A total collapse in bitcoin is a real possibility, says Nobel-Prize economist Krugman

Bitcoin evangelists tout digital currencies as a revolution, a technology that can reshape the global monetary system. Pioneered by a lack of faith in traditional banking, cryptocurrencies will become the new global currency, gold for a millennial age, some devotees argue.

However, Nobel Prize-winning economist Paul Krugman said this feverish enthusiasm is ill-informed and a collapse of Bitcoin

BTCUSD, -4.94%

is a real possibility, arguing cryptocurrencies aren’t solving any problems with the current monetary system, which possesses seamless and low transaction costs.

‘Instead of money created by the click of a mouse, we have money that must be mined—created through resource-intensive computations’

Paul Krugman, American economist

Read: Winklevoss: If you can’t see Bitcoin at $320,000, you just lack imagination

According to data from blockchain.com, the Bitcoin network can currently process between three and four transactions per second, compared to Visa and Mastercard that can handle more than 5,000 per second.

In his op-ed column for the New York Times on Tuesday, Krugman says Bitcoin lacks a backstop, or a tether. Fiat currencies, no matter how large the denomination, are a generally accepted means of payment to someone, and gold, has use as jewelry and filling teeth.

On the other hand, Bitcoin usage for real-world purposes is low, and when it is, it is often for nefarious activity. A January 2018 study concluded that around $72 billion of illegal activity a year involves Bitcoin, and in June, lawmakers said there had been an increase in criminal activity using virtual currencies.

‘Cryptocurrencies, by contrast, have no backstop, no tether to reality. Their value depends entirely on self-fulfilling expectations—which means that total collapse is a real possibility’

Paul Krugman, Nobel Laureate in economy

A total collapse or not, Bitcoin has had a lively 2018. At one stage the No.1 digital currency had lost nearly half its value, then, in the span of about six weeks. However, it has staged a modest turnaround, climbing by as much as 40% in July thus far.

Whether it reaches $1 million or zero, critics like Krugman will always pose the question: “But if you want to argue that I’m wrong, please answer the question, what problem does cryptocurrency solve?”

Read: Opinion: Bitcoin is the mother of all bubbles, Roubini says

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