Why are some prominent libertarians and even Austrian economists coming out against bitcoin? To be fair, it's not all but some. The concept of bitcoin can be difficult to grasp at first and even more difficult to explain. Economists from the 19th and mid-20th centuries can be forgiven for not anticipating an interconnected digital realm like the Internet with its p2p distributed architecture, but modern economists cannot be. In "Libertarian Goldbugs Hating on Bitcoin", Michael Suede observed:
"I feel I have a pretty damn good grasp of Austrian economic theory and its core tenants. Thus, it was incredibly surprising to me when I set about visiting numerous libertarian forums to discuss the new peer-to-peer currency called Bitcoin and was met with wide ranging hostility."Most libertarians have a deep bias towards gold and precious metals as the perfect money because it has withstood the test of time and, although it can be debased and manipulated by the monetary overlords, it cannot be fabricated at will. Therefore, their criticisms of bitcoin stem from two general themes: (1) it has no intrinsic value like gold; and (2) it fails to satisfy Mises' regression theorem of primary use value prior to becoming money. For more detail on Carl Menger, the origin of money, and the Ludwig von Mises regression theorem, see Robert Murphy's "The Origin of Money and Its Value". Let's review some specific comments from noted libertarians and then focus on the two primary criticisms in turn.
First out of the gate was David Kramer, who wrote "Bitcoin: Just Another Bogus Medium of Exchange" in which he provides a non-cryptographic analysis of bitcoin lacking material use/value and then mistakenly proceeds to compare bitcoin to the ill-fated and centralised e-gold. This diatribe was then re-posted at the Mises Economics Blog where it received over 100 comments.
I have to give credit to Robert Wenzel at EconomicPolicyJournal.com who quickly challenged Kramer's piece with "Bitcoins Real Money or Bogus?" and remains a "fascinated bystander that can not rule out, based on Austrian theory, the possibility of a future electronic money that is not created by governments or that had any prior use value other than having perhaps an interim period as a receipt for a currency or commodity."
Kramer was then refuted by the very libertarian Libérale et libertaire blog with "Money is what the Free Market says it is" which had this to say about the regression theorem:
"Lastly, one more note about 'convention.' The 'Misean Regression Theorem,' which establishes Gold as a convention, based on a regression series for a demand for money that can be traced back to a barter economy where gold emerged as a medium of exchange, also can be viewed as a progression series terminating in totalitarian fiat currency abolishing gold as a medium of exchange. And the the only thing that can undermine this state of affairs is something that likely arises out of a 21st century digital barter economy. Conventions are just that, conventions…they should never be mistaken for universal principles."Citing a lack of technical comprehension and an ignorance of public-key cryptography, Kramer was also repudiated by Blogdial in "Refuting the attacks on Bitcoin’s design":
"When you have even a slight grasp of how data and computers work, and you understand that the double spending problem has been solved, your first reaction would be to gasp, as the enormity of what Bitcoin is dawns on you."Peter Schiff
With such a vested interest in gold and the precious metals market, one could expect Peter Schiff to prefer gold as money but gold and bitcoin do not have to be mutually exclusive. Schiff took to the airwaves with a radio discussion on bitcoin with Donald Norman from the London-based Bitcoin Consultancy in what is mainly an audio version of the "no-intrinsic-value" argument.
Schiff's argument is rebutted here and here. Expect to hear more from him in the future.
Personally, I think Doug Casey will realize the potential of bitcoin before Peter Schiff does, but in the meantime Casey's current bitcoin thoughts are summed up in this recent interview with Louis James, "Doug Casey on Bitcoin and Currencies". After commenting on all of the positive attributes of bitcoin, Casey answered the value question:
Louis: Do they have value in themselves?
Doug: There’s the rub; I don’t see that they do. Bitcoins are just an electronic abstraction. They can’t be used for anything else, nor are they made of something that can be used for anything else. They are like one of those knots in a string that disappear if you pull hard enough on the ends of the string. They are not backed by anything at all. Like government fiat currencies, they are a con game, functioning only as long as people have confidence in them, regardless of whether that confidence is well placed or not.
I’ve always said that the dollar is an “I owe you nothing,” and that the euro is a “Who owes you nothing.” With Bitcoins – which no individual can be held accountable for and which have no value in themselves – I’d have to say they are a “No one owes you anything.” It was inevitable, therefore, that the scheme would collapse… at least in its present form.
"This service is as far from Bitcoin as you could possibly be. There is no software to download, you cannot buy and sell it from anywhere without restriction, you have to integrate with the state at a very intimate level, indeed, they cannot even offer this service to everyone, even Europeans like the Dutch, thanks to the State.Michael Suede also refuted Casey in "The Economics Of Bitcoin – Doug Casey Gets It Wrong" where he states:
I would never put my money into a service like this where the State is alerted of all your details and 'holdings'. They offer no utility whatsoever in comparison with Bitcoin. You cannot spend your GoldMoney at retailers directly, you can only redeem your stored gold for cash, which you then have to either take in person or spend through another intermediary if you want to buy something from Bangalore. And of course, there are the myriad fees and taxes you have to pay each time you move YOUR MONEY around between these entities."
"Casey is essentially making the claim that because Bitcoins have no uses outside of acting as a money, they are inherently worthless. I have argued against this in previous articles and I will repeat myself here. This is a fallacious argument. To claim Bitcoins are nothing is like claiming your operating system is nothing, therefore it is worth nothing. Clearly an inordinate amount of time and resources went into the development of your computer’s operating system. The time and resources that went into the development of the software constitutes “something”, which is obviously more than nothing. Software can have inherent properties that give it value in and of itself. In the case of Bitcoins, they are imbued with value by the free market because of the properties they have that allow them to act as a store of wealth and as a trade facilitator. Those properties which allow Bitcoins to act in this specific capacity are exactly the same properties that gold has which allow gold to act as a store of wealth and as a trade facilitator. Again, even if gold had absolutely no other uses besides sitting in bank vaults as ingots, gold would still be a money."Conclusion
Returning to the two primary criticisms, Michael Suede presents a convincing pro-bitcoin argument in "Against the Gold Standard". Echoing my comments on the Keiser Report, Suede writes:
"What system is to prevent the arbitrary replication of receipts for gold under a gold standard? Unless we give up digital transactions and outlaw the use of paper receipts as a society, there is nothing that can prevent it.Clearly recognizing the limitations of gold and a gold monetary standard, C. Harwick in "The History of Gold and the Future of Bitcoin" states:
This core problem must be addressed by gold standard advocates if they want to argue that gold is superior to encrypted digital currencies like Bitcoin. Since gold can not be shoved down a transmission wire, unless the gold standard advocates want to argue that all transactions must be made with physical specie, they have no possible way of getting around this one fatal flaw with the gold standard."
"That is to say, if the subjective theory of value means anything, 'unique cryptographic hash' is not inherently less valuable than 'shiny rock', even if it has no representation in physical space. Each has only the value that people give to it."(1) Intrinsic Value and Bitcoin - I believe that this initial rejection of bitcoin on intrinsic value grounds stems from a lack of understanding of cryptographic protocols, specifically the mathematical integrity of the RPOW (Reusable Proofs of Work). For more elaboration on the topic of RPOW and bitcoin's cryptographic elements, see my article "Bitcoin: Timing is Everything".
While bitcoin may not have tangible intrinsic value, it is still a binary display of a discreet and provably scarce cryptographic item. This is what imbues bitcoin with 'gold-like' qualities compared to a digital movie which has intrinsic value but is infinitely copyable.
(2) A Binary Corollary to Mises' Regression Theorem - The regression theorem is not forward-looking and in the binary digital world of the 21st century a theorem corollary is needed to account for arbitrary enforcement and confiscation against a competing nonpolitical monetary system. This binary corollary weighs the importance of a modern money's survivability and states that a digital money is exempt from the regression theorem specifically if: (a) the network can be demonstrated to be immune from State enforcement and termination; and (b) the monetary unit can be defensible against State confiscation.
Due to its p2p decentralised structure, bitcoin satisfies both of the above conditions of the corollary. A permanent disruption of bitcoin's p2p distributed global network would require a practical shutdown of the Internet itself, something the authorities would be reluctant to do since it would simultaneously devastate the broader economy. Furthermore, the monetary unit itself is defensible against State confiscation because it is protected by strong cryptography and the units exist only on the distributed nodes of the network. Actually, bitcoin units are never really transferred but the block chain records the necessary adjustments to ownership. This is related to the tangible intrinsic value discussion because decentralisation has actually achieved defensibility against State confiscation since any other non-digital type of intrinsic value would be subject to confiscation via its centralised location.
This makes sense because as the State-dominated monetary world inevitably expands, the value component assigned to a cryptocurrency for its survivability, or ultimate resiliency, features may be greater than what the market assigns to its exchange value component. It may even be greater than what the market assigns to its value component for user-defined anonymity and untraceability. Without a world reserve fiat currency and the massive exponential debt from the centrally-planned monetary systems, early leaders of Austrian economics probably would not have considered the disproportionate importance of mere survivability for a currency competitor. It was only slowly dawning on them that the power of the monetary monopoly was the most insidious monopoly of all and the most fiercely protected.
Friedrich Hayek led the way in 1976 with his monumental Denationalisation of Money thesis championing competing and nonpolitical currencies. In making legal tender irrelevant, bitcoin as money indeed follows the Hayekian model of "A Free-Market Monetary System" where it has evolved, and is still evolving, from a competing currency environment.
Additionally, the new binary corollary to the regression theorem compliments and strengthens Mises' regression theorem, allowing for a justifiable cryptocurrency monetary unit that can achieve monetary freedom during our lifetime.
For further reading:
"The clear divisions on Bitcoin", Blogdial, June 22, 2011
"Another Take on Bitcoins", Gary Kinghorn, June 22, 2011
"A Bit of Sound Money: Free Banking or 100% Reserve Banking", Theodore Phalan, June 21, 2011
"Bitcoin's Value is Decentralization", Paul Bohm, June 17, 2011
"The Economics Of Bitcoin – Why Mainstream Economists Lie About Deflation", Michael Suede, June 11, 2011
"Bitcoin and the Denationalisation of Money", C. Harwick, June 8, 2011
This paper was cited by the European Central Bank Report on Bitcoin.