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Ludwig von Mises

The Value Foundations of Bitcoin: Austrian Redux, part I

There have been a number of Bitcoin detractors. Most mainstream economists and intellectuals denounce the idea as either impossible or a hoax, or they misconstrue it along the lines of play money or niche money. Another group of Bitcoin detractors comes from an Austrian/Hard Money contingent. These gentlemen who recognize the invalidity of the Keynesian models have nevertheless made their own various arguments attempting to demonstrate that Bitcoin cannot serve as money. For naysayers of this persuasion, there is nothing improper about the economic incentives of such a system, but simply that it will succumb to State control or prohibition, that it is trackable, or even that Bitcoins are intrinsically worthless.

The Keynesian response is understandable, though lamentable. Their schema for viewing economic operations precludes Bitcoin’s success as a money just as many Austrians would consider the introduction of demurrage money to be completely incapable of performing the role adequately. What is not so understandable is the resistance from Austro-libertarian circles, especially given the obvious complementarity of Bitcoin within the larger Austrian/Misesian framework.

The chief impediment of these thinkers is ignorance – not of economics, certainly – but of technology, specifically open-source code, distributed networks, public-key cryptography, and proof-of-work systems, all of which are integral to understanding Bitcoin’s value proposition. They do not understand how Bitcoin works, hence they cannot identify with other people who subjectively place value on acquiring Bitcoin. It is a simple step from there to suggest there is no value to Bitcoin – that it is a tulip mania, a frenzy, a bubble, a hoax, sure to crash to zero, etc.

The explanation for this negativity ultimately relies on a misuse of the regression theorem as provided by Mises and Menger, as well as a subtle denial of the subjective theory of value. In the eyes of Austrian economists, money – the most salable good in society – must emerge from a state of barter. It must be a good for which prior direct use value existed before it could ever acquire exchange value. Nobody would ever accept a good for indirect exchange unless it already commanded widespread desire through services it natively offered. Thus, gold and silver were widely popular monies for centuries because they offer use value. Bitcoin, on the other hand, emerged, not spontaneously, but as an “invention” that was “intended” to be used as a medium of exchange. According to this perspective, Bitcoin could never become money because there is never any initial use value any single person acquires from them. One holds Bitcoin only because he expects others to accept it indirectly for goods and services, and thus they laugh and scoff and compare Bitcoin to Ponzi schemes or other scams. It is ridiculed on par with perpetual motion machines – an impossibility similar to a medium of exchange without any direct use value. [ref]Thus, explanations for Bitcoin’s popularity from these folk amount to a Greater Fool Theory, where they imply Bitcoin traders have no fundamental value in investing in Bitcoin, but simply to unload them on to a greater fool who will pay more down the road. This is similar to the Keynesian beauty contest perspective in stock investing.[/ref]

This perspective, I believe, is obviously incorrect. Instead, the perspective that should be advanced is one that understands: (1) That Bitcoin as an emerging money perfectly satisfies the conditions of Mises’ regression theorem; and, (2) That value is subjective. The regression theorem demonstrates that a medium of exchange must have prior use value; thus, if we find a good operating as a medium of exchange, we should conclude it therefore has direct use value. This seems straightforward, and yet this approach is rarely taken. Instead, carts are put before horses; interlocutors will examine the perceived absence of use-value, not its presence as a currently functioning medium of exchange. Witnessing Bitcoin operating as a medium of exchange usually involves two further attempts at debate; either we must “throw out” the regression theorem (challenge its praxeological rigor), or the regression theorem is fine, but it proves Bitcoin cannot be money. If Bitcoin is “not money,” then any valuation placed on it is spurious and unsustainable. This is what fuels the charges of tulip mania. Without recognizing any inherent use value, these commentators (who presumably have never interacted with Bitcoin lest they fall prey to “hoaxes”) insist that there is none at all. However, this is a complete non-sequitur. Simply because neither Gary North nor Peter Schiff are creative or observant enough to identify the use value does not imply there is none. Absence of evidence is not evidence of absence. Mises explains the strictness of the regression theorem:


It does not say: This happened at that time and at that place. It says: This always happens when the conditions appear; whenever a good which has not been demanded previously for the employment as a medium of exchange begins to be demanded for this employment, the same effects must appear again; no good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments. And all these statements implied in the regression theorem are enounced apodictically as implied in the apriorism of praxeology. It must happen this way. [ref] Mises, Ludwig Von. “Chapter XVII: Indirect Exchange – The Determination of the Purchasing Power of Money.” Human Action: A Treatise on Economics. New Haven: Yale UP, 1949. 410. Print.[/ref]


Thus, for those who support Mises’ theorem, to take the argument that Bitcoin has no direct use value is to deny the empirics of the situation: that Bitcoin currently is serving as a medium of exchange, and accordingly there must be an underlying value that spurred the creation of its exchange value. There is no other way it could have acquired such.

The second major error is a subtle rejection of the subjective theory of value. When I point out that Bitcoin necessarily must have a use value, people will frequently demand to know what it is. What could possibly compel people to spend hard-earned fiat money in exchange for digital tokens? Usually I suggest social purposes. Bitcoin – being a scarce, digital good – is unique in that creation of one requires solving cryptographic puzzles of increasing difficulty. Thus, in the early days, before Bitcoin had either money prices or exchanges – in Menger’s words, “organized markets” – the only way to acquire Bitcoin was from a friend or to download the client and mine Bitcoin directly. The protocol’s newness and its underground nature enabled Bitcoin to become a status symbol. Cypherpunks and hacktivists – those closest to understanding the value proposition it offered – began to acquire them and mine them (and report their electricity/mining costs on message boards), and from there eventually Bitcoin spread to other markets and social groups. That’s it. The regression theorem does not admit of quantitative tests (ie, “how much” value a certain item or commodity requires before mass acceptance) – it simply states the necessity for prior direct value. This social status value Bitcoin acquired is real. It is a value accruing to whosoever desires it. Hobbyists place value on all sorts of bizarre goods many people would never think to acquire. Even objects of pure fads like Beanie Babies offer real, legitimate value: they offer the value of social inclusion or of being “in the know.”

Historically, while this account suffices to describe Bitcoin’s launch into becoming a medium of exchange, it doesn’t quite answer the question as to why Bitcoin units are individually valuable to users. The answer to this is straightforward. Bitcoin as a payment system is valuable; it renders amazing services nothing else can. The only means to use the payment system, however, is through the use of Bitcoin units. Therefore, as the units themselves are scarce, required means of action, they command a market price. Users are willing to purchase digital space on a ledger in order to take advantage of the manifold benefits they enjoy. The network cannot transfer dollars, euro, or yen. It can only move Bitcoin.

Understanding the Bitcoin units in the larger context of utilizing the Bitcoin network brings clarity to confusion. There is no contradiction or paradox in Bitcoin becoming money; it emerged as a scarce, digital item, which became a good (when scores of people began acquiring and discussing them), and then proceeded to become a medium of exchange (when it was used to indirectly purchase pizza). Whether it becomes liquid enough to crowd out the rest and become money to everyone will have to be seen, but it should be apparent that, from an Austrian perspective, there is no problem whatsoever with global Bitcoin adoption. Digital currencies are real assets that acquired exchange value – just as all media of exchange have – and it is the historian’s job, not the economist’s, to understand the empirical details that gave rise to this exchange value.

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  • Ladislav Mecir

    Agreed with many of your arguments. Except: ” The only means to use the payment system, however, is through the use of Bitcoin units. ” – this is questionable. The payment system is the work of open source software. The difference giving bitcoin higher value than to some fresh copy altcoin lies in the fact that bitcoin is the world’s first and most widespread of its kind.

    • Mattheus von Guttenberg

      What I meant was the only way to utilize the Bitcoin blockchain was to literally send Bitcoin units. I can’t wire dollars over the Bitcoin network.

  • Mark Rees

    Great on the article Matthues. It’s obvious that you put a lot of time and effort into this piece. Great take on it as well. Thank you!

    • Mattheus von Guttenberg

      Thank you!

  • Eric Voskuil

    Nice job Mattheus. I’m reading Rothbard’s Man, Economy & State presently, making your article very relevant. It’s unclear to me how any Austrian could even debate this question. Too many years pining for the return of the Au standard I suppose.

    • Mattheus von Guttenberg

      I imagine many of them simply aren’t aware that there is a controversy at all. There are some Bitcoin positive Austrians, like Jeffrey Tucker and Robert Murphy, who perhaps due to their youth are able to identify better with the crypto-anarchist crowd. Some people want to believe the ‘gold bugs’ are only looking out for their own wealth – which Bitcoin ostensibly threatens – but I am willing to be more charitable than that. I believe many of them just have no knowledge of open source software or distributed networks, etc. To them it is Neopets or World of Warcraft gold.

      • Eric Voskuil

        I agree that’s likely the more prevalent issue.

  • Bitcoinmillionaire

    Good to read an article which immerses Bitcoin into the Austrian school

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  • AmandaInMotion


  • Ladislav Mecir

    “What could possibly compel people to spend hard-earned fiat money in exchange for digital tokens? Usually I suggest social purposes.” – if somebody is objective, she may accept this explanation. However, for somebody not completely objective and indifferent, for example, a member of a group of bitcoin detractors, the social reasons actually work against her accepting bitcoin (she could be ridiculed by the group), and make the explanation unacceptable.

    I think that the detractors of bitcoin do not deny the fact that the software used to build the bitcoin network is tremendously useful. They just claim that the software is not scarce, being offered to the world under an open-source license, i.e., without limiting its availability, allowing anybody to modify it and come with a new altcoin. However, the software as written by the inventor remains scarce in the sense that it has only one application, the bitcoin network. If wanting to use it for a purpose of creating a new altcoin, the interested party must modify the software. The unmodified software easily discerns any new altcoin created by a modified copy of itself from bitcoin, not allowing such a new altcoin to dilute the value of bitcoin.

    • Mattheus von Guttenberg

      1) The question doesn’t concern value that everyone could discover about Bitcoin; it’s a question of if there is ANY value to it. Obviously, there are social status values Bitcoin creates, and this is good enough for the discussion. Bitcoin detractors may find it has negative social value to them (where they may be ostracised for using it), but they cannot deny that SOME people prize Bitcoin for social reasons. Likewise, I may detest and ridicule people for wearing 5-toed Vibram shoes (because I think they look goofy), but it’s a far stretch from there to say they are worthless.

      2) Yes, precisely. Copies of the software are obviously not scarce as it is open-source, but the units that run on the software are. Just as anyone can write down a span of real numbers from 1 to 100 and yet real numbers between that range are scarce. I can’t introduce 102 as a new real number within that range.

      • Ladislav Mecir

        “Obviously, there are social status values Bitcoin creates…” – I am uncomfortable about this:

        1) if stated “Obviously, there are social status values it creates” about anything else, is it possible to falsify the statement? If the statement is not falsifiable, there is a problem.

        2) If the statement is falsifiable, it is also demonstrable, but I do not see a real proof (did somebody ask the owners, and did they agree?)

        An irrelevant side note: real numbers in the 1 to 100 range are not scarce, I guess that you meant the natural numbers.

        The sole purpose of the bitcoin invention is to create and maintain the bitcoin network. It is possible to make copies of the bitcoin system, but it is only possible to copy the rules and basic properties of the system, not the size and the infrastructure of the network. As a rule, a mere copy is much less valuable than the original if there is a way to discern the original from the copy. In the case of the bitcoin network the distinction when compared to some altcoin is trivial.

        It is possible for a new invention to make a newly invented “newcoin” more valuable than bitcoin. The newcoin must meet these nontrivial conditions to be able to replace bitcoin, though:

        1) the newcoin must be a significantly new invention in its own right, and highly valuable at that, see below

        2) the value of the new invention must overweight the accrued value of the bitcoin network with its whole infrastructure

        3) the newcoin invention must be disruptive in that it must be impossible to evolve and adjust the bitcoin system to make it more valuable than newcoin

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