The Nashian Orientation of Bitcoin:

19 min readDec 6, 2022


A Theory of Bitcoin and Money

Menger on the Origins of Money and the Relevant Definition of It

In his time, Menger, inspired by newly emerging (but not yet matured) insights about the origin of man and the progress of knowledge (i.e. natural selection and the principle of falsifiability), attempted to lay out a theory of the origin of money. It must be immediately noted, and perhaps it is not so much a coincidental phenomenon, it is often ignored that there is no perfectly objective or set definition for what is money to use to inquire into the nature of the origins of it.

To this end however, Menger is really concerned not with the evolved variants of money per se, whatever they might be agreed upon to be, but rather the origin of the phenomenon in the first place, whatever medium that may have been:

It must not be supposed that the form of coin, or document, employed as current-money, constitutes the enigma in this phenomenon. We may look away from these forms and go back to earlier stages of economic development, or indeed to what still obtains in countries here and there, where we find the precious metals in a uncoined state serving as the medium of exchange, and even certain other commodities, cattle, skins, cubes of tea, slabs of salt, cowrie-shells, etc

We can better understand what is being inquired into when Menger uses the word ‘money’ by observing his noting that:

…we have to explain why it is that the economic man is ready to accept a certain kind of commodity, even if he does not need it, or if his need of it is already supplied, in exchange for all the goods he has brought to market, while it is none the less what he needs that he consults in the first instance, with respect to the goods he intends to acquire in the course of his transactions.

Money, in the inquiry of the origin of it from Mengers attempt, is defined by the question of how individuals could have naturally universally evolved to accept a certain and specific commodity in exchange for their own goods to the extent that they could value such a commodity (thus dubbed in Menger’s inquiry “money”) as being at least equal or better than holding the excess of their own labor and production.

That is to say there is a certain phenomenon by which when so widely accepted would compel a self interested participant to readily exchange their ‘wares’ with full confidence that they are then only one more trade away from the good or commodity they initially intended to trade for.

Menger rejects the possibility that money arose by social or authoritative mandate. Not that it cannot do so in principle, but rather that this cannot reasonably be said to be its origin:

It is not impossible for media of exchange, serving as they do the commonweal in the most emphatic sense of the word, to be instituted also by way of legislation, like other social institutions. But this is neither the only, nor the primary mode in which money has taken its origin.

Thus the reasoned conclusion theorized is that money originated as the most saleable item in the market as a reflexive process of iterations between market participants Menger means to argue that the complexity of the market grows with the extent of it to the point that a specific commodity reaches a threshold of acceptance in which it is universally valued as an “intermediate commodity”.

Mises Extension of Menger’s Theory of the Origin of Money

Notable Austrian economist Ludwig von Mises acknowledged and extended Menger’s theory in his work The Theory of Money and Credit:

The investigations of Menger have placed the theory on a new basis. But till now one thing has been neglected.

…they have occupied themselves with checking and developing the traditional views and here and there expounding them more correctly and precisely, but they have not provided an answer to the question: What are the determinants of the objective exchange-value of money?

Thus to explain the nature of the market valuation of money is the goal of Mises endeavor with respect to Menger’s origin theory:

The objective exchange-value of money is determined in the market where money is exchanged for commodities and commodities for money. To explain its determination is the task of the theory of the value of money.

More specifically, with respect to the framework extended from Mengers observations Mises means to explain away an apparent paradox that arises from the ‘marginal utility’ framework of economics where value is said to be determined by the market:

… while the marginal-utility theory attempts to base the exchange-value of goods on the degree of their utility to the individual, the degree of utility of money since money can have utility only if it has exchange-value, and the degree of the utility is determined by the level of the exchange-value. Money is valued subjectively according to the amount of consumable goods that can be obtained in exchange for it, or according to what other goods have to be given in order to obtain the money needed for making payments. The marginal utility of money to any individual, i.e., the marginal utility derivable from the goods that can be obtained with the given quantity of money or that must be surrendered for the required money, presupposes a certain exchange-value of the money; so the latter cannot be derived from the former.

Put another way, we want to understand how a market participant might value money as a commodity but the specific usefulness of money is very related to the market’s existing valuation of it. Other commodities don’t have this peculiar nature. Mises addressed this apparent circular paradox by resolving the market valuation of money regressively:

It is true that the subjective valuation of money presupposes an existing objective exchange-value; but the value that has to be presupposed is not the same as the value that has to be explained; what has to be presupposed is yesterday’s exchange-value, and it is quite legitimate to use it in an explanation of that of to-day. The objective exchange-value of money which rules in the market to-day is derived from yesterday’s under the influence of the subjective valuations of the individuals frequenting the market, just as yesterday’s in its turn was derived under the influence of subjective valuations from the objective exchange-value possessed by the money the day before yesterday.

If in this way we continually go farther and farther back we must eventually arrive at a point where we no longer find any component in the objective exchange-value of money that arises from valuations based on the function of money as a common medium of exchange; where the value of money is nothing other than the value of an object that is useful in some other way than as money. But this point is not merely an instrumental concept of theory; it is an actual phenomenon of economic history, making its appearance at the moment when indirect exchange begins.

The Szabonian Theory of Collectibles

Nick Szabo is widely believed to be either Satoshi Nakamoto himself or part of the group that made up Satoshi Nakamoto. But most people haven’t taken the time to dive into Nick Szabo’s works to really understand why he is such a prime candidate. Here we expose just one such work of many that comprise a very broad understanding of our emerging knowledge of the history of our evolution and the cosmos as well as a projection of the evolution of technology and our society. More specifically Szabo offers some theories based on his expertise and studies notably which include computer science and law.

It is not at this time so widely pointed out or discussed but in his essay Shelling Out: The Origins of Money Nick Szabo proposes a theory that extends from Mises and Menger’s theories.

Here we must digress because since Mises and Mengers time the darwinian theory of evolution has been upgraded to consider survival of the fittest on the level of the gene such that we now expect natural order to imply gene’s as an artifact of evolutionary stable survival strategies. The relevant observation Szabo draws from Dawkin’s work is the biological ability to act altruistically as an organism, or survival machine for genes as Dawkin’s calls them and us, even though altruism is otherwise seen as an evolutionary unstable strategy.

Here it’s important to note that when animals are altruistic towards their own kin this would not be to the detriment to the survival/reproduction of the genes of the altruistic survival machine (the animal) since by definition the kin also have the same gene’s to pass on. Kin altruism promotes the wants of the self-gene.

But helping another organism that won’t itself pass on the same gene as altruistic organism couldn’t in and of itself be seen to be a strategy that would promote self-survival. This is where Dawkins began to observe and refer to the concept of Reciprocal Altruism which is where the receiving organisms, for whatever reason, have evolved to payback the altruism. In this paradigm then the genes only evolve through a self-interested paradigm and nature but the organisms which they produce are in fact able to act altruistically.

What Szabo’s theory does is extend Dawkin’s observation that, “money is a formal token of delayed reciprocal altruism” and shows how the evolution of money allowed otherwise non-cooperative groups of humans to work in an altruistic fashion thus benefiting from the efficiency of exchanges that otherwise would not occur.

The mechanism for this evolution of reciprocal altruism, effectively proto-money, Szabo calls ‘collectibles’, which is defined slightly differently than collectibles of today:

The proto-money used by many hunter-gatherer tribes looks very different from modern money, now serves a different role in our modern culture, and had a function probably limited to small trade networks and other local institutions discussed below. I will thus call such money collectibles instead of money proper. The terms used in the anthropological literature for such objects are usually either “money”, defined more broadly than just government printed notes and coins but more narrowly than we will use “collectible” in this essay, or the vague “valuable”, which sometimes refers to items that are not collectibles in the sense of this essay. Reasons for choosing the term collectible over other possible names for proto-money will become apparent.

Szabo suggests that this form of collectibles extended reciprocal altruism to a level well beyond what we or other organisms would be otherwise capable of and thus significant economic advance should be evidenced by the existence of them whenever they close or facilitate a ‘Kula Ring” or a closed loop cycle:

The theories presented in this paper can be tested by looking for these characteristics (or the lack of them) in the “valuables” often exchanged in these cultures, by examining the economic gains from the cycles through which these valuables move, and by observing preferences for objects with these characteristics in a wide variety of cultures (including modern ones).

Szabo suggests that ‘collectibles’ of this nature, which facilitated an evolved form of reciprocal altruism, have specific qualities that humans thus evolved to naturally desire:

Menger called this first money an “intermediate commodity” — what this paper calls collectibles. An artifact useful for other things, such as cutting, could also be used as a collectible. However, once institutions involving wealth transfer became valuable, collectibles would be manufactured just for their collectible properties. What are these properties? For a particular commodity to be chosen as a valuable collectible, it would have had, relative to products less valuable as collectibles, at least the following desirable qualities:

More secure from accidental loss and theft. For most of history this meant carriable on the person and easy to hide.

Harder to forge its value. An important subset of these are products that are unforgeably costly, and therefore considered valuable, for reasons explained below.

This value was more accurately approximated by simple observations or measurements. These observations would have had more reliable integrity yet have been less expensive.

Satoshi’s Implicit Conjecture

Here we return to Mises:

If the objective exchange-value of money must always be linked with a pre-existing market exchange-ratio between money and other economic goods (since otherwise individuals would not be in a position to estimate the value of the money), it follows that an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange-value based on some other use.

This is point is often misunderstood and indeed we find and example of this misunderstanding in Jeffrey Tucker’s attempt to satisfy the regression theory by suggesting a possible pre or non-‘money’ use case for bitcoin:

Bitcoin’s use value

At first glance, bitcoin would seem to be an exception. You can’t use a bitcoin for anything other than money. It can’t be worn as jewelry. You can’t make a machine out of it. You can’t wear it, eat it, or even decorate with it. Its value is only realized as a unit that facilitates indirect exchange. And yet, bitcoin already is money. It’s used every day. You can see the exchanges in real time. It’s not a myth. It’s the real deal.

It might seem like we have to choose. Is Mises wrong?

Trucker gives seemingly weak distinction as an attempt to satisfy his understanding of Mises:

I will cut to the chase and reveal it: Bitcoin is both a payment system and a money.

It is however, not necessary to consider or refute the possibility that bitcoin’s non-monetary usefulness or pre-monetary usecase could be or was as a payment system since it is not necessarily a prerequisite of money in Mises view that it must have had a previous non-monetary commodity use case:

Let us suppose that, among those ancient and modern kinds of money about which it may be doubtful whether they should be reckoned as credit money or fiat money, there have actually been representatives of pure fiat money. Such money must have come into existence in one of two ways. It may have come into existence because money-substitutes already in circulation, i.e., claims payable in money on demand, were deprived of their character as claims, and yet still used in commerce as media of exchange. In this case, the starting-point for their valuation lay in the objective exchange-value that they had at the moment when they were deprived of their character as claims.

Satoshi’s explanation gets curious now, firstly he sets up the concept of Bitcoin in theory as an otherwise useless commodity but which still exists to transfer:

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

And for a moment we revist Mises qualification of that which can or cannot become a money or an intermediate medium of exchange:

…it follows that an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange-value based on some other use.

Satoshi effectively makes a reference to Szabo’s work (has anyone else put forth this theory they seem to share?!) in regard to the reason Bitcoin might have the initial value which would then allow it to enter the gauntlet of market judgment to rise to the level of ‘money’. Or in other words Szabo put forth a theory for money 2 decades ago and we are now able to test it against Satoshi’s implementation:

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)

Through Szabo’s observations on ‘collectibles’ then we are able to reason that over time we developed a natural desire to value collectible things simply for their collectible qualities regardless of any other usefulness. Thus we escape the need to find a non-monetary usefulness to bootstrap an otherwise valueless but optimal (in the collectible sense) medium of exchange. It is now intrinsic in our nature to ascribe non-zero value to them-a quality we inherited (or preserved rather!) through natural order.

On the Significance of the Nash’s ICPI Concept

In his works Ideal Money Nash expounds on a concept which begins to satisfy his inquiry for an apolitical basis for money value comparison and calls this concept an ICPI, “where this acronym refers to ‘industrial consumption price index’”. The ICPI is like the concept of a gold standard but includes a set of commodity prices rather than solely gold in order to decentralize the effects of using certain commodities as a basis for inflation targeting.

Although there is a clear direction illuminated from the metaphor there is also a problem in actual implementation Nash highlights:

We can see that times could change, especially if a “miracle energy source” were found, and thus if a good ICPI index is constructed it should not be expected to be valid, as initially defined, into all eternity. It would instead be appropriate for it to be regularly readjusted depending on how the patterns of international trade would actually evolve. Here, evidently, politicians in control of the authority behind standards COULD corrupt the continuity of a good standard, but depending on how things were fundamentally arranged, the probabilities of serious damage through “political corruption” might become as small as the probabilities that the values of the standard meter and kilogram will be corrupted through the actions of politicians.

It’s a peculiar problem to point out but it’s quite special when we consider it in relation to Bitcoin. What Nash has said is that a significant disruption in the effectiveness of an ICPI would arise if there were a dramatic change in the cost to produce one or some of the commodities that make up the index. Then the attempt to depoliticize the basis in the name of stability would be ultimately nullified as the re-weighting would imply the need for political intervention and consensus etc. Thus the ICPI helps us understand the direction of what would be an ideal basis for money but is intrinsically flawed-as Nash himself points out.

However, Bitcoin, even though only considered as the sole commodity used in an ICPI, wouldn’t be affected by such an ‘cost-to-produce’ shock. It is the crux of its design, the difficulty adjustment algorithm, in fact that specifically addresses what is otherwise fatal to an ICPI composed of other commodities.

The difficulty adjustment algorithm implemented by Satoshi provides the final solution to the implementation of the ideal basis for Nash’s proposal.

On “The Confessional of Targeting”

It’s a strange way that Nash puts it, “confession”, but nonetheless a very important part of our thesis that central banks do in fact have the stated ability to control inflation (and that it’s mandated to do so!):

The idea seems paradoxical, but by speaking of “inflation targeting” these responsible officials are effectively CONFESSING that, notwithstanding how they formerly were speaking about the difficulties and problems of their functions, that it is indeed after all possible to control inflation by controlling the supply of money (as if by limiting the amount of individual “prints” that could be made of a work of art being produced as “prints”).

Here we can think about central banks as players in a non-cooperative game of survival (if instead they worked for a cooperative end there would be no problem to solve in how to create a single global pricing trend), as institutions that arose out of our advancement of reciprocal altruism. If it can ever be said that banks are to be put in a position to either offer a money of a favorable quality or not favorable to its customers then it has to be said that a self-interested central bank would choose the former rather than to allow itself to fade out of relevance and existence.

This is the crux of the opposition to the argument for Hyperbitcoinization, an argument for the future implication of the existence of Bitcoin which foretells of , “…a voluntary transition from an inferior currency to a superior one…”. In this theory Daniel Krawisz suggests:

If this happens, the currency will rapidly lose value as Bitcoin supplants it

The hyperbitcoinization theory believes that Bitcoin will induce a self perpetuating process much like an unwinding of the origin of money in regard to the market participants feelings about it essentially causing ‘fiat’ or traditional major currencies to hyperinflation out of relevance and existence. Ironically and coincidentally this type of induced inflation has been referred to formally as “Nash Inflation”.

But if central banks are capable of controlling the value of their currencies, which is commonly held in mainstream economics (isn’t it?), and we expect them to act in their own self preservation then we should expect them to at least try to match the superior qualities that Bitcoin might have that customers would leave their central banked money for in droves.

Therein lies the Jalian theory of money. Bitcoin is the most superior Szabonian collectible of our time. Its ability to store and transfer higher and higher amounts of value with respect to its cost to “transport” (there are many costs to consider for a transaction) are effectively unbounded. It should continue to attract and gain preference in the currency competition market for this reason.

We should expect to see a trend towards a hyperbitcoinization event which, because of the mechanisms and self interest of central banks, will inspire an asymptotic approach to inter-relational stability between legacy major (centrally banked) currencies and bitcoin as they respond in kind out nothing but want of self-preservation.

Assuming this path is both natural and inevitable, it is furthermore possible and likely that more and more people will understand the implied natural order thus creating a self perpetuating process of bringing global inter-relational stability of our currencies about based on the understanding of the incredible value and progress that is implied with such a change.

It should be noted that to witness a single global pricing system it could be either a single global currency or many currencies that all trend with the same exchange value. So there are alternate paths possible to the same end. The proposal here whereby bitcoin is the catalyst and ultimately the optimal Nashian basis (the Ideal ICPI replacement) for the value trend of the otherwise competing currencies is a solution to the present day scenario of free-floating central banked currencies.

Hyperbitcoinization my not be game theoretically sound as an event however in a long run view when all the major central banked currencies do in fact trend together, and the population is learned enough to demand the constitution of this trend, it can be understood that there might no longer be a need for such national based currency provisions (or their ability to manipulate inflation) and so are then gradually phased out (and perhaps ironically or not fade into a more primitive type collectable form).

Bitcoin then is predicted to end central banking through the Nashian orientation of it as opposed to via a hyperbitcoinization/hyperinflation event.

The Ideal Money Fallacy

Eric Voskuil, co-creator and maintainer of libbitcoin implementation of Bitcoin’s consensus rules has a supporting works that purports to extend, with corrections, the Austrian school of economics. Here we accept Voskuils arguments as valid based on the premise he calls the Axiom of Resistance.

With regard to the cost necessary to secure the network Voskuil concludes:

It cannot be shown that the economy will generate sufficient fees to overpower a censor. Similarly, it cannot be shown that a censor will be willing and able to subsidize operations at any given level. It is therefore not possible to prove censorship resistance. This is why resistance to state control is axiomatic.

Eric attempts to give a proper critique of John Nash’s Ideal Money however we wish to make our Selginian distinction about the want to peg major currencies to a basket of prices:

It has been proposed that the existence of an international non-political (i.e. objective) “value index” will result in people compelling states to “value target” their monies against the index, thereby eliminating price inflation. It has also been suggested that Bitcoin is such an index and will precipitate this scenario.

The leverage envisioned is the option to leave certain state monies for others. The movement is from monies of higher inflation to lower, based on comparison with the index. The consequence is that states must increasingly target their individual rates of price inflation to the index. This result is state monies “asymptotically” approaching the condition of Ideal Money represented by the index.

Ideal Money is state money with a zero rate of price inflation

In both Nash’s arguments the attempt or desire to construct a useful basis for centrally banked currencies is not an attempt at price stability but rather to give a basis for an apolitical rule set to replace political based monetary policy. In both Nash and Selgin’s work this would alter nature of the centrally banked currency from their respective domestic stand points.

Regardless of that point Voskuil has a remaining contention that Ideal Money:

…ignores the existence of foreign exchange controls, which exist specifically to prevent capital flight. Such controls strengthen as capital flight accelerates, in order to preserve tax revenue. Finally, such controls materially limit price discovery in the index, making it less useful than the envisioned reference.

The proposal offers no rational explanation for how people will become able to move between state monies in the face of such controls.

While Nash’s proposal does not offer an explanation for how people or states will evade capital controls it is our argument that the advent of Bitcoin and the evolution of it as a Selginian commodity money and a Szabonian collectible provides this explanation which also thus rests on the axiom of resistance.

Eric concludes the theory of Ideal Money to be invalid. He believes the implications of ending the ability of central banks create seigniorage is something central banks will not willingly surrender:

The theory is therefore invalid. Either fiat will cease to exist or it will collect tax. States only surrender this tax under extreme duress and in such cases only briefly. If anything the “ideal money” will be Bitcoin, and it will not trade freely with state monies (to the extent they remain).

In our argument we accept this premise and use it to suggest that central banks will use Nash’s Ideal Money strategy in order to survive a hyperbitcoinization trend or event.

On Breaking Off the Gold Standard

Of the concept of moving central bank policy to target bitcoin (thus implying a gold like Bitcoin standard) Voskuil argues:

Given the near universal use of gold as a comparably objective index prior to the evolution of global fiat, it is not clear how fiat ever took hold if we can assume people will react to it in this manner.

In our argument we will show that it is the cost to arbitrage gold which increases the interest rate window available to central banks conforming to a gold standard. We extended this out to reason we are effectively still on a gold standard where Ruritania rules otherwise would apply except for the effects of the cost to arbitrage using gold as the settlement medium.

Gold doesn’t cost the same to transport around that world as it is highly dependent on the political circumstances of the world. For example in today’s geopolitical landscape Russia would like access to its gold which is held by western forces:

The Western sanctions have blocked Russian access to roughly $640 billion worth cash and gold reserves in response to the Kremlin’s February 24 invasion of Ukraine.

This is as if the cost to arbitrage has increased to infinite. Thus we have a theory for why the gold standard broke which is often approached from the wrong direction as the question of “What broke the gold standard and led to the world wars?” becomes framed as “What is it about the wars that led to breaking from the gold standard?”

We suggest the global circumstances of the wars increased the cost to arbitrage using gold to a point of fragmenting the global economy. That economics would miss this simple observation is because the cause is seen as an externality to the ‘science’.

We will show breaking from the standard is simply “transmutable” between not having a single basis for money and having one that is simply too costly to transport.