Sunday, June 26, 2011

Why Are Libertarians Against Bitcoin?

By Jon Matonis

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.

David Kramer

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 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.

Doug Casey

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.
And so it is that our prominent gold and monetary freedom advocates come down against bitcoin. Focusing on Casey's incorrect GoldMoney statement that we already have something like bitcoin, yet backed by a precious metal, Blogdial embarrasses the libertarian with the sarcastic "Bitcoins backed by gold launched ". Blogdial states:

"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.
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."
Michael Suede also refuted Casey in "The Economics Of Bitcoin – Doug Casey Gets It Wrong" where he states:
"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."

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.

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."
Clearly recognizing the limitations of gold and a gold monetary standard, C. Harwick in "The History of Gold and the Future of Bitcoin" states:
"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.


  1. Excellent post! Similar sentiments are reflected here:

    Bitcoin: A New Commodity Created To Serve Market Demand - by Anthony Freeman

  2. having generally the same reaction as you, i like that you've written this post. however, including david kramer in "noted libertarians" is possibly very misleading. kramer is of that longtime queer group of glaring noobs at LRC who are inexplicably given blog keys by lew and turned loose (e.g., cort kirkwood, jesse ogden, max raskin). he's notable only to the extent that he's obviously learning liberty ethics on the fly, very publicly, and evinces the cowardly habit of "refuting" sound detractors by referring them, with no specificity, to whole books by revered liberty writers he pretends to channel. he did it in the post linked above. you're supposed to find the connections yourself between his modern drivel and their general mastery — albeit mastery of a world that didn't include bitcoin. it's worse than standard fallacious argument by authority, since he won't even say with just context what relevant thing the authority supposedly said.

    kramer has apparently not yet figured out that many reading his regular nonsense are far more advanced than he, and i don't recall him ever responding to a bust with an honest, "ya got me." rather, he digs heels deeper, then in desperation throws it to H-cubed and the like. that'll teach ya to question an "austrian" economist! (who for most of his adult life spewed rank socialism with the same fervor)

    as one of the first bloggers at LRC, i know well how lew works. he generally keeps a light touch editorially, allowing idiots to wade far deeper than their content warrants (yes, happened to me), while explicitly discouraging "infighting" on the blog. thus, habitual fools like david kramer are led via local non-resistance to believe that what flows from their fingers is automatically superior to the thoughts of those who regularly read LRC. what's superior is lew's tolerance for letting unqualified idiots sound off brashly in "i'm in the LRC stable; you aren't" voice. soon after figuring that out, i bolted. no idea why lew doesn't boot tools like kramer after their first few embarrassments.

  3. Bitcoin: Backed by Gold:

  4. saltypig,

    Thanks for your comment. I always wondered how Kramer had garnered key/login access to the otherwise respected LRC blog and you've outlined it perfectly. No doubt, he won't be the last 'libertarian' to hate on bitcoin.

  5. Is it true that Austrian economics is based solely on the axiom that value is subjective?

    If so, it's weird to see Austrians push the argument that money has to have intrinsic value.

    1. No, Austrian Economics is not based solely on the axiom that value is subjective. One of the tennets is though that value is subjective and context dependent. As Ayn Rand (an Austrian sympathizer but not an economist) said: "The concept of value presupposes answers to the questions of value to whom for what." What things have is intrinsic, objective properties. To these properties of things, individuals, having unique value criteria and facing unique circumstances, impute value.

  6. "Since gold can not be shoved down a transmission wire, unless the gold standard advocates want 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."

    This is not not an unrecognised issue in the gold world. There are two approaches I have seen to it; the Fekete approach of enforcing that all paper transactions made in gold are a) time limited and b) mature into actual gold coin; and the FOFOA approach where gold is physical, paper is paper and electrons are electrons.

    So in that respect, the two best resolved 'gold as wealth' systems I've come across do recognise and resolve this issue, though in different ways.

    Bitcoin seems to have the potential to be a viable currency; it doesn't have the permanent physical embodiment to make it a useful store of wealth, nor the recognition at this stage to form a viable unit of account. So as a 'money' it leaves much to be desired, not being the best form devised for any one of the three roles.

    It's sole redeeming aspect seems to be the concept of freedom from state control which is interesting but of finite value.

  7. @intuitivereason

    the Fekete approach of enforcing that all paper transactions made in gold are a) time limited and b) mature into actual gold coin; and the FOFOA approach where gold is physical, paper is paper and electrons are electrons.

    What this addresses in an oblique way, is the problem that Bitcoin solves; the Double Spending problem.

    Because it is not possible to completely trust a paper certificate for gold since the issuer cannot ever ultimately be trusted, an artificial constraint to counteract the issuer trust problem emerges in the form of expiring certificates in Fekete. This is, of course, an inconvenience and burden on the holder of the certificates.

    Why should I have to worry about the date on my certificates? And of course, if you want to spend them, they actually become worth less as the sell by date approaches, because you are passing on that inconvenience of enforced redemption to the person taking the certificates as money.

    They will have to scramble, musical chairs style, to redeem them, and in fact, these certificates will become worthless way before the redeem date the further away you are from a redemption point.

    With Bitcoin, since there is no untrusted central issuer, there is no need to create an inconvenient, artificial and money destroying infrastructure where all receipts have a 'TTL' (time to live) after which they expire.

    You do not ever have to rush to reclaim the gold, or anything else your Bitcoin can purchase, because it behaves exactly like cash, only better.

    By your own example then, Bitcoin has more to it than the sole aspect of freedom from state control, which is by the way, is of almost infinite value in the long run.

    Every time someone argues against Bitcoin in this way, they make it more attractive, and further expose its utility. Astonishing.

  8. Great post. I've found most Libertarians don't have the faintest clue about technology or engineering design so how could they come up with an informed opinion on bitcoin? If you don't know what you're talking about you could easily confuse it with any of a number of failed e-currency concepts.

    After seeing Doug Casey's article last week, I felt I had to straighten him out, with this response:

    Jeff Berwick, of the excellent Dollar Vigilante blog, reposted it here with some of his own comments:

  9. There is no 'untrusted central issuer' for a Real Bill either, nor a scramble to redeem certificates. Nor do Real Bills expire; they mature.

    At the end of the day with a bitcoin, you still have nothing of substance. While that may be of advantage in use as currency, and may be irrelevant to it's use as a unit of account, it neuters it as a store of value.

  10. much as when the "supreme court" disguises totalitarian impulses and constitution contravention with jukebox phrases (e.g., "clear and present danger", "compelling interest"), i nearly laugh out loud whenever i see "store of value" and the like as supposed refutations of bitcoin. "store of value" is a highfalutin substitute for the direct "not a physical object", to which i reply, "so?"

    if that virtual object is a unique placeholder for something that may be traded easily and reliably, it's a store of value, and no explanation is necessary for its successful operation. listening to bitcoin pooh-poohing, you'd think economists came before economies. absurd.

    consider how bitcoin is superior to physical "stores of value". the vaunted "commodity" aspect of gold is largely an excuse for those disposed to hold gold — a way to avoid saying the truth: "i value gold highly because other people do."

    complete joke listening to an "austrian economics" guy attempting to explain rationally why something valued doesn't have value. assume for argument that the value of bitcoin is 100% illusory. so?

    however, it isn't illusory. bitcoin-concept currency has scarcity, portability, divisibility, verifiability, accuracy, and transactional properties which are net superior to trusty gold the asset. theoretically, bitcoin could devalue gold back down to its pure commodity level, and even lower that.

    if only we could have the permission of blowhard "austrians" clinging to their dogma as if at sea in a leaking dinghy. please, "austrians", may we trade via a medium you declare deficient? may we, great guardians of all that is pre-bitcoin?

  11. The Ethernet card in your computer and a cable attached to it has around zero value in a world where you're the only one that have it. Just becasue you can touch it does not mean it's not useless.

    However -- being able to communicate in the Internet is very valuable. Because many people can participate and exchange information, and benefit -- you're willing to pay for cables, router, cards and optic fiber services.

    This is what synergy is in an essence.

    Bitcoin as a whole is a system (network) allowing secure exchange of some abstract units. This units (Bitcoins) are shares of this system. As Bitcoin as a whole has some value, these shares have proportional value as well.

  12. Update: Doug Casey responds to his critics regarding his recent bitcoin opinions

  13. "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."

    These are rather bold assertions. With advances in deep packet inspection its probable to spot and block btc transactions. As for confiscations, once mining is no longer as profitable it may be that as independents exit they are replaced by gov't servers that target specific clients or transactions (e.g. by size of payment) to prevent them from becoming part of the mainstream hash chain.

    Juno Moneta

  14. @junomoneta

    The point of the corollary is to allow free-market cryptocurrencies to exist within the Austrian economics monetary framework. It is agnostic towards which specific flavor of digital money so it does not exclusively refer to bitcoin. Primarily, the corollary accounts for currency decentralization via distributed p2p systems, because that is the current methodology to avoid the fate of a centralized nonpolitical monetary system.

    The risks of spotting and blocking btc transactions, as you state, can be mitigated to a large degree with safe bitcoin practices. On the government supercomputer threat, the combined power of the current network is equal to one of the world's most powerful supercomputers. In the unlikely event of any single entity gaining control of more than half of the bitcoin network's computing power, the compromised unit would become untrusted and a new genesis block would most likely take its place. It remains to be seen whether all future cryptocurrencies will be preventable even with overbearing processing power. I tend to think not, because you can't put the genie back in the bottle.

  15. Very nice article.

    I would like to add that Bitcoin's technology does not necessarely overwhelm the theories from XIX and XX centuries.

    For example, I think that Bitcoins certainly fit on Menger Theory of Money.

    And more recently, Bitcoins also fit within the Monetary Theory of the Austrian economist Carlos Bondone ( who demonstrates how the Regression Theorem (RT) is unnecessary and also an unfortunate return to the Theory of Objective value.

  16. The term "Intrinsic Value" is in direct contradiction with the "Subjective Theory of Value".

  17. This certainly shows that Austrian Economics is not quite as pro market as is suggested by some of them.

    If they want a free market for currency, why would they reject Bitcoin?

    But unfortunately, the free market for currencies is just a ruse for most Austrians. It is a Gold Standard they want and their portfolio's will testify to it.

    They think they can get away with a free market for currencies, because they argue would win in such a market.

    It wont. Nobody is going to pay with Gold, it's far too good a store of value.

    In a free market Gold will be irrelevant (as will Bitcoin, for the same reason).

    Because it will have to compete with depreciating paper based currencies and everybody will love paying with paper, exactly because it is losing value.

    It is called Gresham's Law.

    I've had a very nice discussion with the people from Daily Bell and Gary North on the same issue:

    I'm all for a free market for currencies, by the way.

    Interest free Mutual Credit based units will dominate such a market.

  18. Continuation of the Mises Regression Theorem debate:

  19. From the article "criticisms of bitcoin stem from ... (2) it fails to satisfy Mises' regression theorem of primary use value prior to becoming money." - - I'm not an economist, but...

    What is a bitcoin before its metamorphosis into a bitcoin? Electricity. Electricity has a "primary use value prior to becoming money." Bitcoin can be thought of as a battery, a place where energy is stored. Because of the nature of its storage, this energy is easily trade-able, much more so than a fully-charged battery. While the electricity that makes up this "battery" or "store of valuable product" has already been expended, the Proof-of-Work behind the creation is a trade-able product. Ultimately, this value will "stick" to the price of electricity needed to create it (and perhaps visa-versa as well.)

  20. "Software can have inherent properties that give it value in and of itself."

    Yes, the old school Austrians are missing a very simple point - information can have value.

    Bitcoin is a type of information that can only be transferred once and then becomes un-spendable. This, combined with the cap on supply imposed by the algorithm gives it scarcity.

    Therefore Bitcoin's intrinsic value grows from its peculiar properties as information:
    - can be transferred P2P
    - works on any Internet connected device
    - it is fungible and divisible
    - scarcity (similar to gold's scarcity, more can be created but only at the expense of great work)
    - difficult to trace (high relative privacy)
    - international - works across political boundaries

    The only conceivable downfall to Bitcoin would be if a mathematician found a short cut to solving the problems that are used as proof-of-work for the Bitcoin system.

  21. Stephen Williamson of "New Monetarist Economics" blog had this article on Bitcoin (June 24, 2011)

  22. Good post, despite the idea that bitcoins (or rather, anything) could have intrinsic value. In reference to this binary corollary of the regression theorem - the value of the gold unit (for example, although it could be any material) is based on its use on that first day - but a second unit of gold also has a use - that is, the value of using gold instead of trading it for money is clearly correlated to its volume. Bitcoins do not have that luxury - the prices of bitcoins to other goods are not based on their use EACH, bitcoins' use value does not increase proportionally with the volume of bitcoins in use.

    To use an example - on the first day of commodity X's use as money, it has two possible uses - its original use as a commodity and its use as money. The choice to use for use 1 or use 2 is of course based on the needs of the possessor at that time, and basically regulates the value in exchange - if commodity x is desperately needed for some other use than that of money, it will be turned to that use. The second unit of X could be used as money, whilst the first unit of X is used in its primary use (perhaps an industrial use of some sort.) The second bitcoin does not possess this luxury. For this reason it is important not to confuse bitcoin's qualities that make it useful as money as the source of its value in some other use, since it has no other use. The confusion between inherent value and its utility in other uses is something to be avoided.

  23. No matter why some of the people out there are against the idea, but there is no doubt that e-currency exchange services for bitcoins are becoming more and more popular. I have recently found another website which is offering e-currency exchange services which includes exchange bitcoins as well as exchange webmoney.