Bitcoin proves once again the underlying problem with gold: Krugman

Bitcoin, a new and private form of currency exchange, got some attention from Paul Krugman in a column who drew parallels between it and gold, finding that both markets are susceptible to underlying problems of “money-hoarding, deflation, and depression.”

BitCoin, which is well-examined in an article by James Surkowieki, is an alternative form of currency exchange.

“Bitcoin is a peer-to-peer digital currency created in 2009 by Satoshi Nakamoto. Peer-to-peer means that no central authority issues new money or manages transactions—these tasks are carried out collectively by the network. It is also the name of the open source software designed in order to use this currency,” according to the organization’s website.

The advantage of Bitcoin is that  people avoid bank fees and can transact anonymously. It also provides an alternative to government-backed currency.

Krugman argues that the true utility of any medium of any currency exchanges is based on its ability to allow for transactions to occur, which in turn helps grow the economy. However, Surowiecki finds that people are more interested in using Bitcoins to get rich.

True believers in Bitcoin’s usefulness prefer to deny that speculation is driving the action in bitcoins. But the evidence suggests otherwise. The value of the currency has been tremendously volatile over the past year. A bitcoin has been worth as little as a few pennies and as much as $33, and after seeming to stabilize at around $14 over the summer, the bitcoin’s value tumbled by almost 50 percent in a matter of days in August.

Krugman sums up.

“So to the extent that the experiment tells us anything about monetary regimes, 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.”

Photo from Prolineserver