Nobel Prize Winning Economist’s Take on Bitcoin as a Replacement of Gold
Paul Robin Krugman, an American economist, has cited some severe concerns regarding Bitcoin. He has received the Nobel Memorial Prize in Economic Sciences for his work on international trade theory.
As an academic, he has always been intrigued by Bitcoin. The doubts expressed by Krugman are concerning Bitcoin’s utility as ‘money’ not as a potent replacement of Gold. He has criticized Bitcoin constructively a couple of times.
In a New York Times column Bubble, Bubble, fraud, and Trouble, he addresses the issue of tethering and the existing friction associated with Bitcoin.
Earlier in 2018, he accepted the fact that the price of bitcoin could be 0 $. He has also stated that Bitcoin would turn the monetary system clock 300-years in the past.
Although $GOLD has always been a medium of exchange, it is only recently that GOLD rose to such heights. The chart for gold has been attached for reference. In 1950 the price of 10 gm gold of 28$. In 1980 it was only $180, the US to INR exchange rate was also lower during those times. Bitcoin will complete ten years in 2019.
Biggest Roadblocks: Friction and Tethering (Economics)
According to him, Bitcoin lacks in two aspects friction (competition from other digital avenues) and tethering.
Friction because Bitcoin transactions are neither cheaper nor efficient than the current system. The associated mining and transaction fees are levied on the customer.
Tethering refers to use-cases, there are a very limited number of use cases for Bitcoins, companies that had started to accept Bitcoin as a mode of payment have taken to altcoins or alternative mode because of the scalability issue. Hence, Bitcoin comes down to a store of value for future speculation.
However, there is one important aspect of Bitcoin that cannot be ignored. The unified ledger with a limited supply of coins. In a recent study, it was found that the cost of gold processing is $1,123 per ounce. The cost is inclusive of mining, transportation, and processing. Bitcoin mining and transactions are far more advanced than Gold.
The electricity cost associated with Bitcoin mining is approx $312 for an equivalent amount of Bitcoin. Hence, by only paying the transaction cost the coins can be transferred to anywhere in the world.
The world has made a lot of progress in terms of efficient electricity production and transmission. Countries like Iceland, Sweden and Germany are completely relying on renewable energy for their electrical energy.
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Later in August, Mr. Krugman humbly claimed at a blockchain conference that ‘Bitcoin is the only one he understands halfway’ also accepting that “Gold is dead and Bitcoin has more utility than Gold.”
The current financial system has evolved over a span of 300 years. Adopting Bitcoin could prove detrimental to fiat currencies; as the reduced demand would destabilize them. Hence, Bitcoin would mostly have to replace Gold or USD as the global benchmark for store and transfer of value.