15 Apr 2013

Bitcoin From an Austro-Libertarian Perspective, Part I

Bitcoin, Economics 115 Comments

[NOTE: If my memory is right, two or three years ago Chris Brunner encouraged me to write an article on Bitcoin since it was getting popular. I started an article, intending Chris and Silas Barta to be co-authors, since both of them had expertise in certain areas (Chris from a network / commercial point of view, Silas from an individual miner’s perspective) and I really needed to understand the mechanics of Bitcoin before I could pontificate on its economic and political ramifications. I did a bunch of research and had a few phone calls with Chris, and started an article that began with an elaborate analogy to explain the nuts and bolts of Bitcoin without using any scary mathematical or cryptography terms. Silas Barta worked with me on refining the analogy, but then the article stayed buried in my hard drive until a few days ago. With the recent, renewed interest in Bitcoin, I hoisted the article out of its dusty folder, and Silas and I finished just the first section. This is what I am now running as Part I in a series on Bitcoin. Silas is currently writing up the main draft of Part II, which will deal with mining. Eventually we will get around to discussing the economics–does Bitcoin violate the regression theorem? is it a fiat currency? etc.–and the implications for liberty activists.—-RPM]

Bitcoin From an Austro-Libertarian Perspective, Part I
by Robert P. Murphy and Silas Barta

One of the hottest topics lately in Austro-libertarian circles is Bitcoin, which its official website describes as a “peer-to-peer virtual currency.” Supporters claim that Bitcoin is the ultimate free-market money of the computer age, because its scarcity is mathematically guaranteed and is virtually impervious to government counterfeiting efforts. Detractors argue that it is a fad, and that only a physical commodity can last as a true money.

In the present article we’ll try to explain what Bitcoin is, and how it works. The topic is tricky because Bitcoin’s implementation relies on distributed computational procedures (carried out by a network of different machines) and encryption. So in this first article of a series, we will simply try to give an analogy for the big-picture understanding of how Bitcoin actually works, where we hope to strike a balance between accuracy and comprehension for those not familiar with “mathematical trapdoor functions” and “public/private key protocols.” In future articles, we’ll talk more about its implications, and how it relates to commodity monies like gold in an Austro-libertarian framework.

How Bitcoin Works: An Analogy

The first thing we want to stress is that—contrary to the impression one might have gotten—all of Bitcoin’s “bookkeeping” is done in full public view. Far from being encrypted, every Bitcoin transaction is out in the open, subject to independent auditing by anyone who downloads the software. In fact, that’s the very strength of Bitcoin, and why its proponents say that it relies on no central authority: Precisely because no single organization is “in charge” of Bitcoin, it will be extremely difficult to stamp it out of existence if Bitcoin should ever become a commonly accepted currency. Friedrich Hayek talked of privately-issued fiat currencies, but his vision still involved management of each (competing) currency by a particular issuer. In contrast, no single group manages Bitcoin; this is the sense in which it is “decentralized.” (However, it’s true that a commodity money like gold is also decentralized in the same sense.)

To gain a full appreciation of how Bitcoin works, it’s necessary to go into the mechanics of public key cryptography, which one of us has done (in a very accessible way) here and here. In the present article, we’ll keep it as painless as possible by using an analogy, which we hope will get across the essence of Bitcoin without losing too many readers in the technicalities.

Imagine a community where the people don’t use tangible money: there are no gold coins, but not any green dollar bills, either. Instead, the money in this community is based on the 21 million integers running from 1, 2, 3, …, 20,999,999, and finally up through 21,000,000. At any given time, one person “owns” the number 8, while somebody else “owns” the number 34,323, and so on. To speak this way doesn’t mean that people have to pay for the privilege of engaging in arithmetic with these numbers. (In other words, this isn’t some weird thought experiment about Intellectual Property taken to the extreme.) Rather, we simply mean that when commercial transactions do occur, the medium of exchange is the community’s notion of “ownership” or “assignment” of these 21 million integers to specific individuals.

For example, suppose Bill wants to buy a car from Sally, and the price sticker on the car reads, “Two numbers.” Bill happens to be in possession of the numbers 18 and 112. So Bill trades the two numbers—18 and 112—over to Sally, and Sally gives Bill the car. The community recognizes that the title to the car has transferred from Sally to Bill, and it also recognizes that Sally is now the owner of the numbers 18 and 112.

Now we come to the really interesting part. With the car, the title was a piece of paper; when she sells the car, Sally has to sign over the title to Bill. In principle this piece of paper could be destroyed, stolen and altered, or fraudulently produced. But with the numbers, things are different; the mechanism through which Bill transfers his ownership of 18 and 112 to Sally is complex. What happens is that the community keeps track of ownership through an industry of thousands of accountants. They each keep enormous ledgers (in Excel files or giant pieces of paper if you like), with 21 million columns running across the top from left to right—one for each number.

So the columns run across the top, from 1 to 21 million. At the same time, the rows of the ledgers record every transfer of a particular number. For example, when Bill bought the car from Sally, the accountants who were in earshot the of the deal wrote down (or entered into their Excel file), “Now in possession of Sally” in the next available row, in the column for 18 and also the column for 112. In these ledgers, if we looked one row above, we would see, “Now in the possession of Bill” for these two numbers, because they were originally owned by Bill before he transferred them to Sally.

Besides documenting any transactions that happen to be in earshot, the accountants also periodically check their own ledgers against those of their neighbors. If they ever discover that their neighbors have recorded transactions for other numbers (regarding deals for which the accountant in question was not in earshot), then the accountant fills in those missing row entries in the column for that number.

Given this arrangement, at any given time there are thousands of accountants, each of whom has a virtually complete history of all 21 million numbers, from the first owner up through the present owner. The only reason the ledgers might differ from one accountant to another, is if one of them had recorded a relatively recent exchange, which had not had time to propagate (through the copying process) throughout the entire community. But any commercial transaction that is at least a few hours old (let’s say), has had time to be copied by every accountant, and so all of the ledgers in the community will have a record of the sale.

Now in this hypothetical world, if someone asks, “Who keeps track of the money?” the answer would be, “The accountants.” But if even half of the accountants and their ledgers were killed in a giant explosion, the financial system would remain intact, because all of those records were massively duplicated across the whole industry of accountants. The only things that might be lost would be sales that had occurred only an hour or two before the explosion, because these might not have had time to propagate over to the accountants who end up surviving the explosion.

Explaining the Relevance to Bitcoin, So Far

Let’s pause in our analogy to make sure the reader understands why we’ve constructed it this way. When all of the Bitcoins have been “mined”—which will happen in the year 2140—there will be 21 million of them in existence. That is a mathematically guaranteed, fixed quantity of them. (To facilitate trade, each Bitcoin can be divided into 100 million sub-components, representing up to eight decimal places. In other words, people have the technical ability to transfer ownership of 0.00000001 of one of their Bitcoins, but that is the smallest “unit” possible within the Bitcoin protocol. In this sense, there will actually be—in the year 2140 when all Bitcoins have been mined—a grand total of 2.1 quadrillion fundamental units of the currency.)

In our analogy above, we aren’t dealing with the complicated issue of “mining” Bitcoins. Instead, we are focusing on the steady-state where all of the 21 million Bitcoins have been mined, and the community functions economically just by transferring ownership of the forever-fixed quantity of these mathematical objects.

So in the real world, people transfer their ownership of a certain amount of Bitcoin to other people, in exchange for goods and services. This transfer is effected by the network of computers performing computations and thereby changing the “public key” to which the “sold” Bitcoins are assigned.

In our analogy, we captured this aspect of things by saying the accountants entered the new owner of a particular number in the next-available row in that number’s column. In the real world, the entire Bitcoin network has an entire history of each Bitcoin’s “life cycle,” from the moment it was mined, through every owner it ever had, down to the current owner. In our analogy, we captured this aspect by saying that you could look at the number 18, for example, and see its first owner in row 2, its second owner in row 3, etc. (We assume the first row is reserved for listing the integers themselves.)

Where Does Encryption Come In? The Problem of Anonymous Owners

Now in our fictitious world, there is still one glaring problem we need to address: How do the accountants verify the identity of the people who try to buy things with numbers? In our example, Bill wanted to sell 18 and 112 to Sally for her car.

Now Bill really is the owner of the numbers 18 and 112; he can afford Sally’s car, because she’s asking “Two numbers” for it. (And by the way, in this community when people quote a price in terms of “numbers” everybody knows it means “between 1 and 21 million,” because any integer outside this range is not considered legitimate money.) The accountants will verify, if asked, that Bill is the owner of those numbers; it says “Bill” in the last row which has an entry in it, under the “18” column and the “112” column in all of their ledgers.

But here’s the problem: When the nearby accountants see Bill trying to buy the car from Sally, how do they know that that human being actually IS the “Bill” listed in their ledgers? There needs to be some way that the real Bill can demonstrate to all of the accountants that he is in fact the same guy referred to in their ledgers. To prevent fraudulent spending of one’s money by an unauthorized party, this mechanism must be such that only the real Bill will be able to convince the accountants that he’s the guy.

In the real world, this is where all of the complicated public/private key encryption stuff comes in. Again, if you are feeling up to the challenge, read these more technical posts (here and here) for an explanation of the computational mechanics behind Bitcoin transfers. But for our article here, we’ll try to water it down to give the essence of what’s happening, without scary mathematical terms.

Unfortunately, at this point our story gets a little silly, which just means we haven’t been able to come up with a good analogy for this aspect of the Bitcoin process. But without further ado, suppose the following is how the people in our fictitious world deal with the problem of matching the names in the ledgers with real-world human beings:

Each time one of the numbers is transferred in a sale, the new owner has to invent a riddle that only he or she can solve. The thing is, the people in the community are clever enough to recognize the correct answer to the riddle when they hear it, but they are not nearly creative enough to discover the answer on their own.

For example, when Bill himself received the numbers 18 and 112 from his employer—Bill gets paid “two numbers” every month in salary—the accountants said to Bill:

“OK, to protect your ownership of these two numbers, invent a riddle that we will associate with them. We will embed the riddle inside the same cell in our ledger as the name “Bill,” in the columns under 18 and 112. Then, when you want to spend these two numbers, you tell us the answer to your riddle. We will only release these numbers to a new owner, if the person claiming to be “Bill” can answer the riddle. Keep in mind, Bill, that you might be on the other side of town, surrounded by accountants you have never seen before, when you want to spend these numbers. That’s why our seeing you right now, isn’t good enough. We need to put down a riddle in our ledgers, which will also be copied thousands of times as the information pertaining to this sale reverberates throughout the community, so that every accountant will eventually have “Bill” and your riddle, embedded in the correct cell in his or her ledger.”

Bill thinks for a moment and then has an ingenious riddle. He tells the accountants, “When is a door not a door?” They dutifully write down the riddle, which then gets propagated throughout the community.

A few days later, some villain tries to impersonate Bill. He wants to buy a necklace that has a price tag of “one number.” So the villain says to the accountants in earshot, “I’m Bill. I am the owner of 112, as everyone can see; these spreadsheets are public information. So I transfer my ownership of 112 to this jeweler, in exchange for the necklace.”

The accountants say, “OK Bill, just verify your identity. What is the solution to your riddle? Tell us, ‘When is a door not a door?’”

The villain thinks and thinks, but can’t come up with anything. He says, “When the door isn’t a door!” The accountants look at each other, scratch their heads, and agree, “No, that’s a dumb answer. That didn’t solve the riddle.” So they deny the sale; the villain is not given the necklace.

Now, a few weeks later, we are up to the point at which our story originally began, at the beginning of this article. The real Bill wants to buy Sally’s car for “two numbers.” He announces to the nearby accountants, “I am the owner of 18 and 112. I verify this by solving my riddle: A door is not a door when it’s ajar.

The accountants all beam with delight! Aha! That is a good answer to the riddle. They agree this must be the real Bill, and allow the sale to go through. They write down “Sally” in the next-available rows in columns 18 and 112, and then ask Sally to give them a new riddle, to which only Sally would know the answer.

Explaining the Relevance to Bitcoin, Once Again

Even though we had to strain the story a bit—since in reality, it would be pretty easy for someone to guess the solution to Bill’s riddle—we think this is a decent analogy to how Bitcoin actually works. Without getting into the details, there is a way that the actual owner can perform an operation mathematically, which can only be reversed with possession of a specific number. This special number is the “private key.” In our story, the private key would be analogous to Bill’s mental ability to solve his own riddle, and the actual solution to the riddle would be his “signature.” In the real world, once given a “signature” that can only be generated by someone with the private key, the computers in the Bitcoin network can recognize that the owner is legitimate, but it would take thousands of years of computing power (with current technology) for an outsider to guess the private key and hence produce a “valid” signature. Even the CIA with its supercomputers thus couldn’t transfer someone else’s Bitcoins.

One final twist of realism: In the real world, people don’t need to use their actual names such as “Bill” to identify themselves as the owner of a particular Bitcoin. Instead, they can use any old identifier. This identifier is the “public key,” which all can see. In our analogy, it would be as if Bill told the accountants, “Call me ‘CoolKat’ in your ledgers.” Then, to prove that he was in fact “CoolKat,” Bill would have to answer the riddle, just as before.

The reason libertarians are so excited about this aspect, is that Bill can disguise how many numbers he possesses. He can slap the label “CoolKat” on 18 and 112, but he can throw “JamesBondFan” on his other numbers 45 and 974. So Bill owns four numbers total, but nobody else in the community—not even the accountants—would know this. As far as the records indicate, 18 and 112 are owned by “CoolKat,” while “JamesBondFan” owns 45 and 974. Nobody but Bill realizes that these point to the same human being.

This wraps up our present post. We hope we’ve given an intuitive, yet accurate, explanation of the basic mechanics of Bitcoin. In future posts we will address Bitcoin’s relevance to Austro-libertarians.

115 Responses to “Bitcoin From an Austro-Libertarian Perspective, Part I”

  1. Smiling Dave says:


    Make sure you read my series of articles in simple language on bitcoin [https://smilingdavesblog.wordpress.com/2012/08/03/bitcoin-all-in-one-place/] before you write about the Austrian perspective, or you will wind up saying something really foolish.

    From listening to your videos with the doublemint twins and the reddit ask me anything, what you have to grapple with is the idea that numbers play a very important part here. Five or six guys in a frat room trading scrips for beer and cigarettes among themselves does not turn those scrips into media of exchange, beyond the fact that they were used in the past in an isolated transaction as such. But that’s not the medium of exchange that turns into money. Even when it is in the pre-money stage, it is only called a medium of exchange in the context of the regression theorem if it is in wide demand.

    For the same reason, bitcoin as it is today is not a counterexample to the regression theorem, because of the miniscule numbers involved. My articles cite many cases of spontaneously risen local currencies, such as the Ithaca Hour, which also violated the regression theorem, supposedly. They lasted a few years, then died the death exactly as Mises predicted, and for the very reasons he mentioned.

    The dummies have asked me for quotes from Mises. I haven’t found any, only in articles by later economists. Since it requires a little thinking and common sense to grasp this fundamental idea, not everyone will get it. But it is correct. My articles explain it in various ways, hoping to get through to everyone.

    Helping you avoid pitfalls in advance,
    Smiling Dave

    • Major_Freedom says:

      Bitcoins do not violate the regression theorem not because of “small numbers involved”, but because the materials of which the currency is composed was valued prior as non-currency goods. Electrons, ethernet, etc -> Bitcoins.

      • Smiling Dave says:


        I see your agument all the time when it comes to bitcoin. So feel comfort that you are not alone making your mistake.

        A bitcoin is not “composed of” materials, in the sense a gold coin is composed of gold. You cannot take apart a bitcoin and get Electrons, ethernet, etc back from it.

        Say you had a garage sale somewhere. You could sell your gold coins for scrap, at the very least. You could sell your broken furniture for firewood. But what will you sell your bitcoin for? Will anyone say, hey I could use take apart that bitcoin and use the ethernet inside it? Of course not.

        Maybe you are making the mistake of thinking that the value of something comes from its cost of production. Any Austrian will tell you why that is wrong.

        • Major_Freedom says:

          It’s OK SmilingDave, most people who don’t understand the regression theorem, nor economic scarcity, also erroneously conceive of “virtual”, “intangible” concepts as free from the constraints of economic scarcity.

          A bitcoin is indeed composed of physical materials, it’s just that the physical materials are formed into a particular pattern, what we call encryption, or even more generally, “information”. Without electrons, ethernet, routers, etc, bitcoins as we know them could not exist.

          Now, to address your point about deconstructiion and construction, and costs of production, you are making two mistakes.

          One, if the physical materials of which botcoins are composed, no longer were formed into the same pattern and encryption as bitcoins, then the resulting physical materials would, contrary to your claim, be valued for other uses. The valuation may very well plummet relative to the value of the materials in the form of bitcoins, but it is wrong to claim that they would not be valued at all. The physical materials that make bitcoins possible are indeed valued for uses other than bitcoins.

          Two, the doctrine of costs of production being a determinant of prices in no way contradicts Austrian subjectivist value theory. It is fully consistent with it. It is just talking about the prices of particular goods. Most manufactured goods are priced in terms of costs of production (plus competitive profit). The connection to subjectivist pricing has to do with the pricing of the factors used to produce those manufactured goods. To the extent the factors are manufactured goods, they too are priced by costs of production, whereas to the extent the factors are raw materials sold in broad markets around the country and world, then the supply and demand subjectivist pricing comes into play. Austrians Bohm-Bawerk and Weiser understood this.

          Having said that, my argument in the prior post doesn’t actually depend on the doctrine of pricing by costs of production. It is only arguing that bitcoins do not violate the regression theorem, because the materials with which bitcoins are produced, were already valued prior in other uses.

          • guest says:

            It is only arguing that bitcoins do not violate the regression theorem, because the materials with which bitcoins are produced, were already valued prior in other uses.

            That’s like saying Fed notes don’t violate the regression theorem because paper was already valued prior in other uses.

            Besides, electrons aren’t information, and patterns aren’t information. Information is what we assign TO the patterns. The devices which allow us to record, preserve, and transmit patterns are the things that have utility.

            • Major_Freedom says:


              “That’s like saying Fed notes don’t violate the regression theorem because paper was already valued prior in other uses.”

              Well, not quite. Fed notes aren’t solely based on paper. Historically they were grounded on gold as well. Then gold was abandoned.

              “Besides, electrons aren’t information, and patterns aren’t information. Information is what we assign TO the patterns.”

              Distinction without a difference.

              “The devices which allow us to record, preserve, and transmit patterns are the things that have utility.”


              • guest says:

                Distinction without a difference.

                The distinction is important because we can assign information to anything.

                We say that there is a problem with assigning a certain kind of information to Fed notes because we realize that believing doesn’t make it so.

              • Major_Freedom says:

                You can’t “assign” any arbitrarily complex cryptographic information to just any tangible material.

                Bitcoins are more valuable as a medium of exchange than swirls of vanilla fudge, even though both could in principle be “assigned” informational patterns.

          • Smiling Dave says:

            MF, let me explain via homely analogy.

            Let’s say somebody walks into your home and rearranges the furniture. He puts the refrigerator in the attic, the TV set under the table, and under random stuff.

            He then presents you an invoice for the work he did. The invoice reads:
            Price of TV set $500. Price of table $100. Price of fridge $900. My work: $300.

            You argue with him that his work is not worth $300, or anything at all, because he did not improve your house in any way. He says, OK, but pay me for the fridge, table, and TV set.

            I hope we all agree that he is being ridiculous, since you owned those things before he walked in the door.

            Are you following me now? Or should I elaborate?

            As for costs of production, they cannot infuse a useless object with value. If we accept that bitcoins have no use that satisfies the regression theorem, the fact that they cost something to make does magically give them value.

            • Major_Freedom says:


              “Are you following me now? Or should I elaborate?”

              I’m not following and it’s up to you to elaborate.

              “As for costs of production, they cannot infuse a useless object with value. If we accept that bitcoins have no use that satisfies the regression theorem, the fact that they cost something to make does magically give them value.”

              Not following that either.

            • guest says:

              And, really, when you think about it, that’s a 1:1 analogy, since writing to a digital storage device is simply changing the polarization of magnetic bits (for magnetic media) which are already in your possession.

              • Major_Freedom says:


              • guest says:


                Right. So bitcoins are an arrangement OF the things with utility. Which you already own.

                The storage devices could theoretically be the money, but not the bitcoins.

              • Major_Freedom says:

                Bitcoins are composed in part of storage space.

              • guest says:

                Bitcoins are composed in part of storage space.

                Bitcoins have zero composition. They are concepts; Information.

                They are the meaning you assign to a pattern; A meaning you could assign to any pattern, if you felt like it.

                When you “trade” bitcoins, you’re just replicating it on other people’s storage devices.

                If you could memorize every pattern, you wouldn’t need storage devices.

                They are accounting entries, at best. Except that they don’t yet account for anything.

            • Tel says:

              I hope we all agree that he is being ridiculous, since you owned those things before he walked in the door.

              The same could be said for downloading the latest “Steam” game and paying by credit card. The download does nothing more than rearrange the magnetic fields on your hard drive (which you already own) and the payment on credit card does nothing more than identify the transaction for some registry somewhere. In neither case has anything “real” happened, except if you get caught downloading without payment you will really get locked away.

              Since software is probably the only part of the US economy that is growing, you better hope it is real… but at any rate, economics studies what people do, so the mere fact that lots of people think it is real is quite good enough.

              • Smiling Dave says:

                I agree with your analysis of Steam games and credit cards. They are re-arrangements.

                But money has to have a component of usefulness besides its usefulness to go shopping with. That’s what the regression theorem states. [Read my articles to see why].

                The rearrangement of your computer innards known as a bitcoin does nothing for you of non shopping usefullness.

                In fact, by the regression theorem, a steam Game can in theory become money, because it has usefulness as a game, a non shopping usefulness.

                A credit might have some usefulness to pick cheap locks, so it might in theory become money some day.

                But bitcoin has no non shopping usefulness.

              • guest says:

                The download does nothing more than rearrange the magnetic fields on your hard drive (which you already own) …

                I knew the IP issue was tied to Bitcoin, and I thought about addressing it from that angle, since MF is anti-IP, but I figured it would be less distracting if I didn’t.

                But since you brought it up …

                Unless one agrees to a contract saying the use of a download precludes copying it, et al, then I am free to copy it, regardless of whether someone had bought it under contract.

                I own the medium. The arrangement of it is a service.

                … and the payment on credit card does nothing more than identify the transaction for some registry somewhere.

                A credit card authorizes transfer of money* from one account to another.

                The terms of the download are that the transfer takes place.

                * Fed notes, as MF explains, still kind of have a connection to the price of gold, but gold coins could be transferred in the same way – though I wouldn’t recommend it.

          • martin says:

            Whether Bitcoins are somehow composed of physical and/or valuable materials or not isn’t relevant for the regression theorem to apply or not. What is relevant is whether Bitcoins themselves have value besides their trading value. If they weren’t tradable (or expected to be in the future), would people still want them?

    • Bob Finney says:

      You don’t understand even the basics of praxeology, Dave.

      Praxeology does not allow for subjective judgments or measures of magnitude, such as that a use case is “too small” or “limited to geeks.” Your attempt to weave irod-clad praxeological apodictic certainty out of the fluff of personal subjective value judgments is ever more amusing.

      • Smiling Dave says:

        Glad I amuse you, Bob Finney.

        I’ll amuse you even more by explaining what I mean with a homely little story.

        A shy man tells a matchmaker he does not want to be set up with an ugly girl. But when date night rolls around, he finds himself before a hunchbacked lady with half her skin rotted by leprosy.

        Upon complaining to the matchmaker, she defends herself by saying that “ugly” is a subjective judgement, and praxeology does not allow for that sort of thing.

        Is she right? Nope. Why not? Because although the mid-range of pretty and ugly is vague and subjective, the extremes are not.

        Bitcoin is at the extreme range of “almost nobody”. It’s not a subjective value over there.

        Of course, I’m not the first one to point this out. Mises and Rothbard did, too. Show me your expertise in praxeology and find out where they made my distinction about exactly this variable [how widely used as medium of exchange].

  2. Chris P says:

    I think Konrad Graf wrote the best overview of bitcoin and the regression principle that I have read:

    “As a praxeological statement, the monetary regression theorem is not threatened at all by the existence of bitcoins, nor are they threatened by it; the two merely gaze across the intellectual landscape at one another with knowing smiles. If we understand the regression theorem clearly, we already know that there must have been some direct-use and direct-exchange values, because 1) having them is a prerequisite for becoming a medium of exchange and 2) bitcoins are a medium of exchange.

    Our challenge, then, is not to “test” our regression theorem as if it were a hypothetical “theory,” but rather to stretch our interpretive capabilities to the demands of the empirical case at hand. Our question as economists is not, “Was there a prior direct-use value?” but rather “What was it?”

    There is also no reason that some initial transactions of bitcoins may not themselves have had characteristics of barter rather than indirect exchange. “I’ll give you two slices of pizza for a bitcoin” just because I want to have a bitcoin, is a barter transaction, not an indirect-exchange transaction. And indeed, it appears that perhaps the first “real” bitcoin transaction was a somewhat legendary swap of a large block of coins for a pizza. According to the Bitcoin Wiki’s history entry for 21 May 2010, “Laszlo first to buy pizza with Bitcoins agreeing upon paying 10,000 BTC [currently exchangeable for about $310,000] for ~$25 worth of pizza courtesy of jercos.”

    I might also want a bitcoin for any reason I feel like having one. I might want to just study it and see how it works or collect it as a virtual souvenir or trophy. I might want to use some of its code string as T-shirt art. I might want to stay up nights trying to crack the system because it’s there, like the proverbial unclimbed mountain. I may just want to feel cool and smart by having a bitcoin and telling friends about it. None of these purposes constitutes an indirect-exchange purpose. These are all direct uses.

    But this is already somewhat more than needs to be shown. The regression theorem concerns the emergence of indirect exchange characteristics on top of previous direct-use and direct-exchange characteristics. Yet the only one who knows the difference is the person using it. The only way to find out whether little Timmy just bought a bitcoin because he thought it was cool to have one or because he thought he could later buy other stuff with it is to ask little Timmy, and then we are still not sure if he is telling the truth. These are empirical questions.
    Nor does any direct-use value have to persist once indirect-exchange value has emerged. The regression theorem is only a temporal-sequential explanation of the initial emergence of indirect-exchange value. After that, the initial direct-use value is no longer required: the emergence of indirect-exchange value has both already happened and already been explained.
    All that is required for a transition from direct to indirect exchange is an increasing number of people wanting to have a good just because they want it—for any reason, which in turn can give rise to some people realizing that they might want to obtain that good because they know of other people who want it—also for any reason. Actors therefore begin to expect that indirect exchanges will start becoming more widely possible with this good. The indirect exchange component thereby begins to grow relative to the direct-use and direct-exchange components. Even if the value components other than indirect-exchange value have fallen away completely (which I don’t think they have, although risks are present, as we soon discuss), this does not impact the regression theorem, which has already done its work right at the beginning and is now free to return to its Viennese study and resume smoking its pipe undisturbed.”

  3. Peter Šurda says:

    Dear Professor Murphy,

    I briefly skimmed over the article, but it does not actually appear to perform an economic analysis of Bitcoin, so hopefully that will follow in the next ones. I again recommend my master’s thesis and other writings as an Austrian introduction to Bitcoin.

    As an economist, I’d just say that Bitcoin is an immaterial good with an inelastic supply and ultra-low transaction costs. That should be sufficient to deduce its abilities to satisfy human needs.

    • Bob Murphy says:

      Peter I truly will try to read your thesis before we write on the economics of Bitcoin. You’re right, in these opening salvos we just want to make sure people know what it is, because e.g. a lot of people flipped out over the Mt. Gox scandal saying, “A ha! I thought it was secure!”

      • Smiling Dave says:

        Make sure you don’t try to read Pete’s thesis in a comfortable position conducive to sleep.

        His thesis is best read as poetry, thus relieving it of the responsibility of logical reasoning or making any sense. Otherwise one will be disappointed.

        But maybe that’s just me.

      • Peter Šurda says:

        Let me know when you are just about to read it, I’ll send you the latest revision of the book.

  4. Yancey Ward says:

    So, it would take thousands of years with current technology to break the public/private key encryption, but let’s suppose that 25 years from now, it takes a week to do so- does Bitcoin already include within it’s architecture the means to upgrade the encryption to stay thousands of years ahead of the code-breakers?

    • Chris P says:

      “So when I tell you that there are 2^160 possible Bitcoin addresses, unless you’ve got a very specific educational background to overcome these limitations, you probably don’t have any concept of how big that is.

      If we express 2^160 in proper scientific notation it’s about 1.46e+48. That’s still way too big for most people to comprehend, even folks who understand the scientific notation. It’s estimated, for example, that there are 10^21 grains of sand on the entire planet, which is about the biggest “everyday” comparison number I could come up with but you’d need 1.46e+27 Earths worth of sand to have a number of sand grains equal to the number of Bitcoin addresses. In other words, if every grain of sand were actually its own entire planet just like Earth with its own 10^21 grains of sand, you’d still come up short. 1.46e+27 is a really big number!

      But computers are better at dealing with big numbers than us, we know this. I think there’s another breakdown in understanding here that leads to the perpetuation of this idea: people know computers can handle bigger numbers than they can, but they mostly have no clue what the upper limit is on what a computer can handle and especially have no fundamental knowledge of how a Bitcoin address works.

      For the geeks in the house, a Bitcoin address is the RIPEMD160 hash of the SHA256 hash of the public key of a 256-bit ECDSA keypair. For everyone else, just know that there are 2^160 of them and it takes a lot of math for a computer to generate one. But computers are good at math, too, certainly better and faster than we are, so they can do that math really fast, right? Absolutely, but not fast enough. Imagine that a specially-built chip can compute 10^12 addresses per second (1 terahash) – keeping in mind that this theoretical chip is more than 30,000 times more powerful than anything currently in use for similar projects – how long would it take you to look through every single wallet?

      The answer to this one is pretty easy – 1.46e+36 seconds or about 4.63e+28 years. Given that the sun will become a red giant and engulf the earth in 7.6e+9 years, that’s not a problem.”


      • Yancey Ward says:

        I know next to nothing about computers, computing, and cryptography, other than how to turn a computer on, and how to recognize I am using public/private key in a transaction, but I do read quite a bit, and one thing I read pretty often lately is about the promises of quantum computing where one of the promises is that it will be able to solve problems that would take thousands of years to solve today with the fastest machines available. Is this just hype from people who know nothing, or is it a real concern for cryptography? And you still didn’t answer my main question- does Bitcoin already include the possibility for encryption upgrades?

        • Chris P says:

          I’m not sure about that one. I’m pretty sure the longer the public key the longer it will take to crack through brute force. It maybe be possible to just create longer addresses if quantum computing threatens it.

    • Bob Murphy says:

      Yancey I refuse to answer any question that uses “it’s” as a possessive.

      • Yancey Ward says:

        Yeah, I make that mistake all the time. Its one of my failings.

      • konst says:

        Good excuse 🙂 I would have used it myself if I didn’t know the answer. I think Bitcoin has the flexibility to increase the strength of the encryption it uses.

    • Silas Barta says:

      Yes, the protocol can be updated by consensus of the network. If it becomes clear that some of the cryptographic protocols are not as future-proof as thought (e.g. someone breaking one of the cryptosystems it uses), then it is in everyone’s interest to use a modified version with the latest crypto standards.

      The same mechanisms that work to ensure (or fail to ensure) everyone follows the protocol today, will work (or not work) to ensure that people collectively switch before attacks become feasible.

      To that extent, the maintainers of the Bitcoin project have a certain amount of power: everyone will want to switch to what everyone else switches to, and the maintainers serve as a focal point that everyone will watch for advice on which adapted protocol they should use.

      • Yancey Ward says:

        Thanks, Silas, that does answer my question.

      • Major_Freedom says:

        Can the protocols be hacked to allow for a total supply of bitcoins greater than 21 million?

        • konst says:

          There is another version of Bitcoin called Litecoin that has a limit of 4 times 21 million based on the bitcoin protocol. It’s like silver to gold in that the 2 virtual currencies have different properties while sharing some properties.

        • Silas Barta says:

          No. As long as people follow the protocols, there can’t be more than 21M bitcoins, since any possible mechanism by which you could introduce the extra coins would be recognized as an invalid action by all protocol followers. Whether you do it by:

          a) claiming more new bitcoins for yourself on a block solution than the protocol allows,
          b) transferring more coins away from an address than it currently has,

          or anything else, it’s easily spotted as a violation and rejected.

          However, as konst notes, you can certainly get a subset of the network to switch en masse and follow a different set of rules, each sub-network rejecting the others’ as invalid. On the technical side, it’s pretty easy, since the bitcoin protocol and source code are open; it’s just a matter of getting enough people to go along that you reach critical mass.

          Anything short of large, coordinated shifts are futile for changing things, though, since ledgers containing deviations from the protocol will be rejected by nodes that see them, and they’ll refuse to propagate them.

  5. Konrad S. Graf says:

    Thanks, for posting, Chris P. Interesting, Peter. I never came across Murphy’s earlier work on this when I was researching this initially. Still haven’t seen it, but will have to have a look. But this article here is a great approach to an introduction. Actually, I think the riddle thing even works quite well as an analogy. I went from 0 to 240kph on this starting in late February 2013, so I was basically working with whatever I did find quickly that had already been done. My approach has been to start with the economic and individual unit perspectives and gradually move toward the legal and system perspectives, and this article is already more in that latter direction (system perspective, title ledger). I’ve just started writing as fast as I could put the time together once I got a glimpse of what this thing is about. What I have so far is collected here: konradsgraf.com/bitcoin-theory

    • Bob Murphy says:

      Konrad it wasn’t written; he’s linking to a reddit video Q&A I did. This is the first thing I’ve “formally” written on Bitcoin, but I’ve been verbally giving my thoughts about Bitcoin vis-a-vis the regression theorem for a couple of years now.

    • Peter Šurda says:

      I have the video in the bibliography of my thesis, Konrad, and I mention it with respect to the regression theorem, on page 39 and again 42. The part about Bitcoin is approximately from 15th to 32nd minute if my memory serves right.

  6. Yancey Ward says:

    I also have a question for Silas, if he is willing to answer, or to any other miner who can do so anonymously:

    How many bitcoins per dollar spent for gear and electricity have you generated in a year?

    • Chris P says:

      It is very profitable right now. If you had your hands on say a 50 GH/s machine you would be earning about $10,000/month.

      To put that in context butterfly labs is taking preorders for 50 GH/s machines for only $2,500.

      The problem is that in the next six months to a year the hashing power in the network will increase dramatically as more asics come online massively reducing profitability. BFL (if they ever get their act together) has like 30,000 orders already. And there are other firms shipping asics.

      So basically, if you have the right equipment right now you are rolling in money. But if you order now, by the time you get your machine the return will be much more modest.

      • Yancey Ward says:

        So, that is about 100 bitcoins/month for a single rig, right, and 1200/yr. So if the theoretical limit is 21,000,000, it takes a single machine 17,500 years to produce them all, or 17,500 machines a year to do so. So, I don’t understand why the last one will be mined somewhere around 2140, unless the rate of production significantly declines over time.

        • Jason Gilliland says:

          The rate of production does significantly decline over time. The mechanism by which this is done uses the rate of production over the past 2 weeks to set for the next 2 weeks what the ‘difficulty’ of the cryptographic problem to solve will be. Thus the production rate is re-tuned periodically so that about 6 blocks/hr will be produced. Currently 1 block=25BTC, but it had been 1 block=50BTC until a few months hence. Further halvings of the block reward are scheduled, until it ultimately jumps to 0 block reward after all 21MBTC have been mined.

          • konst says:

            Right and since the difficulty increases over time these ASIC machines have a limited window of profitability.

      • konst says:

        Here is a Bitcoin app/website that tells you how much money you would be making and by the way 50GH/s is not that much. It’s much better than current GPU mining but not like $10,000/month levels.

        “Bitcoin mining profitability calculator”

  7. K.P. says:

    Apparently your article has been linked on Reason 24/7.


  8. konst says:

    Bitcoins probably do NOT violate the regression theorem. Consider dollars. Before the Fed when banks used 100% reserves (if they ever did but lets assume they did), dollars were used as convenient receipts to gold held in the bank. Therefore when dollars became fiat they previously acquired their price, in terms of every other good from their previous existence as actual receipts to gold. Though the Fed’s money printing wrecks their price-exchange value they still owe their price to the previous use.

    Same thong applies to bitcoins. Bitcoins get their price-exchange value from the current dollar.

    • konst says:

      Last sentence should read
      Same *thing* applies to bitcoins. Bitcoins get their price-exchange value from the current dollar.

    • skylien says:

      I agree, I also don’t see how BitCoins violate the regression theorem, which as far as I understand it now only says: In a barter economy nothing without direct use value can become money because no array of prices exists expressed in one medium of exchange. Today we already have an array of prices through the USD (which got it from gold)…

      The question I ask myself is: Would BitCoin become money if there was no government involvement in money at all? Well, I don’t think so, I have even sent my reasoning why I think that to Bob thinking in my naiveté that there won’t be too many people doing that as well..

      I realize now at least about that I was completely wrong….

    • Smiling Dave says:

      No, konst. Let me explain with a homely story.

      A fishmonger has a stand in the market place. There are bins for the different kinds of fish. Every bin has a little sign declaring the price of the fish in that bin.

      One day, a strong wind knocks down all the signs. Our fishmonger does not have a good memory, and forgot what price to charge for the different kinds of fish. Luckily his honest customers do remember what they paid for the various fish in the recent past. Using their info, he gets the prices for all the bins but one.

      “What about this new fish called bitcoin?” he asks everyone. “What is the price of it?”

      “Dunno, worthy fishmonger. I never paid for one before.”

      You get the idea. It’s not mine, it’s Mises’s. When the dollar goes off the gold standard, people give it the purchasing power it had yesterday, when there was a gold standard. But like that smelly new fish, bitcoin has no yesterday to go by.

      That’s the essence of the regression theorem. Ponder it well.

      • Major_Freedom says:

        Bitcoin values didn’t arise in a vacuum. They are grounded on the valuations of dollars. Just like gold went to dollars through past valuations, so too did dollars go to Bitcoins via past valuations.

  9. konst says:

    Bob good try trying to explain encryption with that example but I don’t think it captures what encryption does or the way bitcoin uses it (though I’m not an expert, just an interested amateur).

  10. Chris P says:


    The more I think about the analogy them more in think introducing numbers is unnecessary and confusing. All that is needed to make the system work is for the accountants to record that two “numbers” (or Bitcoins) were transferred from Bill’s account to Sally’s. The numbers 18 and 112 are unnecessary. The bitcoins themselves aren’t numbered. When a transaction occurs the “accountants” simply add up the inflows and outflows from Bill’s account and if he has a balance of two or more Bitcoins than the transaction is authorized.

    • Bob Murphy says:

      Chris P if you are right then it’s not just the analogy that’s off, we are saying something about Bitcoin that is false. We claim in the article that one could trace the “life cycle” of each Bitcoin from the time of its mining through all intermediate owners to the current owner. Is that wrong?

      • konst says:

        I think that’s correct though I wish the analogy was better. Someone said there hasn’t been much research to analyze the transaction history of the “bitcoin ledger” yet.

      • Chris P says:

        Bob, I kind kind of want to say yes and no.

        Consider this example. Suppose I send you two Bitcoins. The software will just add a transaction to the ledger saying Chris sent two bitcoins to Bob. If you already had, say, 10 bitcoins in your account (your bitcoin address) before, then your balance would show you now have 12 bitcoins.

        If at some point later on you decide to send two bitcoins to Sally, the software just records in the ledger that Bob sent two bitcoins to Sally. But it doesn’t distinguish if the two coins you sent to Sally came from me or someone else.

        This is in part what makes ‘mixers’ work for anoymizing transactions.
        Suppose Adam wants to send funds from account A1 to account A2, and likewise Brett wants to send funds from B1 to B2, and Charlie from C1 to C2, and David from D1 to D2. Normally the public ledger would show funds sent from A1 to A2, B1 to B2 etc. which makes the transactions public to everyone.

        But a mixer works like this: Adam, Brett, Charlie, and David all send their funds to a mixer run by Mike at address M. So in the public ledger you would see transactions that look like this: A1 sent 2 BTC to M. B1 sent 2 BTC to M. C1 sent 2 BTC to M. D1 Sent 2 BTC to M.

        Then the Mike the mixer would just send the funds from account M to the receiving addresses: M sent 2 BTC to A2. M sent 2 BTC to B2. M sent 2 BTC to C2. M sent 2 BTC to D2.

        Now there is no way of knowing if the funds Adam has in account A2 came from A1 or from B1, C1, or D1.

        So I would have to say no it isn’t possible to trace each ‘bitcoin’ back to it’s origin since bitcoins are really nothing more than a balance in an account. You can see the transactions to and from each account, but that doesn’t allow you trace each ‘coin’ (since there really aren’t any such things as coins in that sense).

        • Silas Barta says:

          Chris_P is right that the currency units (CUs) do not exist in the Bitcoin system apart from their representation in a balance total of a specific addresses.

          Still, you can look at the address(es) the first 50 BTC went to, then the second, etc, and from there follow “the” path of any CU (or subset thereof). So the analogy is still valid, it just leaves off the possibility that CUs (integers in the story) are arbitrarily divisible and thus can branch out into many pieces.

          Bob, however, is correct that you can follow the flow of money from one pseudonym to another arbitrarily and as far as you wish.

          Mixers don’t delete this flow history, they just make it more computationally-expensive to follow, and they diffuse the evidence-value of any bitcoin balance being in any address at a given time. That is, if address A is revealed to be Rob the Robber, and a chain of transactions results in him transferring bitcoins (through a zillion stages) to address D (and a zillion other addresses), then you can’t just go up to D and say, “gotcha!”

          That’s because the mixer has ensured that zillions of addresses *in addition to* D transacted with A, making the situation analogous to finding cocaine on someone’s dollar bills and trying to use it as proof that he’s a dealer.

          IMHO, mixers are the weak point of BTC because what they’re doing is closest to laundering and easiest to identify and shut down.

          • guest says:

            How does Bitcoin know which ledgers to copy?

            • Silas Barta says:

              Good question. That will be the topic of the next part. But the short answer is that the network picks, after filtering out ledgers with invalid transactions, the ledger update with the most computational work invested in (and this number includes the work put in all previous updates — the block chain — that led up to this ledger).

              They are able to know it has the most work invested in it by using cryptographic “proof of work” techniques involving searches for partial pre-images of hash function outputs.

              Members of the network, in turn, invest this computational work because if they can find a valid solution to that problem, then their ledger update gets accepted by the network and entitles them to claim 25 BTC (an amount that decreases over time) for any address of their choosing (usually one they control).

              Hope that was in the realm of making sense.

        • Bob Murphy says:

          Thanks Chris, you (and Silas) have refined my understanding of how Bitcoin works.

  11. skylien says:

    Nice article. I rally like the riddle analogy!

  12. Yancey Ward says:

    One other question that is troubling me. Let’s say you lose your e-wallet in a fire and the information to access your bitcoin hoard, and you have no backup. If I understand things correctly, this means that no one can access those bitcoins, ever, so they simply fall out of circulation like a bar of gold in the Marianas Trench.

  13. JP Koning says:

    Good exegesis, Bob. Anyone who wants to get a good feel for bitcoin should find this post useful.

  14. Smiling Dave says:

    And now, what everyone has been waiting for. There follows a link to a humble article called Four Valuable Lessons From Actually Reading the Regression Theorem.

    The four lessons, proven beyond doubt from Mises own words, are:

    1. Every money needs a yesterday, meaning “[it must be] linked with a preexisting market exchange ratio between money and other economic goods”. Bitcoins have no yesterday, so they have no today or tomorrow either.

    2. Cost of production is not a valid yesterday.

    3. “Intrinsic value” is a meaningful and appropriate phrase, in the proper context, even given that all value is subjective.

    4. Fiat money has a yesterday, and thus does not violate the regression theorem.

    But Dave, where is the humble link to your humble article? Right here:


    • Shailesh says:

      (reposting since i posted this as a new comment instead of a reply to Dave’s comment)

      Bitcoins are slowly getting a value in terms of USD and, maybe, other goods.

      So, maybe today is the ‘yesterday’ that will allow Bitcoin to be used as money tomorrow?

      • Smiling Dave says:


        It’s hard to say they are getting a value when:

        1. most [over 99%] of the things produced in the world cannot be bought with bitcoins. Can you buy a Toyota with bitcoins?

        2. most [over 99%] members of any geographical unit you choose have not even heard of bitcoins, much less have any idea what they are worth.

        3. the price of bitcoins is so volatile, as in going from $266 to $50 in a few hours.

        • Major_Freedom says:

          1. Bitcoins are bought and sold for fiat currencies which are used to by 99% of all goods.

          2. Bitocins are, at present, worth the combined total of bitcoins multiplied by the fiat price per bitcoin.

          3. Why haven’t they gone from $1,000,000 per bitcoin to $50,000 per bitcoin during that time? Oh that’s right, because of yesterday’s fiat prices.

          • Smiling Dave says:


            You didn’t read the article. Or the links therein.

            • Major_Freedom says:

              Dave, you don’t understand the regression theorem, nor how it applies to bitcoins.

        • Shailesh says:

          Thanks Dave. My point is Bitcoin’s use will become more and more widespread IF:

          1) the fiat currencies keep getting debased like crazy (that’s why Bitcoins come into existence and are popular even among a tiny section);
          2) governments somehow manage to prevent commodity money from re-gaining ground;
          3) nobody comes up with a better currency
          4) Bitcoin holds up to its promise of being secure, non-debasable and easy to use (with technological advancements)

          A lot of IFs do you disagree with the logic?

          • Smiling Dave says:


            All those things are like small helium balloons attached to a skyscraper. They won’t get it to levitate.

            Bitcoin has a problem so basic, so destructive, that no matter what happens, it will never be widely accepted.

            Search my blog for Bitcoin Takes a Beating
            to see what that flaw is.

            I happened to have seen an article today that proves only 75 people in the whole world actually use bitcoins to buy stuff. The link:


    • Major_Freedom says:

      1. Bitcoins do have a yesterday. They were traded for fiat currency.

      2. Cost of production doesn’t have to be valid yesterday in the regression theorem in order to be a valid explanation of (some) prices.

      3. Intrinsic value is a misguided application of subjective value.

      4.Fiat money having a yesterday is why bitcoins have a yesterday.

  15. Shailesh says:

    Bitcoins are slowly getting a value in terms of USD and, maybe, other goods.

    So, maybe today is the ‘yesterday’ that will allow Bitcoin to be used as money tomorrow?

  16. Eric Bergemann says:

    Robert, as a Software Engineer your riddle analogy had me cracking up.

    • Bob Murphy says:

      In a good way or bad way, Eric?

      • konst says:

        I think he might mean the story was funny, i.e. the part where the accountants ask the alleged Bill what’s the answer to the riddle and the riddle thing itself. Not in a bad way. I thought that was funny.

      • Eric Bergemann says:

        Yeah, it wasn’t funny in a bad way.

        It is hard, though, to make private/public key crypto systems any more simple than in the links you provided. While the analogy does have many correlations to how it really works, I still see some people would have a hard to grasping how one could computationally write a riddle that only I could solve and others could tell when it was solved without actually being able to solve it themselves. 🙂

        Mathematically, the algorithms make total sense as to how they cannot be hacked. Explaining how that happens without delving into too much math gets a little hard.

      • Eric Bergemann says:

        Let me clarify and say what I think I found most funny was that an economist was explaining public/private key crypto systems. That isn’t something you see every day!

        You seem to be grasping the big picture too.

        • Bob Murphy says:

          Eric wrote: Let me clarify and say what I think I found most funny was that an economist was explaining public/private key crypto systems. That isn’t something you see every day!

          I do try.

  17. Smiling Dave says:

    Here’s the argument I see most about bitcoin, in syllogism form:

    1. The regression theorem, as interpreted by Smiling Dave, says bitcoin can never have a clearly established price that most people will rely on.

    2. But bitcoin certainly does have a clearly established price. Just go over to mtgox.com, or some other bitcoin trading site, and it is posted up there for all to see, in every major currency. For example, last week it was $266 per bitcoin. Right now it is $65 per bitcoin.

    3. Since 2 contradicts 1, and 2 is a fact, whereas 1 is a theory, 2 wins.

    4. Thus 1 is wrong, and either the regression theorem is wrong, or Dave misunderstood it.

    The flaw in the argument is in 2, because the mtgox prices are phony. Here’s the link that explains why in detail, with a homely story:


    • konst says:

      Your explanation of the bitcoin price roller coaster is way off. Here’s an Ars Technicha story of why the price rose in the first place

      “Taming the bubble”: investors bet on Bitcoin via derivatives markets

      • Smiling Dave says:

        First of all, kosnt, why it rose is one thing. I’m talking about why it fell. And it fell because those listed prices are phony, as explained in my humble article.

        Second of all, did you even read your own article? It may as well have been copied straight from my humble blog, so dismissive [and correct] is it. Here’s the relevant part of the Ars Technica link you provided:

        How do you value one bitcoin, anyway?

        The reliability of bitcoin-related businesses is precisely that problem. Hardly anyone in the world gets paid in bitcoin, and hardly anyone is selling goods in bitcoin. Sure, you can buy stuff from Bitcoinstore.com or any other similar site, but nearly all goods there are based on exchange rates with traditional currencies.

        “Even if there is a speculative element [with traditional commodities], at the end of the day you expect the price to have a gravitational pull towards the true value,” James Angel, the Georgetown professor, added.

        “We have models for valuing stocks and bonds, so we can get a sense of what it’s worth. But I really have no way of figuring out what a bitcoin is worth. Sure, I can go to exchanges and see what the current price is, but how do I know that that price tells me anything? If I look at the price of the euro, I know what I can buy with euros. I know how many euros it takes to get a Big Mac in Paris or a hotel room in Frankfurt. We have this idea called ‘purchasing power parity’ that says that sooner or later exchange rates should reflect prices across different exchanges. We don’t have that with bitcoin.”

        Plus, he added, traditional commodities like gold, oil, wheat, and others have practical value beyond their monetary value. Gold can be used as jewelry, or manipulated industrially to manufacture semiconductors. Oil can be used to power machinery or refined for gasoline. Bitcoins have zero inherent utility.

        “The demand for bitcoins can be driven by either its usefulness as a medium of exchange or a store of value,” Irfan Emrah Kanat, a doctoral student studying virtual currencies at the W. P. Carey School of Business at Arizona State University, told Ars. “Bitcoin is not accepted on Amazon or in the corner store, so its use as a medium of exchange [is] limited.”

        • Smiling Dave says:

          In other words, when real world professional investors, not stupid geeks or amateurs, look at bitcoin, they have the exact line of thinking Mises was talking about in the regression theorem. Which is why they won’t touch bitcoin with a ten foot pole.

    • guest says:

      This was a good response:

      Bitcoin Takes a Beating

      One may ask, then how come they were traded on certain websites at $33 a bitcoin? P.T. Barnum provided the answer. There’s a sucker born every minute. A small handful of people decided to speculate in bitcoins and bought them at whatever silly price they thought was worth it. But bitcoins were never generally accepted at any price but zero. They have no reason to be.

      Basing the quantity of bitcoins one will assign to dollars on what essentially amounts to drawing numbers out of a hat, and then trading dollars for that amount, does not make bitcoins money.

      • Bob Murphy says:

        Ha ha I thought you were being sarcastic with this, guest. Linking to someone laughing about Bitcoin crashing from its “high” of $33 and saying that price made no sense… But I stand corrected.

        • guest says:

          No, no. I only mean that any value would have to be a guess.

    • Major_Freedom says:

      “or Dave misunderstood it”

      Ding ding ding.

  18. Reality Engineer says:

    re: “Nobody but Bill realizes that these point to the same human being.”

    The problem is it may not be that clear cut. The entire transaction log is public, so it is possible to analyze it and potentially match it against other data to try to match up identities the way data mining does in other realms. E.g. match timing to other online or real world events in an investigation, and perhaps whatever other data they can get on web and IP traffic from compliant service providers. The ACLU has now been saying the IRS has been snooping in people’s emails which they might then match to this sort of data. This paper analyzed the transaction log, and it references other work (which I hadn’t read) that raises concerns over ways to violate privacy:

    “The Bitcoin scheme is a rare example of a large scale global payment system in which all the transactions are publicly accessible (but in an anonymous way). We downloaded the full history of this scheme, and analyzed many statistical properties of its associated transaction graph. In this paper we answer for the first time a variety of interesting questions about the typical behavior of users, how they acquire and how they spend their bitcoins, the balance of bitcoins they keep in their accounts, and how they move bitcoins between their various accounts in order to better protect their privacy. In addition, we isolated all the large transactions in the system, and discovered that almost all of them are closely related to a single large transaction that took place in November 2010, even though the associated users apparently tried to hide this fact with many strange looking long chains and fork-merge structures in the transaction graph.”

    This is from the ACLU:

    “New documents released to the ACLU under the Freedom of Information Act reveal that the IRS Criminal Tax Division has long taken the position that the IRS can read your emails without a warrant—a practice that one appeals court has said violates the Fourth Amendment (and we think most Americans would agree).”

  19. Reality Engineer says:

    More papers that call into question the ability to for them to penetrate anonymity:

    An FBI paper here on the bitcoin: http://cryptome.org/2012/05/fbi-bitcoin.pdf

  20. konst says:

    By the way, Bob and others, a useful site with customizable charts and data is


  21. Smiling Dave says:

    Guys, my apologies, but I don’t know how to find questions addressed to me in the comments here besides scrolling through all 107 plus of them once a day or so and seeing if somebody up there left a question. Which is not very efficient for me.

    So please just drop into my site https://smilingdavesblog.wordpress.com/ and leave a comment there on some bitcoin article.

    I presume Bob won’t mind.

  22. Smiling Dave says:

    FRANK SHOSTAK, brilliant and respected Austrian economist supreme, has an article today explaining why bitcoin is a “myth”.

    His main arguments: 1. Does not satisfy regression theorem. 2. Has a price, or value, only as a vehicle for paying in dollars. It is not the money, the dollars are.

    Article: The Bitcoin Money Myth by Frank Shostak

    Link: https://mises.org/daily/6411/The-Bitcoin-Money-Myth

    Smiling Dave’s comments: http://mises.org/community/forums/p/31743/518122.aspx#518122

  23. Eric Bergemann says:

    I haven’t been able to read all of the comments on this video so I apologize if I am repeating what others are saying.

    Regarding the Regression Theorem and the Bitcoin, don’t energy companies already trade energy? I recall seeing companies make agreements to provide energy to each other in the event of a power outage or something. While energy isn’t necessarily a tangible good, it wouldn’t take too much of a stretch to see how the trading of something that isn’t a physical object could transition into using it as a currency.

    Because of the difficulty in mining new Bitcoins, if everything works out to where people actually want to use it for more than just something else to speculate on, then I can see that the value of the coin could level out to the amount of energy it takes to mine a new coin.

    I am no expert economist here, so I am asking, what makes a currency that is tied to a commodity any different than a currency that is tied to a service?

    • Eric Bergemann says:

      I am guessing the answer is, unlike the currency that is tied to a service, the commodity currency can also be used as a commodity along with its use in exchange?

      Is the commodity based currency the foundation of the regression theorem or is the progression of the thing that has value from battering to being a standard medium of exchange the foundation of it?

    • Smiling Dave says:

      Energy companies sell energy to each other that can be used to light up homes and so forth. But bitcoin cannot be used for anything besides shopping. Mises regression theorem proves that something of that nature can never become money.

      The value of something does not depend on the effort or other input required to make it. It depends on how useful it is to people after it is made.

      What does “tied to” mean in this context? It means “can be traded in for with reasonable certainty”. Bitcoin cannot be traded in for anything. It is not tied to the dollar, for example, because you never know how many dollars you will get for your bitcoin. Twice already it has lost over 80% of its exchange rate for dollars in less than a day.

  24. Robert McKeown says:

    Thanks for this series of articles, Bob. I am concerned that Austrians may miss this new development in money. I was just discussing this matter with Jeffery Tucker earlier this afternoon. As Austrians I think it’s imperative to remain on the cutting edge of economic and monetary theory. I’ll be reading more of your work on BTC in the future.

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