What Does Bitcoin Mean For Austrian Money Theory?

Tyler Durden's picture

Submitted by Logan Albright via Mises Canada,

Libertarians tend to agree with each other on most things. We all favor less government regulation, lower taxes, less involvement in international conflicts, and more personal freedom. There are a few areas, however, in which the movement remains sharply divided. One of these areas involves the nature of money.

The two schools of thought are essentially the “gold standard” crowd versus the “competing currencies” crowd. Nobel laureate F. A. Hayek argued strenuously in favor of competing currencies, pointing out that it made no sense to praise the benefits of competition in every good and service, while denying those same benefits for currency itself.

Ludwig von Mises, and his most celebrated student Murray Rothbard, on the other hand, argued that commodity money, specifically gold, was the only kind that could ever enjoy the stability needed to prevent inflation and credit busts.

Mises formulated this argument as “the regression theorem” of money in his first book, The Theory of Money and Credit, in 1912. The theorem, in brief, runs as follows:

People will only accept a medium of exchange if they observe that it has value, and can actually be exchanged for things. The only way to observe that is by looking at whether it was so used in a preceding time period. Thus, this chain of observations can be followed back until the first instance in which a particular type of money was used as a medium of exchange, and in order for those first adopters to accept it, it must have had value independent of its use as a medium of exchange, or in other words, be a commodity. Paper money, especially that with no commodity backing, is only adopted when governments force it upon people.

Mises’ theory is elegant, and for a long time it has been accepted wisdom among many Austrian economists. The only trouble is that Bitcoin is in the process of proving it wrong.

Although commodities have historically been successful, history does not prove inevitability, but merely what people have chosen in the past. Mises himself makes this point in his methodological treatise, Theory & History, in a scathing critique of statistical methods within economics.

The science of human action for which Mises coined the term praxeology, as Rothbard later pointed out, does not deal with why people choose one thing or another (psychology) or with what they should choose (ethics), but merely deals with the ramifications of the fact that they do choose and act towards goals. Economics, therefore, as a subset of praxeology, cannot predict what type of money will be chosen in the future or why. As Jörg Guido Hülsmann wrote in The Ethics of Money Production, “one cannot tell on a priori grounds what the natural money of a society is. The only way to find this out is to let people freely associate and choose the best means of exchange out of the available alternatives.”

The fact that Bitcoin, a fully digital currency with no commodity backing, is now being adopted by increasing numbers of people as an alternative currency would seem to cast doubt on the inevitability of commodity money.

When a theory, however logical, finds itself at odds with observed reality, there are only two possible courses of action for a rational thinker. The first is to discard the theory in favor of one that accurately describes the world as we observe it. The second is to find reason to doubt the reality of our observations. One explanation could be that while the regression theorem looks only at past value, it neglects to take into account the expectations of future value, which is what have driven Bitcoin. Another possibility is that only when commodities are actively prohibited as currencies by government, can a digital fiat money arise and gain popularity. AT this point, it’s too early to tell.

Bitcoin may yet fail, in which case Mises’ theorem will remain as a powerful argument in favor of the gold standard. If it ends up succeeding, however, an alternate explanation will have to be found.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Slave's picture

Oh fuck, here he comes....

Publicus's picture

Cryptocurrencies are the future.

CH1's picture

If it ends up succeeding, however, an alternate explanation will have to be found.

THAT is what someone seeking the truth is supposed to write.


Stackers's picture

Bitcoin is so much more than a currency. The concept of the decentralized public ledger for the transfer of assets over a public domain network is truly ground breaking and not possible before now, with the advent of economical personal computing and the internet

Publicus's picture

The next step is for the mining of the coin to equal a rented out computation resource, then you get decentralized cloud computing.

zaphod's picture

Bitcoin is simply a better implementation of the gold standard than gold itself was. It implements the same 6 key properties of money as gold, and is even better on some (such as scarcity).

Bitcoin's success will demonstrate that the gold standard was right, and that gold was the best version of money given the technology available at the time.

misterb4096's picture

I count 8:
Medium of exchange
Store of value
Unit of account
Limited in supply
Use your fucking brains and you will see why BTC is better ( MUCH more easily divided or transferred) than even gold at being gold. I believe the value of bitcoin will soon detract from the monetary value of precious metals, leaving them with only industrial value. Good luck gold and silver bugs…

crazytechnician's picture

Nope , gold will have new monetary value as circulating metal coins in areas where internet connectivity or trust is a problem. But PM value will be greatly reduced because hoarding will no longer be necessary by banks and individuals so the metal will enter into very widespread circulation. Just because we have aircraft does not mean we no longer use trains or bicycles...

Prisoners_dilemna's picture



The OG of bitcoin.


Anything which is sufficiently scarce and has utility will command a price. BTC is useful for its distributed functions. btc is useful as money.

The regression theorem is wrong.

ZerOhead's picture

If you truly wanted to establish a currency on an asset that is scare, useful and essential then oil stored underground in salt mines etc. may be it.

At the end of the day the standard of living that you enjoy today is a direct product of oil and the energy revolution..

0b1knob's picture

Total value of all the bitcoin in the world is a lttle over one billion dollars.  It means nothing.   A rounding error in the US GDP.  

crazytechnician's picture

Current market cap. is around 6.5 billion. It peaked last year around 14 billion. It will reach full stabilisation price matching global GDP in the year 2140. Volatility will stabilise in steps every 4 years 2017 , 2021 etc. Do some homework.

Bollixed's picture

If we have an EMP event, natural or manmade, and our electronic systems go down, I'll trade you for things I need, or gold or silver, but I won't trade you anything for the promise of a bitcoin once the systems come back online...

Bollixed's picture

I used EMP as an example for the sake of illustration. I could have just as easily used another situation where a 3rd party risk is involved where you don't have absolute control over your possesion of an exchange medium. Some people probably understand the risk.

Elvis the Pelvis's picture

I hate to burst your bubble.  But the future is still the American dollar.  The empire's not dead yet.  Bitchez.

Bollixed's picture

No bubble to burst. Vast sums worldwide are still held as dollar denominated assets that can't easily be moved to other currencies crypto or not without creating massive disruption. I'd have given you a greeny if you hadn't ended your post by spamming your website.

Zero Debt's picture

Mises theory still holds. Bitcoin is absolutely backed by a commodity: computational power. Even though this particular commodity did not exist when Mises wrote this, it holds well in this regard.

ombudsmanrules's picture

No IMHO it's quite the opposite.  Bitcoin is created through exponentially more computation, but you could say it's directly related to the amount of energy spent solving the hashing algorithm.  

If I could trade that quite significant amount of computational resources to another entity,  say in the cloud, or if I could reuse the energy expended to solve the crypto, then BTC would be backed.  

As it is, it's an interesting concept, but my expectation is that governments will ban it, or tax BTC transactions out of existence. 


orez65's picture

If Bitcoin could be used as "electronic coin" to operate an orgasmatron then it would be money.

economics9698's picture

The Austrian perspective is simple, what is valueless eventually returns to zero.


If people want to use bitcoin go for it.  Hope it works out well for you.  

crazytechnician's picture

Yeah , Fiat currency actually has a negative value because it exists as debt. That is what Von Mises was talking about. Bitcoin has value , it is backed not only by the entire global internet system - itself worth trillions , but also by the combined computational power of the exponentially growing mining hardware and transaction network , to say that has no intrinsic value is just plain stupid.

economics9698's picture

It is worth what people want to pay.  That will at some time in the future be zero.  10 years, 20 years?  I do not know.  Best of luck.

Sashko89's picture

When major commodities like wheat, oil start getting priced in bitcoins than bitcoin will be a major currency until then, its just a wet dream for the tech people)  Right now, I feel people just buy them in hopes that the dollar will depreciate and the value of their bitcoins will go up...  but if the dollar crashes and you're holding all these bitcoins how do you determine their value then? in gold?

Sashko89's picture

ounce.me website is still all in terms of dollar value)

Dr Hackenbush's picture

the very nature of the gold standard is de-commotization by pegging its price 

Sashko89's picture

not true... not if you have the gold coin standard :) 

7.62x54r's picture

Anything can be a currency, as long as it is rare, and cannot be spammed out by counterfeiters/governments.

The Yapese did just fine with gigantic multi-ton stone coins. They didn't mov e them, they just remembered who owned what coin. And historical provenance of the coin added to its value.

Sashko89's picture

Anything can be currency but not everything can be money. Bitcoin can be a great currency, but gold and silver are money.

shouldvekilledthem's picture

As it is, it's an interesting concept, but my expectation is that governments will ban it, or tax BTC transactions out of existence. 


They can ban it but how could they enforce it? They cannot affect torrent, banning bitcoin is futile.

They can impose taxes, but how could they enforce it? Bitcoin is global.

If politicians impose dracionian laws against bitcoin, they will just render it underground in that jurisdiction and it will thrive elsewhere.

Bitcoin is the first independent money. Bitcoin = freedom. 

centipede's picture

I think you are too optimistic. First of all, anybody can create simmilar cryptocurrency using simmilar (or the same) technology. Acctually anybody can create ten, hundred or thousands of such currencies. What will be the value of Bitcoin then? Competition could be countless even though number of specific bitcoins is limited by an algorithm.

What will happen, when people start to use their bitcoins in everyday commerce? Their overblown value as an investment hype will go down to that of a common currency. And there is no bottom, because there is no intrinsic value in them. At first nobody will want them for an investment anymore and then their unstable price in other currencies will make them difficult to use.

Pseudonymous's picture

There is one and only one clearly distinguishable and recognizable cryptocurrency called 'bitcoin' and I don't think its scarcity is in question today.

Creating more cryptocurrencies does not affect bitcoin's value or the combined cryptocurrency market value any more than founding Google Inc. and issuing GOOG stocks affects IBM stocks' value or the whole stock market; or discovering the precious metal platinum affects the value of gold and silver. I have never heard of a famous artist being deterred from painting any more paintings lest he or she negatively affects the value of the previous paintings, either.

What will happen, when people start to use their bitcoins in everyday commerce?

That has already happened years ago. Some people bid for bitcoins just to buy certain goods or services. Even if they spend it immediately, it is still a net demand. Unstable prices have not stopped this demand.

And there is no bottom

I don't see why you would say this, since it is clearly fallacious. Even Weimar marks have a bottom. You can buy a ton of it and sell it for recycling or burning. The difference between 1 ton of trash paper and a bitcoin is in their convenience for direct exchange and storage. That difference, of course, couldn't be greater.

centipede's picture

I think you are wrong. Companies on stock exchange are able to earn income, which allows them to pay dividends or increase their asset values. Stocks have intrinsic values. Gold, silver, platinum have intrinsic values. Every painting is different and people buy it only if they like it. They can not become currencies. Bitcoin price fluctuates only because of speculation. It doesn't have any intristic value. If I buy the same technology I can create X exactly identical copies of cryptocurrencies with the same features as bitcoins. What will be different except of the name of the currency? I am not sure about platinum, but huge new discoveries of silver in the time of gold standard would have had significant influence on prices of goods in gold, because both gold and silver were currencies determining monetary base and money supply. So if bitcoin and all its numerous clones become currencies and part of money supply it will most certainly have a significant impact on their price in other currencies and prices of goods.

Is the set of those "certain goods" growing? Can you imagine buying every day groceries with bitcoins? People are not doing it even with e-gold. Right now they are buying bitcoins as an appreciating asset.

Acctually, what I ment that there is no bottom, was that the bitcoin has no intrinsic value - the bottom, where could its price drop. The bottom in this case is zero. So you are right, there is a bottom. It is of course only a theoretical bottom. Weimar marks did drop to their theoretical bottom - their intristic value of trash paper. I see no big difference in the convenience for exchange and storage of bitcoin and existing currencies stored electronically. On the international level maybe, but I can buy groceries definitely easier with local currencies.

So I am trying to find a good reason to buy few bitcoins, but honestly I can't find any so far. There is always something not insignificant which leaves me in doubts.

hairInTheSoup's picture

there have been an emp in xix century strong enough to wipe out all our current grid; it's not a fantasy.

at that time societies were not depending on the electric grid, so it didn't create the chaos it would now, as we'd be pulled back to the stone age more or less (no economic sector would survive save some coconut plantation on some remote tropical islands).

it's short -sighted & ignorant to deny the reality of the possibility even if the odds are weaks.

zerocash's picture

An EMP is certainly possible but it would affect much more than Bitcoin. It would kill the internet, destroy the world financial system, kill all equipment with microchips in them (including modern cars). It would throw us back into the 19th century without the infrastructure that existed back then and with too many people. There will be massive social unrest and hundreds of millions of people will die.

After an EMP gold and silver are pretty much useless too. People will want stuff that can help them survive. Not some shiny metal that has no use in a Mad Max type situation.

I get tired of this lame argument that is being kept repeated even though it has no merit. Nothing can withstand the most extreme possibilities.

You might as well say about any activity of man "why bother because you will die eventually?"

Bendromeda Strain's picture

EMP , Yawn, FFS.....

You mendacious BTC clowns crack me up. How many cities have been bombed around the world since electrification? If you yawn at the possibility of grid loss you are a fool and will eat your phone sobbing when it comes time to play "everyone's hungry - whatcha got?"

crazytechnician's picture

Question is - what have you got ? Because if you think there will be some kind of Mad Max future then you will be sorely shocked to find out that gold and silver would be just as useless as bitcoin in the scenario, grow a brain , the internet and grid ain't going down any time soon. It would mean the end of life as we know it.

Sashko89's picture

Not true, humans will still need to trade and gold and silver are the most markeatable commodities known to man, and they will be used as money again)

TheHound73's picture

Then sink value into gold in preparation of a madmax scenario. Lord knows you won't be using that gold in the here and now. But make sure to keep using YellenBux in the here and now because you are a good citezen.

crazytechnician's picture

Erm  , no ac power grid means no more cooling of the spent fuel pools at the planets hundreds of nuclear plants , good luck with surviving that scenario , think Fukishima x Chernobyl x 1000 . The end of complex life within a few months. The elites surely are fully aware of this fact and dispite Obama's 'internet kill switch' - which must surely be a hoax , the powers that be should really be working diligently on hardening the power grid and the internet from any form of attack whether it be political , technical or extra terrestrial (EMP / Solar Flare / Carrington Event etc).

Pseudonymous's picture

You wouldn't need any more electrical energy to send or receive bitcoin than you would need to check a gold coin or a bar for tungsten. And that is not a lot of electrical energy. Backup energy sources for such modest needs (small and portable solar panels, wind turbines, generators, etc.) are dime-a-dozen nowadays.

TheHound73's picture

Probably true. But what do you use between now and the start of the MadMax era? YellenBux?

Bollixed's picture

Whatever others will accept in trade for what I need. YellenBuks are in fashion now so they work.

Years ago people thought Beanie Babies were a good investment.

TheHound73's picture

No thanks. I'll not use YellenBux whenever possible. With bitcoin that is becoming easier and easier for me.

Pseudonymous's picture

Actually, bitcoins are in fashion now. You would be amazed at how many places accept them now.

gold-is-not-dead's picture

one should always have some gold, but one can't handle one mllion in gold. internet will go away just as water pipelines went away.

Citxmech's picture

Oh, I think I could handle 1 million in gold just fine, thank you.

Sashko89's picture

New Austrian School of Economics, towards the bottom, the discussion on bitcoin gets interesting... 


Bitcoins can be a competing currency all they want, but there will never be a bitcoin standard like a gold standard... gold is still the most markeatable commodity known to man--- that is my own opinion... but check out the article below from the New  Austrian School of Economics




Menger, Fekete, > Mises