Economist Paul Krugman at FIDES 2023 in Rio de Janeiro, Brazil on September 25, 2023

President Donald Trump's views on digital currencies have changed dramatically since his first administration. In the past, Trump remarked that Bitcoin "seemed like a scam" and was "based on thin air."

During his second term, however, Trump is all in for cryptocurrencies.

Liberal economist Paul Krugman, in an October 14 column for his Substack page, is highly critical of Trump's crypto activities — arguing that they are a house of cards.

"Stocks fell sharply Friday, (October 10)," Krugman explains, "but the really striking action came in crypto, where Bitcoin fell 20 percent and smaller, less liquid tokens fell even more…. Also, it just so happens that Trump himself holds an estimated $870 million worth of Bitcoin, so he suffered large personal financial losses from the crypto crash. This was the largest one-day crash crypto has experienced so far."

Krugman was skeptical about cryptocurrencies to begin with, but an "intensified trade war," according to the former New York Times columnist, will put them in an even more vulnerable position.

"These days," Krugman warns, "crypto derives its value largely from the support of politicians and government officials — in particular, officials who can be bribed. As a result, at this point, crypto is largely a Trump trade. And crypto fell because the backlash against the potential trade war threatened to weaken Trump politically."

Krugman continues, "A brief history of crypto: When Bitcoin, the original crypto asset, was introduced, enthusiasts predicted that it would displace conventional fiat money, that is, currency issued by governments. The blockchain, they claimed, would make transactions using cryptocurrency easier and cheaper than transactions using dollars. And cryptocurrencies would be safe from the ravages of the printing press: governments couldn't debase your money through inflation. That was more than 15 years ago, and crypto has completely failed to deliver on those promises."

The economist observes that although, "almost nobody uses cryptocurrency as a means of payment," the "public holds roughly $4 trillion in crypto assets."

"Why? Largely as a pure speculative investment," Krugman argues. "In addition, however, crypto has found real-world use as a convenient tool for criminal activity and money-laundering…. So why did Trump's threat of all-out trade war with China cause crypto prices to plunge? Not because the economic damage from such a war would reduce the use of crypto, because crypto basically doesn't have any legitimate uses. But an intensified trade war, especially a trade war America would almost surely lose, would drive Trump's public support into an even deeper hole."

Paul Krugman's full Substack column is available at this link.