- http://mises.org/daily/6399/The-Moneyness-of-Bitcoins (Nikolay Gertchev)
- http://mises.org/daily/6401/Bitcoin-Money-of-the-Future-or-OldFashioned-Bubble (Patrik Korda)
- http://mises.org/daily/6411/The-Bitcoin-Money-Myth (Frank Shostak)
Prior to that, they posted about it during June 2011, by Justin Ptak:
- http://archive.mises.org/17249/ideological-and-irrational-exuberance/
- http://archive.mises.org/17294/a-clear-concise-look-at-bitcoin/
- http://archive.mises.org/17356/another-bitcoin-crash/
In the meantime, Jeffrey Tucker became a Bitcoin enthusiast (disclaimer: I’ve been interviewed by Jeffrey and Laissez-Faire Books is publishing my book about Bitcoin, so I might be biased). Justin Ptak appears now to be friends (on Facebook) with Bitcoin fans. This may or may not imply his change of opinion, but it doesn’t look like he published anything more about Bitcoin at least.
Now, there is nothing wrong with criticism. And Bitcoin can be criticised, there are many legitimate objections to it. But to criticise something merely because someone feels a pressure to criticise, and then rushes to hastily print something quickly is not scholarly work. It is symptomatic that the institute didn’t publish anything in between. They are under pressure to publish something when there is a media interest in Bitcoin, and hence hastily rush to assemble something. But actual academic research appears to be absent.
The main issue appears to be the conflation of money, unit of account and a medium of exchange. Unit of account is not a necessary function of either money or a medium of exchange. It is merely a possible byproduct of it.
A further issue is the “self-reinforcing monetary spiral” (i.e. which mainstream economists call the network effect), in which one medium of exchange emerges victorious and beats all other media of exchange and that we call money. But this is merely a hypothetical model that is furthermore prone to misinterpretation. First of all, transaction costs can prevent this spiral to escalate to its final stage. Currently, we have hundred something currencies all over the world. Legal restrictions prevent this spiral from playing out. But this is merely an empirical factor, rather than a rule that gives legal restrictions magical powers. Even without legal restrictions, we can’t be entirely sure that the transaction costs won’t hinder a full monetisation.
The second issue is the neglect of other media of exchange, those that are not money. Mises calls them “secondary media of exchange”, and Rothbard calls them “quasi-monies”. These goods are liquid, and a part of their demand is due to their liquidity. They are not liquid enough to be money, but nevertheless they serve, not only through their other uses, but also through their liquidity, a valuable purpose. This is what Bitcoin is. This is what gold is too. And this is also the pool for potential candidates for money. Before something can be money, it must be a medium of exchange.
Bitcoin is somewhat liquid, and it has a very important advantage against extant money: it reduces transaction costs. It reduces transaction costs even further than existing payment mechanisms, so that even a fluctuating price is not enough to offset this reduction. We can therefore expect Bitcoin to be used as a payment mechanism in those areas where it can substitute for other payment mechanisms. This is also a type of network effect. Once they use it as a payment mechanism, people may decide that they do not actually need to fully convert it to/from fiat, and use Bitcoin as a store of value as well. Indeed, Tony Gallippi from BitPay reported (can’t find the link now) that their customers are increasingly opting to keep a larger proportion of the payment in Bitcoin, whereas at the beginning they just converted the whole sum to fiat money.
Yet again I have to quote White in his brilliant insight, which has not yet been processed by other Austrians:
“Coinage reduces transaction costs compared to simple exchange, because of authentication and weighing. Bank liabilities also reduce transaction costs. But these are empirical factors, and not something inherent in all possible monetary systems.”
Rather, other Austrians make empirical (!!!) statements like this (Salerno):
“With the use of clearing systems, money substitutes are virtually costless to transfer.”
An adoption as a payment mechanism, and expansion into a store of value are the early stages of monetisation. This is the same mechanism as the Austrians hypothesised occurred during pre-monetary times, only we now already have a different money. But already existing money is not a showstopper for this mechanism to work. Liquidity is just not the only factor influencing the choice of media of exchange. The argument of Hoppe that
“Driven by no more than narrow self-interest, man will always prefer a more general, and if possible, a universal medium of exchange to a less general or non-universal one.”
is therefore false. It is only apodictically true in a world without transaction costs. It still may happen in a world with transaction costs, we merely can’t be sure about it. And Bitcoin is a hint that empirical factors can’t be dismissed entirely. EDIT: If the statement of Hoppe was true, once money exists, it could never have been replaced by a new money, and we clearly know from history that that’s not the case.
Will Bitcoin ever become money? That’s an empirical issue and we can’t know this in advance. But equally we cannot dismiss it, unless we find a competitor to Bitcoin based on fiat money (or precious metals like gold) that is able to mitigate the transaction cost advantage of Bitcoin. And that would be very difficult to pull off. One of the reasons is the transaction costs associated with the boundary between money in the narrower sense and money substitutes (such as redemption, settlement, and so on), which Bitcoin does not need. Bitcoin is form-invariant and can exist in practically any imaginable (and unimaginable) form. The second one is regulation (management of money and money substitutes is strictly regulated and burdened by many restrictions which have nothing to do with monetary policy, such as anti-money-laundering, capital controls, war on drugs and so on). Even if regulation affects Bitcoin, unless there is an alternative that isn’t affected by regulation, there is still no reason for Bitcoin users to switch to something else.
But Bitcoin can do much more than become money. With algorithmic contracts, it can make large parts of the financial sector obsolete. With its ultra low transaction costs, it can make money substitutes redundant (and, obviously, without money substitutes there is no credit expansion and without credit expansion there is no business cycle). Again with its transaction costs and abstract base, anyone can make a payment to anyone, anytime, anyplace. Nothing that has existed so far in the history can do that. And even if we disregard it as a hypothetical, we just need to remember that gold already failed, because it was reduced from money to a secondary medium of exchange. This was only possible because money substitutes emerged. If nothing else, Bitcoin shows that money substitutes are merely an empirical quirk and not an inherent feature of monetary systems, and for that alone is it should change the landscape of the Austrian literature forever, and open a wide spectrum of possibilities for research and our understanding of money.
For more in depth analysis, I recommend my master’s thesis, or if you wait a while you can get an updated version in a book format.