Here’s what Paul Krugman doesn’t get about Bitcoin

krugmanbitcoin23 Dec 2013 / Washington Post – Paul Krugman doesn’t like Bitcoin. He’s taken several swipes at the technology on his blog over the last couple of years. And yesterday he devoted a full column to denigrating the cryptocurrency. He argues that Bitcoin mining, the process where new bitcoins are created by repetitive mathematical calculations, is socially wasteful. And, he argues, that’s reflective of the pointlessness of Bitcoin more generally.

There’s just one problem: Mining isn’t just a process by which new bitcoins are created. Those newly created bitcoins are a clever mechanism for rewarding miners for participating in the mining process. The point of the mining process is to process Bitcoin transactions. Without it, the Bitcoin network wouldn’t function at all. By neglecting to mention this fact, Krugman misleads readers more than he informs them.

Unfortunately, that’s par for the course in public discussions of Bitcoin. Bitcoin has a dual character as a currency and a payment network. The latter is what makes Bitcoin useful and potentially important. Yet the former is what has gotten all the media attention.

That’s partly because gyrations in Bitcoin’s value has generated most of the press. It’s easy to report that the value of the currency has risen by a factor of 10 in a matter of weeks. It’s much harder to explain how the payment network works and why it might be useful.

But Bitcoin advocates themselves also deserve much of the blame for the press’s myopic focus on Bitcoin’s character as a currency. Bitcoin fans overlap heavily with critics of the Federal Reserve who favor tighter monetary policy. They love the fact that the supply of bitcoins are permanently capped at 21 million, and they’ve touted it as an alternative to the inflationary policies of central banks…… Read more

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