Bitcoin and Mises’ Regression Theorem
UPDATE: An edited version of this article was published on the Washington Times editorial page. Read it here.
The following is a piece I wrote for the Washington Times, set to run at some point in the near future. While the intended audience is the typical conservative Washington Times reader, I tried to nudge the conversation about Bitcoin a little toward Misesian theory, in an attempt to convince the reader that s/he doesn’t have to abandon traditional, conservative principles in order to like Bitcoin. Plus, it’s a good opportunity to introduce conservatives to Ludwig von Mises – that’s how I started toward libertarianism.
It turns out, despite a rash of bad news in the first half of 2014, that Bitcoin is still a big deal. Beloved by tech geeks and libertarians alike, Bitcoin has begun to filter its way out of the seedy fringes of the internet into mainstream conversations about technology, finance, and the global economy. However, despite its base of devoted supporters, uneasy skepticism continues to surround the cryptocurrency.
As Bitcoin has gained increasing media attention in recent years, many conservatives, especially those who favor commodity-backed currencies, have dismissed it out of hand. “How could a digital currency backed by nothing,” they protest, “be any better than what we have now? Isn’t that the problem with fiat currencies?” Hard-money Austrians, aware of Ludwig von Mises’ famous regression theorem, insist that the only way a truly market-based currency develops is by starting as a commodity valued for its non-monetary uses. So gold and silver became widely accepted as monies only because they first had industrial and aesthetic value. Prisoners trade cigarettes because, at some point, someone will smoke them.
Bitcoin may be a neat idea, they say, but it is fatally flawed and will collapse in the end, just as all fiat currencies backed by nothing eventually do.
What these critics miss is that, despite its digital nature, Bitcoin is not backed by nothing. In fact, as cryptocurrency experts have increasingly emphasized, Bitcoin is not primarily a money. More fundamentally, it’s a payment network. This network, known as the Blockchain, is a revolutionary worldwide ledger that keeps track of everyone’s assets in real time, without the need for centralized third parties like banks or governments. This open decentralization means that holders of Bitcoin know their property will not be debased by corrupt influences, and that the network is far more secure from attacks than any networks with central points of failure.
So really, the value of Bitcoin-as-money derives from the value of this innovative, distributed asset ledger. In other words, the staunch hard-money conservatives are on the right track, but they make an arbitrary distinction between goods and services. It’s true that gold became valued as a money because it first had value as a non-money – as a good. But in the exact same way, Bitcoin has developed value as a money precisely because it first had value as a non-money – as a service (i.e., asset reconciliation in a complex worldwide network, secure in its decentralization).
And Bitcoin’s history bears out this theory. While critics gleefully proclaim its death at every opportunity, such as the seizure of black marketplace Silk Road and the bankruptcy of the major exchange Mt. Gox, Bitcoin nevertheless bounces back stronger each time. Its current dollar price of $600 is up roughly 600% from its value this time last year. A year before that, it was trading at approximately $7. And we have plenty of reason to believe that it will go much higher in the future.
At the beginning of this year, online department store Overstock.com blazed the trail for major merchants by integrating Bitcoin. Months later, satellite television provider Dish jumped on board, announcing that customers would be allowed to pay their bills with Bitcoin. Earlier this month, Expedia.com began allowing customers to book hotel rooms all over the globe with their Bitcoins. Most recently, payment processor Bitpay rushed into the College Football world by creating the Bitcoin St. Petersburg Bowl. Yes, Bitcoin is on a roll.
Even the increased scrutiny by regulators isn’t all bad news. While many bitcoiners mourned at the IRS’s ruling that Bitcoin is to be treated as property for tax purposes (making it subject to capital gains taxes), the simple fact that the Feds acknowledged it at all give corporations a hint at how they should treat it.
Bitcoin’s early history has long been compared to the early Internet. At first, adopted only by the übergeek; then gaining media attention mostly for its shady, criminal elements; then giant, unsustainable bubbles that resulted in crashes, with purported experts smugly proclaiming it a silly fad. Eventually, though, Bitcoin, like the Internet, will certainly change the way we interact with one another. One day, we’ll look back and find it hard to believe how little we understood about this technology early on.
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