I believe the thinking behind this is that if a nation state designates a currency as their official currency, that will guarantee a baseline demand for the currency: citizens will need to either hold or obtain the currency to pay their taxes. With Bitcoin, no such baseline demand is guaranteed: if the "faith" in Bitcoin drops in the network, and people stop accepting it as payment, there's no stopping the decline in value.
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.
> 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.
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.