I recently wrote an article about bitcoin and Mises’ regression theorem. For a brief moment I thought I had written something novel as the previous attempts by others to resolve bitcoin in regard to the regression theorem have never satisfied me. The basic idea is that people are searching for the non-monetary use case that bitcoin MUST have in order to become a money. This is the interpretation of Mises (and Menger and I should admit I haven’t read much of either) and some feel bitcoin can’t become a money if it has no previous non-monetary related use cases.
Nearly immediately after I walked away from the article I wrote, my ego started to break down (a good thing but always uncomfortable). I realized I hadn’t actually found a use case that wasn’t as a money. Moreover, the more I thought about it I realized there wasn’t one.
It was an uncomfortable sleep, to go from feeling so right to so wrong, but by the morning I realized something-I now understood the regression theorem.
Mises wasn’t explaining a property that money MUST have, he was inquiring into how money could have arose in the first place, before money existed and from a barter state. In order for it to arise as the special commodity we primarily use for exchange it must be, Mises would have reasoned, that it gained some form of value in order to enter the markets through natural order.
Bitcoin hasn’t arisen at a time when we are in pure barter and so much like fiat, it doesn’t need a non-monetary use case to enter the markets and eventually gain status as a money (here the usage of the word “money” implies some significant level of general acceptance). Bitcoin then can gain value on speculation and inorganically or unnaturally by people simply accepting it as a money out of a hobby/collectible state.
This post seems to explain this well. I am simply just now understanding it:
In order for bitcoin 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 vekja.net 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.
(This process is similar to the process described by George Selgin on Ruritania-the outcome of a free banking environment.)
Satoshi’s response is notable especially the way he deals with how bitcoin might gain value initially:
As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
- boring grey in colour
- not a good conductor of electricity
- not particularly strong, but not ductile or easily malleable either
- not useful for any practical or ornamental purpose
and one special, magical property:
- can be transported over a communications channel
If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.
Maybe it could get an initial value circularly as you’ve suggested, by people foreseeing its potential usefulness for exchange. (I would definitely want some) Maybe collectors, any random reason could spark it.
I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something.
(I’m using the word scarce here to only mean limited potential supply)
Nick Szabo also suggested money can arise of our instinctual drive to “collect” in his treatise on the origins of money: Shelling Out.
I’m still considering the viability of my ideas on how shells and gold might have gained their initial values in the first place and possibly arose first as a byproduct to other more useful commodities.