In his latest column for the New York Times, award-winning economist and best-selling author Paul Krugman dismisses the booming internet currency bitcoin as essentially worthless, though it's being treated as if it were the modern equivalent of gold. Writing about three "money pits," Krugman names an Iceland bitcoin mine (which is a bunch of computers performing complex algorithms in order to secure bitcoins) as an example of the anti-modern sentiment coursing through society. "[A] lot of real resources are being used to create virtual objects with no clear use," Krugman writes.
Ultimately, Krugman concludes, bitcoin is just one more example of how we humans are "digging our way back to the 17th century."
Bitcoin is a digital currency that has value because ... well, it’s hard to say exactly why, but for the time being at least people are willing to buy it because they believe other people will be willing to buy it. It is, by design, a kind of virtual gold. And like gold, it can be mined: you can create new bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers.
Hence the location in Iceland, which has cheap electricity from hydropower and an abundance of cold air to cool those furiously churning machines. Even so, a lot of real resources are being used to create virtual objects with no clear use.
Talk to gold bugs and they’ll tell you that paper money comes from governments, which can’t be trusted not to debase their currencies. The odd thing, however, is that for all the talk of currency debasement, such debasement is getting very hard to find. It’s not just that after years of dire warnings about runaway inflation, inflation in advanced countries is clearly too low, not too high. Even if you take a global perspective, episodes of really high inflation have become rare. Still, hyperinflation hype springs eternal.
Bitcoin seems to derive its appeal from more or less the same sources, plus the added sense that it’s high-tech and algorithmic, so it must be the wave of the future.