The Economics Of Bitcoin – Challenging Mises’ Regression Theorem

There has been a lot of outcry from the libertarian gold bug community over the Bitcoin monetary system, with some commentators even going so far as to produce feature length videos decrying the monetary system.  David Kramer writes on Lew

What was Bitcoin’s prior material use/value? Zero. It is just bits in a computer. And what’s with the “fixed” amount of Bitcoins? Who/what determined the “proper” amount of 21 million for Bitcoins to top out at? A computer program? (Next we’ll find out what the proper minimum wage should be.) Only the free market can voluntarily determine how much of a real medium of exchange is needed in the marketplace over time. While the idea of  attempting to get rid of the Bankster monopoly on creating money out of thin air is commendable, Bitcoin is also money created out of thin air. Bitcoin is just substituting one bogus medium of exchange for another.

UPDATE: I’ve been getting a lot of reader response trying to “explain” to me the economic virtues of Bitcoin. Some responders have even mistakenly used Austrian economics to rationalize their views. I would suggest that before you write to me about the Austrian economics view of a medium of exchange, you should read the two books by one of the two giants of Austrian economics, Murray Rothbard, on what a medium of exchange is.

Doug Casey also chimed in with the following commentary:

L: Do they have value in themselves?

Doug: There’s the rub; I don’t see that they do. Bitcoins are just an electronic abstraction. They can’t be used for anything else, nor are they made of something that can be used for anything else. They are like one of those knots in a string that disappear if you pull hard enough on the ends of the string. They are not backed by anything at all. Like government fiat currencies, they are a con game, functioning only as long as people have confidence in them, regardless of whether that confidence is well placed or not.

The arguments made by Casey, Kramer, and Nielsio are typical of the gold bug community, and I present them to you so that you may judge for yourself which set of logical arguments is superior.  Judging by the ratings of the Nielsio videos, I think the public agrees with my position that not only are Bitcoins a legitimate money, but they are in fact superior to gold as a medium of exchange.

There is a lot of disdain for Bitcoins by the Austrian gold bugs for a few reasons.  The primary reason is that, well,  they are all holding gold!  It stands to reason that they don’t like potential threats to their investment holdings.  Another primary reason, which all of the above authors allude to, is that Bitcoins challenge the Misesian Regression Theorem of Money, which states:

…because of Menger’s explanation of the origin of money. We can trace the purchasing power of money back through time, until we reach the point at which people first emerged from a state of barter. And at that point, the purchasing power of the money commodity can be explained in just the same way that the exchange value of any commodity is explained. People valued gold for its own sake before it became a money, and thus a satisfactory theory of the current market value of gold must trace back its development until the point when gold was not a medium of exchange.

I’m going to come right out and say it – Mises was wrong.

*the crowd wails* Boo!  Hiss!  Heretic!  

I’ll explain why I think the whole basis for this approach to the origin of money is wrong in a moment, but first I will present you with an argument that attempts to demonstrate why Bitcoins do not violate Mises’ Regression Theorem.  Therefore, even if you don’t agree with my theory, you can clearly see that powerful arguments exist within the Misesian framework which demonstrates why the gold bugs are wrong in their interpretation of the Regression Theorem.  In this absolutely brilliant analysis on the Bitcoin forums, XC writes:

The Money Regression and Emergence of Money from the Barter Economy
The entire purpose of the regression theorem was to help explain an apparent paradox of money: how does money have value as a medium of exchange if it is valued because it serves as a medium of exchange?  Menger and Mises helped break this apparent circularity by explaining the essential time component missing from the phrasing of the paradox.

As Rothbard explains in Man, Economy, and State (p 270),

“…a money price at the end of day X is determined by the marginal utilities of money and the good as they existed at the beginning of day X. But the marginal utility of money is based, as we have seen above, on a previously existing array of money prices. Money is demanded and considered useful because of its already existing money prices. Therefore, the price of a good on day X is determined by the marginal utility of the good on day X and the marginal utility of money on day X, which last in turn depends on the prices of goods on day X – 1. The economic analysis of money prices is therefore not circular. If prices today depend on the marginal utility of money today, the latter is dependent on money prices yesterday.” [all emphasis added]

Rothbard then goes on to explain that in order for money to emerge from a barter economy, it must have a preexisting commodity value.  This commodity value arises from barter demand for the potential money in direct consumption (i.e. ornamentation).  This value seeds future estimations of the value of the money as a medium of exchange.  The natural market emergence of money is thus fully explained.

The Monetary Economy
However, once an economy has been monetized and a memory of price ratios for goods and services has been established, a money may lose its direct commodity value and still be used as a money (medium of indirect exchange).  Rothbard explains (p 275):

“On the other hand, it does not follow from this analysis that if an extant money were to lose its direct uses, it could no longer be used as money. Thus, if gold, after being established as money, were suddenly to lose its value in ornaments or industrial uses, it would not necessarily lose its character as a money. Once a medium of exchange has been established as a money, money prices continue to be set. If on day X gold loses its direct uses, there will still be previously existing money prices that had been established on day X – 1, and these prices form the basis for the marginal utility of gold on day X. Similarly, the money prices thereby determined on day X form the basis for the marginal utility of money on day X + 1. From X on, gold could be demanded for its exchange value alone, and not at all for its direct use. Therefore, while it is absolutely necessary that a money originate as a commodity with direct uses, it is not absolutely necessary that the direct uses continue after the money has been established.”

This explains the history of fiat currencies.  They originally started off as simple names for weights of commodity money (silver) that developed out of the pre-monetary barter economy.  Despite later losing their ties to direct commodity value through state interference, paper currency retained status as money because of memory of previous money prices.  This factor is so strong that the relationship between gold and the USD, for example, is somewhat inverted.  Gold no longer circulates as a common medium of exchange.   Prices are set in USD, not in gold.  Most individuals wishing to trade in gold do so based on their knowledge of USD/gold price ratios.  (“Hey, let me buy that $100 couch from you in gold?”  “Ok, USD/gold is $1000/oz. Give me 1/10oz of gold.”)  Legal tender laws, state taxation, and the entire financial regulatory environment maintain this inertia of USD prices and make it challenging to return to gold money directly, despite the destructive inflationary nature of fiat currencies.

The Emergence of the Bitcoin Economy
The very first businesses in the Bitcoin economy were exchangers (NewLibertyStandard, BitcoinMarket, BitcoinExchange,….).  This is not an accident, but flows from the analysis above.  In order for Bitcoins to serve as a medium of exchange without commodity value for uses besides indirect exchange, there must be a translated knowledge of money prices.  Market exchangers fill this gap and give Bitcoin users access to this knowledge.  Bitcoins may therefore currently serve as a money intermediary for paypal dollars\pecunix\euros.  But why is there demand for Bitcoin over USD??  This is a subjective valuation arising from properties such as anonymity, decentralized system of clearance, cryptographic trust, predetermined and defined rate of growth, built in deflation, divisibility, low transaction fees, etc…. inherent to the Bitcoin system.

The essential point is that once exchange can occur between a money (USD) and Bitcoins, providers of goods have a means by which to value Bitcoins as a potential medium of exchange.  The money regression is satisfied, because taken back far enough we reach traditional commodity money: BITCOINS -> USD -> MONETIZED GOLD & SILVER [start monetary economy] -> [end barter economy] COMMODITY GOLD & SILVER.

Of course, if a major meltdown occurred and knowledge of all price ratios was wiped out, Bitcoin probably would NOT directly emerge as a money (assuming Bitcoins have limited value outside of exchange).  Fiat currencies with zero direct barter value certainly would not.  Commodities such as gold and silver that have widely recognized direct value in barter would likely emerge first.  The economy would then be monetized with price ratios in gold and silver.  Bitcoins then, being valued for intrinsic properties amenable to exchange, might then become prevalent in trade.  Initially, creators of value would continue to make their price value ratios in terms of the true money (gold oz/BTC ratio), but with time Bitcoin prices (BTC) can emerge (see as example).  We are in this initial phase now.

Therefore, so long as exchange of BTC and USD/Euros/etc… occurs, knowledge of existing price ratios can be utilized in the Bitcoin economy.  In time as Bitcoins become increasingly marketable, these fiat<->BTC price ratios will seed direct BTC price ratios.  The Bitcoin Economy thus emerges.  The Misean regression theorem is satisfied.

 Now, to challenge the assertions of Mises, Rothbard, and XC, I will start by presenting a question:

If there were no money or money prices in existence today, could Bitcoins arise as a currency without a pre-existing dollar price framework?  

According to XC’s interpretation, this should not be possible.  Nor should it be possible under Rothbard or Mises’ interpretation.  However, I don’t see a conflict with Menger’s theorem about money arising from the saleability of a good.  If you carefully consider Menger’s proposal, you’ll find that a good does not have to have a pre-existing use in order to arise as a money.  The good simply has to be saleable.  Consider that a good could have absolutely no use except to act as a money.

Menger attempts to demonstrate that money arises from the market selecting the most saleable good as the preferred medium to facilitate indirect exchange.

…astute traders will begin to engage in indirect exchange. For example, the owner of a telescope who desires fish does not need to wait until he finds a fisherman who wants to look at the stars. Instead, the owner of the telescope can sell it to any person who wants to stargaze, so long as the goods offered for it would be more likely to tempt fishermen than the telescope.

Over time, Menger argued, the most saleable goods were desired by more and more traders because of this advantage. But as more people accepted these goods in exchange, the more saleable they became. Eventually, certain goods outstripped all others in this respect, and became universally accepted in exchange by the sellers of all other goods. At this point, money had emerged on the market.

A direct quotation of Menger on this subject:

Under such circumstances it became the leading idea in the minds of the more intelligent bargainers,and then, as the situation came to be more generally understood, in the mind of every one, that the stock of goods destined to be exchanged for other goods must in the first instance be laid out in precious metals, or must be converted into them, or had already supplied his wants in that direction. But in and by this function, the precious metals are already constituted generally current media of exchange. In other words, they hereby function as commodities for which every one seeks to exchange his market-goods, not, as a rule, in order to consumption but entirely because of their special saleableness, in the intention of exchanging them subsequently for other goods directly profitable to him. No accident, nor the consequence of state compulsion, nor voluntary convention of traders effected this. It was the just apprehending of their individual self-interest which brought it to pass, that all the more economically advanced nations accepted the precious metals as money as soon as a sufficient supply of them had been collected and introduced into commerce. The advance from less to more costly money-stuffs depends upon analogous causes.

This development was materially helped forward by the ratio of exchange between the precious metals and other commodities undergoing smaller fluctuations, more or less, than that existing between most other goods, — a stability which is due to the peculiar circumstances attending the production, consumption, and exchange of the precious metals, and is thus connected with the so-called intrinsic grounds determining their exchange value. It constitutes yet another reason why each man, in the first instance (i.e. till he invests in goods directly useful to him), should lay in his available exchange-stock in precious metals, or convert metals, and the consequent facility with which they can serve as res fungibiles in relations of obligation, have led to forms of contract by which traffic has been rendered more easy; this too has materially promoted the saleableness of the precious metals, and thereby their adoption as money. Finally the precious metals, in consequence of the peculiarity of their colour, their ring, and partly also their specific gravity, are with some practice not difficult to recognise, and through their taking a durable stamp can be easily controlled as to quality and weight; this too has materially contributed to raise their saleableness and to forward the adoption and diffusion of them as money.

Menger doesn’t delve to deeply into why the metals should be so saleable, but he does touch on it by making various points about their fungibility, divisibility, scarcity, and recognizability.  And here in lies the heart of my argument.

As Menger points out, people can perceive the benefits that arise from having a money product to facilitate trade and to act as a store of wealth.  In Murphy’s article he makes the argument that “there’s the unlikelihood that someone could have invented the idea of money without ever experiencing it”  – and I say this the same as saying “there’s the unlikelihood that someone could have invented phones without ever experiencing phone service”.

The market has a need for a trade intermediary and a store of wealth.  This need can easily be preceived by anyone who has ever tried to barter a product.   Of course the people will recognize that a form of money is important from the time the very first trading community of humans arose.

Saying that people couldn’t figure out money was necessary without ever experiencing it is ridiculous in my book.  Archaeology suggests that people were using trade intermediaries as far back into human history as we can possibly see.  Money arose across continents between people who had no interactions with each other independently across all of human civilization.

So, once we have a perceived need in a free market for a trade facilitator and a store of wealth, what should we expect the market to do?  We can expect it to try and find a solution to this problem!  Mises attempts to argue that the market solved this problem because people valued gold for its own sake before it became a money, and it was this value they had for gold in ornamental use that allowed it to become a money.

This is patently wrong.  Consider that as soon as the market perceives a need for money, it wouldn’t matter if gold had a pre-existing value in ornamental use or not, because it would suddenly have value as a trade intermediary as soon as the need for a trade intermediary entered the public consciousness.

The very act of humanity perceiving a need for a trade intermediary would imbue gold with value as a trade intermediary because of the specific money properties that gold has.  Even if gold was brutally ugly to look at and made for poor jewelry, the money properties of gold would give it market value as a trade facilitator.

Consider this example using silicon microchips.  If I was to go back in time to ancient Egypt and carried with me a pocket full of extremely expensive microchips, do you think I could trade them for some wheat?  Of course the answer would be no, because absolutely no one could perceive any possible use for those chips.  They would be worthless baubles to the Egyptians.  It is only after the perceived use for them becomes apparent that they would suddenly have value.

When people first perceived that a form of money was a valuable thing to have, the next thought that would have gone through their heads is – what makes a good money? 

Should the money be cocoa beans?  wheat?  gold? – what properties should a good have that make it a quality money?  People used all of those things as a “money” at some point in history.  Consider that the process of selecting and determining the best money does not require that an item have a pre-existing use!  Because the need for a money exists, any item that can meet that need will be valued for its own sake as a money product.  It doesn’t matter if gold is ugly or entirely useless for any other purpose because those other purposes have nothing to do with fulfilling the need for a money.

The properties that make for a quality money are easily recognizable by markets.  The qualities that make for a good money are fungibility, scarcity, divisibility, and recognizability.  Because gold is one of the most fungible, divisible, scarce, and recognizable metals that exists within our physical universe, it came to be selected as the best money.

So now we must get back to how prices arise based on the market selected money product.

Consider my original question; if there were no money or money prices in existence today, could Bitcoins arise as a currency without a pre-existing dollar price framework?  I would argue that prices in Bitcoins could be readily established by the markets simply by introducing Bitcoins to this state of barter.

Given our technology today, people could easily establish a few facts that are entirely independent of prices:

1.  The number of Bitcoins in existence

2.  The amount of work necessary to produce a Bitcoin

3.  The rate Bitcoins come into existence

4.  The number of Bitcoins that will ever come into existence

5.  The money properties of Bitcoin (ie. its fungibility, divisibility, scarcity, and recognizability)

From which people can automatically make generalized assumptions about the value each specific coin would have.

Merchants would see the value of Bitcoins as a money and agree to accept them in exchange for goods and services because of the inherent properties they have.  The merchants would be speculating on the value of the coins at first until prices were established, but eventually if enough people recognize the inherent value of the coins, prices will be established for all products and services in terms of those coins.

Consider if I walk into a cafe and I inform the owner as to the existence of Bitcoins and their properties.  So he agrees to sell me a cup of coffee for a Bitcoin.  As soon as he makes that agreement, we now have pricing in terms of coffee established.  Why would the owner agree to such a trade?  Because he sees the inherent value of the coins as trade intermediaries.  He can evaluate the fungibility, scarcity, divisibility, and recognizability of the coins instantly and establish a value of each coin for himself without having to reference any pre-existing prices for any other products.  To the cafe owner, he sees the value of the Bitcoin as being more than the cup of coffee, so he is willing to trade the coffee for the coin.  It might be that he wants two coins or ten coins for a cup of coffee, but the number of coins the owner agrees to doesn’t matter in terms of negotiating a price.  All that matters is that the cafe owner sees potential value in the coins as a money.

In the same way a painting may have tremendous value to an art aficionado, while having almost no value to anyone else, the aficionado makes the determination about how much value the painting has based on his own internal value scale.  He sees value in the painting for its own inherent properties.  He doesn’t have to reference the prices of any pre-existing paintings to make a valuation of a particular painting for himself.

If enough people agree to accept Bitcoins for various goods and services simply because they see the inherent value of the coins as trade intermediaries, a pricing system in terms of the coins will rapidly establish itself.

To some, like the Bitcoin detractors I noted at the top of the page, the coins would have no value at all.  While to many others, the coins would have a tremendous value.  It doesn’t matter if some people reject them as having value in order for a pricing system to establish itself.  It only matters that some people see the value in them in order for a pricing system to establish itself.

From this point the market will weed out which goods act as the best trade intermediaries.  Those goods which are the most  fungible, divisible, appropriately scarce, and recognizable, will become the most broadly accepted forms of money.  Like all market competition, there may exist pricing across a market in several goods at once.  I don’t see any reason why people would not or could not price their items in terms of gold and Bitcoins simultaneously.

So to sum up my arguments:

Pre-existing use is not necessary for a good to become a money.  It is not necessary because the markets are able to recognize the value of a good in terms of its use as a money based on the good’s properties of  fungibility, divisibility, scarcity, and recognizability.  Once the market recognizes the value of a potential money product for its own sake, people will be willing to trade goods and services for it.

Prices in terms of the new money product can be established without having to reference pre-existing use values, in the same way prices for fine works of art can be established without anyone having to reference pre-existing values for other works of art.  The value calculations are internal to each individual who is willing to accept the currency based on the properties of the currency being offered for trade.

I can demonstrate that a free market money exists which has absolutely no other use other than to act as a money.

The market has deemed this good to have value in-and-of-itself.

The market has determined prices for this good without the good having to be valued in some other capacity, other than to be a money.

There will come a time in the future when textbooks reference the “Suede Monetary Utility Theorem” .

Probably after I’m dead, since that seems to be the way of things.

Read Prof. George Selgin’s response to this article here.

Related articles:

The Economics Of Bitcoin – Doug Casey Gets It Wrong

How To Use Bitcoin – The Most Important Creation In The History Of Man

Libertarian Goldbugs Hating On Bitcoin – Free Market Money

The Economics Of Bitcoin – Why Mainstream Economists Lie About Deflation

The Economics Of Bitcoin – How Bitcoins Act As Money

Against The Gold Standard

The Ridiculousness Of Demanding Government Return To A Gold Standard

The Economics Of Bitcoin – Resource Allocation And Interest Rate Distortion

  • Bitanarchy

    Bitcoin actually does have a preexisting use before the use as money. Namely as a tool against spam. See hashcash in the following discussion:

    • If it does, its pretty much irrelevant to my arguments.   But thanks for the info.

  • Pingback: The Economics Of Bitcoin – Challenging Mises’ Regression Theorem | Bitcoin News()

  • Hello Michael,

    This finding is important enough to review austrian monetary theories.   Carlos Bondone did notice this flaw even before Bitcoins came into existence and he developed a new monetary theory based on Menger´s principles:

    • Yeah, when he states “Purchasing power is a consequence of utility, not the opposite.” – That pretty much sums up my argument in a nutshell.

  • zrb

    the proof is in the pudding.  Bitcoin is being used as money, so it is money.  It didn’t need “prior use” to come into use as money.  People adopted it for the novelty, and now that it has exchange value, it doesn’t need the prior use bootstrap.

    • Obviously I agree.

      The arguments against Bitcoin not being a legitimate money are clearly wrong since, as you note, it is being used as a free market money at this very moment.

      It was able to establish pricing for itself even though it has no other use other than to act as a money.

      • Freedom

        Bitcoin is fiat money

        depending on prices set by fiat money – dollar, people are forced to use. Not free market, it is created from thin air like dollars, thus causing inflation too.

  • Graham

    I agree with you but think you are arguing from a weak angle, which makes this article way longer and less persuasive that it could have been. 


    People – your average Joe Blow – are not largely not going to be aware of basic economics and what makes a good money. They are simply going to look for something to facilitate their exchanges, and choose whatever they deem best. For MOST people, that is simply going to be “what everyone else I know uses.” 

    Hence it is quite possible for Bitcoin to “bootstrap” itself into monetary status. As soon as we have a community – of any size worthy of the name “community” – using bitcoins as money, the cat is out of the bag: there is now a de facto money being used in the world that is superior to all other forms of money, including gold. The laws of economics dictate that that money will tend to gain universal acceptance. 

    By the way, if Bitcoin does catch on, the world will change in ways we cannot possibly imagine, but almost certainly for the better.

  • DrGizmo

    Wow wow wow, Mike, you make my head explode with Ideas… I really like your stuff, I think I see it as  you see it… as we know … the market is a bunch of transactions, transactions are decisions between 2 “people” it is the P tp P aspect that excites me most, as you say money must have the trust, of the transactors… we trust truth, truth is found in past transactions, “history” … and BTC is based on math the ultimate “truth” …  I have always felt the Physical property (engineerd by God) was the real valued the … its elemental property, not a compound, its mass was constant everywhere…and the mass carried the integrity and the trust. BTC has some of the same propertys albeit in a virtual world.

    any way my ideas are based on respect, … I just believe and always have believed money must carry the “promise” pledge” “honor” and truth…of the “transaction between two humans”  and the promise carry s the integrity of the transaction… human actions… see respect is all bout decisions, ( you decide then you act)  In RESPECT… you sacrifice your decision to another, ( he gets to decide for you)  (he… well you both decide)  this process is a “transaction” and above all it must be free from (force and fraud)  it (the action) must have TRUST as its most important aspect… BTC has this in abundance…at least that is the way i see it.

     see  mutual respect  and decisions are all about human actions… there can be no transaction without respect (trust)  and money must inculcate the respect  (trust) of the transaction… as you say…moeny must hold its value,

    and for me BTC does this perfectly, even to a mathematical certainty.  BTC is/as you said well be the most important thing to happen in “history” and  is  the “truth” … so finally BTC gives us, an honest, and truthful system of exchange to base our decisions-actions- transactions … a system that has engineered “trust & mathematical truths” into the the very essence of the transaction… I love it.

    BTC with all its inherent “mathematical values can /will …monetize the Global –  information on the web, ” Global – a tip jar economy” it is a beautiful thing to contemplate…

    I might be nuts but I also see BTC as a debt free exchange… the opposite to fiat $. I see BTC as the way out of this fiat crisis … and the world will see it too as soon as it can comprehend it.

    anyway you exactly right, this time…  is a here is a little pun, to ponder…

    the BTC is a “perfect” good.  Good in all respects.

  • Crypto

    Yes. Thank you. This explains in full length the most fundamental objection to digital currency and provides its necessary response. From the most superfluous and misinformed objections to the most essential, I believe this objection to be of the most essential. There are innumerable commentaries of similar structure that deal with surface issues, which is fine for the Bitcoin newcomers, but too few that respond to those with a sincere and informed interest in Bitcoin but have had difficulties stomaching some of the hard economics.

  • Pingback: Bitcoin: a Mises-regresszió felülvizsgálata | Magyar Bitcoin Portál()

  • Well, interesting post, thanks!

  • I’m a late commenter, obviously,  but this post really resonated with my own feelings about money. I never thought it needed a prior use or value to be used as money, because of the properties you describe.

    In a way, I believe that the value of money is based on the value of time/effort that it effectively replaces by allowing people to no longer barter. Like you say, getting from a telescope to a fish may be very difficult with barter, so the value of a medium of exchange arises simply because someone prefers to do something else with their time besides barter.

  • DL

    Ok, but what if Bitcoin (or any other form of electronic money not controlled by Governments) ever grows to the point of being used on a large scale? Isn’t it inevitable that Governments will ban it?

    The Internet CAN be controlled at a massive scale, as the Chinese Govmt. shows every day.

  • Pingback: Bitcoin and Mises Regression Theorem. « Smiling Dave's Blog of Psychology, Economics, and Gentle Sarcasm.()

  • Pingback: Interview: David Veksler and Tim Swanson discuss Bitcoin, Litecoin, cryptocurrency, cybersecurity in China | Great Wall of Numbers()

  • Pingback: The value of cryptocurrencies | Great Wall of Numbers()

  • Pingback: Bitcoin: ο χρυσός του μέλλοντος ή η αρχή του τέλους των τραπεζών; | JusticeForGreece()

  • Deepfriedsammich

    Your argument against the regression theorem is an appeal to effect without cause, which is a common logical failing in human brains. It is true that money acquires value as the medium of exchange but its utility as a commodity must come first. Why? Because without objective substance having intrinsic properties (not that I did not say “intrinsic value”) there is no way for the individual to rationally impute value to the monetary unit besides reference to nearly meaningless data about prior transactions. Consider a hypothetical: you and I go to a particular restaurant and order the same dish. When it comes time to pay, you pay in some fraction of a Bitcoin and I pay with a silver troy ounce coin. Let us suppose that the next day, that neither the restaurant nor nearly anyone else, will trade a meal, or anything else for either a Bitcoin OR a silver troy ounce. Well, in my case, I can still make a silver pendant out of my coin and give it to my girlfriend, who may prefer to adorn herself in ornamentation made from a scarce metal that has pleasing aesthetic properties and which is not available to women having less access to the metal. The silver still can and will have value simply because it is a something to which someone somewhere can and will impute value. What will your Bitcoin be worth under those circumstances, if the pure faith in “exchange value” evaporates? It is, ultimately, nothing but an abstraction that has absolutely no existence in the physical world. Upon what basis would you, or anyone else, impute any value to it at all? It is a pure floating abstraction, literally a virtual coin, imaginary. How much real wealth would you forgo or exchange in order to posess a massless “coin,” “made” of “imaginarium”? Can you strike up a correspondence with someone else’s imaginary friend? Bitcoin is a fad, a mania, a bubble in an abstraction more evanescent than the fragrance of a tulip..

    • So basically your argument revolves around the fact that you think Bitcoin has no inherently valuable properties.

      Yep, you’re definitely a weirdo.

      • Adrian Frost

        Actually his argument revolves around the hypothetical collapse of the global economy to the point wherein all money loses all value and we start melting silver coins to make jewelry for our ladies while starving to death. I guess anything is possible but an investment contingent on that future would be as unlikely to pay off as an investment in a tulip bubble.

  • Adrian Frost

    A good job articulating what I have been thinking for a while. It is very unlikely precious metals were the first money. Debt was actually more likely. Precious metal technology came much later. But this doesn’t destroy Menger and Mises. It only further substantiates the notion that the market selects more salable items to monetize. The modern global super economy is likely to never produce a particular single economic trade unit for the whole system because computers will be able to revalue balance sheets in any currency in real time and currency risk can be hedged on exchanges. Welcome to the 21st Century.

  • Pingback: Chicago School vs Austrian School on Bitcoin | The Lucas Critique()

  • Pingback: Chapter 1: Introduction | Great Wall of Numbers()

  • Pingback: Chapter 2: Smart Contracts | Great Wall of Numbers()

  • j.b.clamence

    Bitcoin is an interesting development and serves as a fascinating challenge for the application of Austrian monetary theory. But I think you are making a very fundamental error in your analysis of Mises’ regression theorem. You act as if a money can be recognized as valuable merely by its self-evident characteristics as money of which you name some as “fungibility, scarcity, divisibility, and recognizability”. Per your example:

    “Consider if I walk into a cafe and I inform the owner as to the existence of Bitcoins and their properties. So he agrees to sell me a cup of coffee for a Bitcoin. As soon as he makes that agreement, we now have pricing in terms of coffee established. Why would the owner agree to such a trade? Because he sees the inherent value of the coins as trade intermediaries. He can evaluate the fungibility, scarcity, divisibility, and recognizability of the coins instantly and establish a value of each coin for himself without having to reference any pre-existing prices for any other products.”

    But you fail to recognize that the acceptance of money is not JUST tied to some basic units of space and time that your money characteristics suggest. In order for a person to accept your Bitcoin he would have to also be convinced that at least one other person that provides goods or services that the owner of the coffee shop desires (besides yourself) will accept Bitcoins for payment. In other words, it must already be accepted within the marketplace for it to be useful as money. Therefore, Mises comes to the conclusion that the establishment of money is an evolution. Money cannot be the beginning use-value of a thing, but a next stage of use-value beyond its other uses. In short, it’s exchange value must already be established in direct exchange.

    • “In order for that person to accept your Bitcoin he would have to also be convinced that at least one other person that provides goods or services that the owner of the coffee shop desires will accept Bitcoins for payment”

      Why? Do people buy art because they assume they will be able to resell it? A person can see value in a “thing” for the properties it has. Setting that point aside, bitcoin has already PROVEN that people can recognize “things” that have good money properties.

      I don’t need to know specifically who else will accept a specific “thing” as a money before I decide I will accept it as a money. And I can make that determination based on the properties the “thing” possesses, as can anyone else.

      You’re arguing against reality here. Bitcoin has ALREADY demonstrated your argument to be wrong. It’s like you’re saying what we already know to be true about bitcoin didn’t actually happen.

      • j.b.clamence

        First of all, you’re making a false equivalency between art and Bitcoin. Art has other uses and therefore can be appraised of its value independent of its resale value. “Pure money”, of which Bitcoin seems to be your example, cannot be valued in this way ACCORDING TO MARGINAL UTILITY THEORY. Pure money would have to have an acceptance within some market otherwise it would have no use because it’s SOLE use is to be traded for OTHER GOODS.

        You must understand that I’m responding to your theoretical point. And, as result, to state that the mere existence of Bitcoin disproves Mises’ theory is not enough. You have to prove it logically. You’re dismissal of the Regression Theorem is not enough to explain Bitcoin in terms of the theoretical tradition that Mises contributed to. I’m not saying that Bitcoin doesn’t exist or that Mises is ipso facto correct. I’m merely implying that the explanation for Bitcoin has to either be explained using Mises’ Regression Theorem (perhaps in a more sophisticated way) or you must come up with a different way of explaining it because your argument reestablishes the circularity of the reasoning with regard to Money and Marginal Utility theory that Mises’ Regression Theorem overcame. Using the existence of Bitcoin as proof is not an explanation and therefore contributes little to the understanding of money.

        • You’re wrong bro.

          People are able to recognize that some “thing” can function as a money based on the properties that thing has, completely independent of any previously existing market for that money. And because they can recognize those properties, they can ascribe a value to it independent of any pre-existing use or market. Bitcoin has proven this to be so.

          To argue otherwise is to say the initial bitcoin enthusiasts didn’t value bitcoin for the properties it has, but rather they valued it because a market already existed for it, or because it had some pre-existing use, which is not the case.

          I’m not making any circular arguments, I’m pointing out obvious facts about how bitcoin came to be valued. It didn’t come to be valued because of a pre-existing barter market for bitcoins. It didn’t come about because bitcoins had some pre-existing use. It came about because people can clearly recognize “things” that make for a good money, and value those things solely for the purpose of using them as money, without ANY pre-existing market or pre-existing use being required.

          The irrefutable fact that bitcoin came to be valued as a money without any pre-existing use or pre-existing market automatically refutes the regression theorem. It’s a real world example of people valuing an object solely for its use as a money, without any pre-existing use or market.

          • j.b.clamence

            You’re failing to grasp my finer THEORETICAL point. The “saleability” of a good that you think is enough to establish its value as money is not the ONLY thing that is necessary when discussing a complete theory of money. I’m not stating that people don’t value money according to certain characteristics that make a money better than others. Those are important. I’m saying that it requires an ADDITIONAL characteristic of a history within the marketplace because of the reasons I outlined above. The fact that you’re not recognizing the theoretical problem that your abandonment of the Regression Theorem creates makes me think perhaps you’re not that familiar with the depth of debate that the Regression Theorem was involved in with regard to money and Subjective Value Theory at the time of Mises’ writing. You are reestablishing the circularity in the explanation over how money forms. Either you must use the Regression Theorem or you must attack the problem from a perspective different than just “saleability”, bro.

          • I don’t see a theoretical problem here. What applies to bitcoin applies to gold, or any other market money that has been used throughout history. It’s easy enough to extrapolate backwards.

          • j.b.clamence

            After re-reading my responses I realize that I was wrongly mischaracterizing your argument slightly. The defect in your approach isn’t that you are reestablishing a theoretical circularity, but that you are ignoring the problem in the pricing of money that does establish that circularity. As a result you are glossing over a fundamental problem in the formation of the price of money that Mises’ Regression Theorem sought to address.

            Let me explain this in another way. Your argument answers the question over the formation of money prices by stating that the utility of a money can be discerned without regard to its purchasing power within the marketplace – that the purchasing power of money need ONLY be the result of its characteristics appraised for its salability. But in your example, how does the Coffee Shop owner know that he is establishing a price (an exchange ratio) that yields him a profit – that is fair? This is the problem that you’re overlooking. The only way the Coffee Shop owner could come to a fair trade is to have knowledge of Bitcoin’s price with regard to OTHER GOODS. In other words, the price of money in terms of coffee (its purchasing power) would need to be appraised using the price of money in terms of something else (its purchasing power). But this realization poses a problem for monetary theory because it establishes a circular reasoning. You end up
            explaining the price of money by the price of money. Mises’ Regression Theorem overcame this by explaining money’s origins through an organic process that can be traced back to a point where money was not used as money but used for some other purpose.

            Without the recognition of this problem, you are turning back the clock on monetary theory and upending one of
            the pillars of Austrian Monetary Theory. The Regression Theorem had repercussions within the theory of money other than a pure historical explanation, but its historical importance lay in the explanation of how money forms ORGANICALLY as “the result of human action, not of human design”. But once money has been established and humans recognize its benefits, new forms of money can form. In my opinion this is how we should look at Bitcoin.

            I think it can be recognized that with the formation of money already established, the need for pricing other goods in terms of their benefits as something other than mediums of exchange can (so it seems to me) be bypassed. This is how I explain Bitcoin – that it can be explained as money only because its exchange ratio is first established in terms of already accepted money. By being priced in money, it can then be turned around and traded for other goods. In essence, it comes to life already with the advantages of money because it uses other money to be priced in. Therefore, in your example, you would convince the Coffee Shop owner on the price of coffee in Bitcoins only through its translation in dollars. This is why it was necessary for the pricing of Bitcoin to be done through its pricing in relation to dollars and other forms of money. One thing we must recognize is that once an item is priced in terms of money, it can then be utilized to act as a medium of exchange to purchase practically any other thing. Instead of going through the evolution of starting from a
            commodity or industrial good and then working its way into its role as money, it can overstep this process by beginning to be priced in money. And as the demand increases for it, it can begin to overtake other forms of money as the most common medium of exchange.

          • “But in your example, how does the Coffee Shop owner know that he is establishing a price (an exchange ratio) that yields him a profit that is fair?”

            Whatever price he decides to accept is a fair price. He can establish a value based on the properties of the bitcoin system. This is the entire point of my article. Why is this so hard for you to comprehend?

            The coffee shop owner can determine:

            1. How muck work it takes to mine a bitcoin by looking at electrical costs per coin. Or, in the case of gold, how many man hours on average it takes to dig up a nugget.

            2. In the case of bitcoin, the shop owner knows the total number of coins that will exist, EVER. This makes establishing initial value for bitcoin easier than gold, because gold’s scarcity isn’t assured and cannot be accurately measured.

            3. The shop owner knows bitcoins cannot be faked, unlike gold.

            4. The shop owner knows the coins are fungible, just like gold.

            All of these properties allow the shop owner to make an educated guess as to the value of a single coin. Even if no one else in the world will accept bitcoin, the shop owner could still agree to take some coin(s) as a curio, betting that someday the bitcoins will be worth a lot more than what he got them for BECAUSE OF THE PROPERTIES THEY HAVE.

          • j.b.clamence

            I comprehend the entire point of your article quite well actually. But maybe you don’t. You didn’t just argue about price formation. You stated that your argument proves the Regression Theorem wrong. THAT is what I’m taking issue with. But you seem to not comprehend MY critique. My critique is that you don’t understand the purpose of the Regression Theorem in the THEORY of money and value that it was intended to complete and therefore your abandonment of it is rather reckless and haphazard and has repercussions that you don’t seem to see.

            What you’ve been consistently failing to recognize is that money has a very particular meaning in Marginal Utility and Subjective Value Theory. Remember, Marginal Utility bases the value of something upon its USE. Therefore, the meaning of money must be understood in terms of its use. And the ENTIRE use of money and therefore its entire definition is to use it for further TRADE. The definition of money isn’t in its “characteristics as a thing”. Those characteristics are only important as far as they facilitate that fundamental use that makes something money. A “thing” can have other uses in addition to this fundamental use and can be assessed in accordance with those characteristics you pointed to, but without this use it can never be considered money. For something to be used as money it has to be bought and then sold. Money is not consumed but traded, or, more precisely, money’s consumption is to trade it. This means that money REQUIRES at least two trades, which means it requires at least two exchanges, which means it requires at least two exchange ratios, which means it requires at least two prices. No SINGLE trade can ever be considered
            a money trade because no future trade is taken into account.

            So there is an extra step here. In a barter economy, a person trades and then consumes (direct trade). In a money economy, a person trades, trades, and then consumes – he trades for money then trades for the good he wishes to consume (indirect trade). Therefore, money is used as a means to an end. It is not sought as an end in itself. People don’t trade just to trade. People trade in order to fulfill their desires.

            But more fundamentally you seem to not recognize the very purpose of the Regression Theorem. The Regression Theorem is a THEOREM – it functions within a THEORY of money and value. And since, money is a good that ONLY functions in trade it has no other purpose than to use it in trade. This makes it a higher order of trade. And since it is a higher order of trade it must be understood as evolving from a lower order of trade, which is a barter economy (direct trade). In a THEORY of money and value you must build from the simple to the complex. And the Regression Theorem sought to explain the evolution of money from the more fundamental, basic, and primitive form of social cooperation that we call a barter economy. THAT is the fundamental purpose of the Regression Theorem. It’s perfectly legitimate to critique the way others have used the Regression Theorem to argue against Bitcoin. I’m not taking issue with that. But to abandon the Regression Theorem is to upend a fundamental tool in the theory of money based upon Subjective Value and Marginal Utility. Either you have to use the Regression Theorem in your defense of Bitcoin or you have to base your argument on some different theory with different foundational premises than those of Subjective Value and Marginal Utility because the Regression Theorem was instrumental in completing those theories with regard to money.

          • My whole point is to show bitcoin pricing can arise in a barter economy. And you seem to be adding in a lot of qualifications to Mises theorem that he never made.

          • j.b.clamence

            A barter economy is a NON-MONEY economy. That’s its very definition. It involves a SINGLE trade. For something to be used as money it must be involved in MORE THAN A SINGLE TRADE. To state that a thing can be valued in terms of its use as money is to presuppose the very concept of money a THEORY of money is tasked with establishing the creation of. To state that more than one trade exists before a single trade is to put the cart before the horse. You are basically saying that the more complex operation predates the simpler operation. And what qualifications do you think I’m adding that he never made?

          • “To state that money arose as a concept from its use as money is to presuppose the very concept of money”

            Hey! You finally got it! That’s precisely what I’m saying.

            You seem to think people are too stupid to realize the benefits of having a money without it coming about through the pre-existing use of some commodity in barter. I’m saying that’s not the case at all.

          • j.b.clamence

            Wow. You do not understand that sentence at all. You seem like a smart guy, which is why I’m a little surprised that you’re tripping up so badly.

            This is very simple. Money is a more complicated form of trade. Barter trade is one trade. Money trade is two trades. Therefore, barter trade must precede money trade. Therefore, the CONCEPT of money must arise from trade other than money trade. To say that invention evolves from the simple to the complex does not mean people are stupid. It is just to realize how human invention and ingenuity operate. It is how people become smartER. I’m saying people were smart enough to see the advantages of indirect exchange. And they did this naturally given the problems that direct exchange (barter) posed.

            Barter is cumbersome because you have to seek out those that not only desire YOUR goods, but that sell goods YOU desire. Given that difficulty of the more basic system that we must assume was the beginning of all economic activity, people saw the advantage of trading for a good that they could then turn around and trade for the thing they actually desire. It’s not that people need a thing to begin as something other than money. It’s that people need to encounter the problems of the more fundamental act of barter in order to see a need for money. This is all basic stuff I’m surprised that you’re having such a difficulty getting it.

          • I get what you’re saying, I’m surprised you’re having such a hard time understanding what I’m saying.

          • j.b.clamence

            I realize that we’ll probably not come to an agreement here, but the Regression Theorem has a place within monetary THEORY that is important whether you agree with the more strict interpretation of it that some of its defenders use to criticize Bitcoin or not. And I feel that abandoning it in its entirety and replacing it with your particular interpretation establishes a logically backwards reasoning and by focusing on that it doesn’t address the more interesting implications of your argument. I think the more interesting and productive debate is over the nature of how new money can form within a money-economy. After all, Bitcoin is a novel experiment arising totally organically without a giant entity like the government using its compulsory economic demands to establish a market for it in order to make it function as money. The question is whether a speculative frenzy like what’s happening with the pricing of Bitcoins can serve as a virtuous cycle to sustain its utility as money and result in the price stability that is necessary to make a money more desirable than others. THAT seems to me to be a debate worth having.

  • Freedom

    Bitcoin is fiat money

    depending on prices set by fiat money – dollar, people are forced to use. Not free market, it is created from thin air like dollars, thus causing inflation too.

  • Pingback: The Economics of Bitcoin: On Regression | Security Analysis Blog()

  • Ben Salomon

    You say: “Given our technology today, people could easily establish a few facts that are entirely independent of prices:

    1. The number of Bitcoins in existence”

    However the number of Bitcoins in existence is a murky area, as many Coins/Wallets have been lost. The original creator Satoshi Nakamoto likely owns over 1 million coins (making him a billionaire at current market prices March 2017), however is no longer anywhere to be found, if he has passed away or lost access to his coins, potentially up to 8% of current Bitcoins are lost forever. How does this fit into the value of a single Bitcoin in your mind, since nobody can ever actually know how many spendable Bitcoins there really are?

    • It doesn’t matter how many are lost because there’s no limit to how far a single bitcoin can be divided. A single bitcoin could be worth trillions of dollars, but it wouldn’t matter since it can be divided trillions of times over. The only thing that matters is the upper limit on creation which ensures inflation will never be an issue.