bitcoins are the ultimate fiat currency, with a value conjured out of thin air, paper currencies have value because they’re backed by the power of the state
Dollars and yuan are fiat currency. What difference does it make that bitcoin holders aren't back by a state? Is anything going to change if countries convert their reserves to bitcoin? How many bitcoins does the US own?
This seems like an argument that will evaporate given enough time.
I'm still not sure whether to buy this argument, given that history has more than a few examples of state currencies crashing like there was no bottom, too.
State currencies usually crash when the State isn't doing to well, (not infrequently as a result of losing a major war.)
Which is actually consistent with Krugman's point.
Ultimately, value of any good used as currency (and, really, pretty much any good at all) comes from two sources: (1) what is it good for without trading it (use-value), and (2) what do I expect I will be able to trade it to others for in the future (trade value). Pure currencies, like common fiat currencies and bitcoin, tend to have no (or virtually no) use value -- sure, you can use pennies to weight something down, or burn banknotes for heat, but that's most irrelevant. Their value is all trade value. Having a government that you expect to have to deal with that expects payment in dollars (or pounds, or what-have-you) for fines, fees, taxes, etc., and which denominates damage awards in civil cases in the same currency, and makes tendering that currency a legal attempt to pay a debt which is given weight in court (what "legal tender" means), provides a baseline demand. Of course, when that State becomes weaker, the support its backing gives currency becomes weaker.
Let me know when some country starts to accept bitcoins for tax purposes.
If history is any guide, they'll want the ability to dictate Cyprus's internal policies. That's usually the international response to default, rather than demands for gold.
Concrete power, rather than weak symbolic representation of power.