Bitcoin - "A Currency Without an Army*

April 15, 2013
Posted by Jay Livingston

I must be missing something in Paul Krugman’s dismissal of bitcoins (today’s NYT column here).  Krugman says that unlike gold and paper money, the value of bitcoins does not rest on some intrinsic usefulness or upon the power of a state. 

Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment.

Then a few paragraphs later, he approvingly quotes Paul Samuelson saying that money is a “social contrivance.”  What makes paper, silver, or gold worth something is “the expectation that other people would accept them as payment.”

So bitcoin and metals and paper all depend on socially constructed definitions.  But then how is bitcoin different from more traditional kinds of money? 

Or does Krugman mean that because the free-floating bitcoin is untethered to precious metals or governments, those definitions are less stable and that the bitcoin’s value is more susceptible to the mood swings of the public? (FWIW, the price of gold has fallen 13% since Thursday.)

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*The subject line of this post is a variant of what has often been said of Yiddish – a language without an army