thought experiment, it may be much more difficult to explain away his many confused and oftentimes arrogant takes on bitcoin over the past ten years.

Krugman first wrote about bitcoin in The New York Times back in September 2011. In this post, Krugman mainly compared bitcoin to gold in a rather negative light. "To the extent that the [bitcoin] experiment tells us anything about monetary regimes," he wrote, "it reinforces the case against anything like a new gold standard—because it shows just how vulnerable such a standard would be to money-hoarding, deflation, and depression."

In other words, Krugman made a moral case against the adoption of bitcoin as money. In Krugman's telling, a bitcoin standard would make the world much worse off because bitcoin has a fixed supply and central bankers would not be able to increase the money supply to stimulate the economy during economic recessions.

Even if you accept the idea that the world would be much better off under a more inflationary monetary system where central bankers have the power to stabilize the economy (I don't), individuals tend to respond to incentives related to the betterment of their own lives, not necessarily the greater good of society. If holding bitcoin theoretically makes the world as a whole a bit worse off but acts as a better form of savings for an individual, is the average person going to choose to put his savings in fiat currencies that lose value over time out of the kindness of his own heart, or will he choose to just hold bitcoin? It's also important to remember that the entire point of bitcoin is to persist in the face of governments that try to force their citizens into only using the government-approved form of money.

In April 2013, Krugman invoked Adam Smith to make another moral case against bitcoin, this time claiming that the use of gold, silver, or bitcoin as money was a waste of resources. "Smith actually wrote eloquently about the fundamental foolishness of relying on gold and silver currency, which— as he pointed out—serve only a symbolic function, yet absorbed real resources in their production, and why it would be smart to replace them with paper currency," Krugman wrote. "And now here we are in a world of high information technology—and people think it's smart, nay cutting-edge, to create a sort of virtual currency whose creation requires wasting real resources in a way Adam Smith considered foolish and outmoded in 1776."

This was an early version of the energy and climate change–based arguments being made against bitcoin today. This is a faulty argument, however, because it assumes there is no difference between bitcoin and traditional bank accounts. The entire point of bitcoin as an asset is that, unlike Venmo or traditional bank accounts, users can retain full control over their digital money and are not simply holding IOUs. Claiming that this is a waste of resources is a subjective argument. It is no different from saying automobiles or YouTube are wasteful due to the amount of energy that is used to power them. People use bitcoin because it provides value for them, so the resources expended to make bitcoin possible aren't a waste.

Later in 2013, Krugman simply declared that "Bitcoin Is Evil" because, as science-fiction writer Charlie Stross put it, "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." That said, Krugman did at least go into the argument that bitcoin lacked any sort of fundamental price floor and contrasted that characterization with gold's use in jewelry and the U.S. dollar's use for paying taxes.

Krugman would go on to use bitcoin's lack of a price floor mechanism as his key argument against the cryptocurrency for many years to come. For example, as he argued in a 2015 interview, bitcoin "is a technically sweet solution to a problem, but it's not clear that problem is one that has much economic relevance. It's certainly not a reason to hold that currency.…If you're looking for the idea that a currency doesn't really have to be something physical, it can be something that is virtual, that's the system we already have."

But this misses the point of bitcoin, which is actually nothing like the monetary system we currently have. For one, bitcoin's long-term monetary policy was "set in stone" when the network launched in January 2009, and it is not subject to changes by a trusted third party such as a central bank. Additionally, bitcoin solves the problem of centralization that is found in the digital equivalents of both the gold and fiat-based currency systems. Bitcoin users are able to retain full ownership over their coins with no counterparty risk; a bitcoin is not an IOU. Further, due to the censorship-resistant nature of the bitcoin network, a new financial system can be built on top of the bitcoin blockchain through the use of smart contracts to enable a greater degree of user privacy for a wide variety of activities, operating in a manner that contrasts the current surveillance state.

In addition to calling bitcoin evil, Krugman has also dismissed it as "libertarian derp" on multiple occasions. He even took pleasure in the crashing bitcoin price in early 2018. Notably, some of Krugman's negative comments toward bitcoin popped up around the absolute bottoms of two consecutive cryptocurrency bear markets. In other words, it may be a good time to buy bitcoin whenever you see Krugman taking a victory lap.

Unfortunately for Krugman, the "libertarian derp" cryptocurrency hit a new all-time high once again in 2021, 10 years after his initial criticisms of the crypto asset were first published in The New York Times. Instead of acknowledging the reasons for bitcoin's staying power, however, it appears that Krugman will continue to claim there is no utility for this technology and keep dismissing bitcoin as a cult that can survive indefinitely.

Fortunately for bitcoin, it can rebut Krugman by simply continuing to exist and thrive in the marketplace.