Smiling Dave sometimes wonders if he is the only guy on the planet who knows what’s what about bitcoins. For some reason, he has become the default address for all discussions about how bitcoin is the greatest thing since sliced bread. Not shirking his lonely vigil, Dave patiently replies to all new arguments in favor of bitcoin, and, like Sir Gallahad facing a Dragon, demolishes them all.

The latest argument in certain circles has bitcoin being defended as a “secondary medium of exchange”.

Here’s the background. Readers of this humble blog know that Dave has been saying that bitcoin violates Mises’ Regression Theorem. His argument goes as follows.

1. Mises’ Regression Theorem is true.

2. Mises’ Regression Theorem states conditions which bitcoin has to fulfill to be a money some day.

3. Bitcoin does not fulfill those conditions, and by it’s very nature, cannot ever fulfill them.

4. Therefore, Bitcoin does not have a chance of ever being money, and never will be.

The various defences of bitcoin deny all of these statements.

Some deny the first, and say the regression theorem is false, giving various lame proofs of its falsity.

Some deny the second. They assert that the theorem gives no conditions that are relevant to bitcoin, claiming the theorem is either talking only about gold, or only about a barter economy, or only about the pre-computer era, or is indeed only a history lesson and not a theorem about the future at all.

Some deny the third, saying that bitcoins has fullfiled all the conditions admirably.

Some deny the fourth, saying that in practice bitcoin is a money right now, and has been for a while. Others will not go so far as to say a bitcoin has the same economic status as a dollar bill, but will claim it is money’s little brother, a medium of exchange, which Mises asserts is right around the corner from being a money. All it needs is a few more people accepting it as a medium of exchange, and it will be a money.

Smiling Dave has refuted all these arguments in the course of the many articles here about bitcoin. Search the blog for the keyword “bitcoin”, or look for the article Bitcoin All in One Place, which links to most of them.

In the course of these discussions, the topic of medium of exchange has come up often. In fact, the whole discussion has centered on whether bitcoin is a medium of exchange, with Smiling Dave claiming that it is not.

Here is Mises’ definition of a medium of exchange:

A medium of exchange is a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production.

In other words, a medium of exchange is something you trade for in order to use it to buy stuff. If you buy it in order to eat it, or in order to sell it to someone else at a profit, or to sit on it hoping its price will go up, it’s not a medium of exchange.

Smiling Dave argued that bitcoin is not a medium of exchange, because almost nobody buys one in order to buy something else with it. Why should they? They can buy everything they want with their local currency.

OK, now we have the background all set up. Along come some of the bitcoin adherents and claim Smiling Dave has made a mistake. Because maybe bitcoins are not primary media of exchange, but they are secondary media of exchange. Take that, Smiling Dave.

After all, secondary media of exchange are not use to buy something. They are exactly like bitcoin. You take your dollars, buy a secondary medium of exchange like a stock or a bond, and sit on it. Nobody has ever gone to the grocer’s with a share of stock to buy milk, and yet Mises calls them media of exchange. Bitcoin too, therefore, while certainly not a primary medium of exchange, as is clear from Mises’ definition above, is a secondary medium of exchange. You have been disproven, Smiling Dave, they argue.

What can I say, guys? Mises explains secondary media of exchange here. 

He says that some people want to reduce their cash holdings, because holding onto cash sometimes has disadvantages, but want to trade their cash for something that will be readily convertible right back to cash pretty quickly should the need arise. He gives as an example jewels, stocks, bonds, and various other things that have been used at times for this purpose.

Given that definition, it seems obvious to me that bitcoin is not a secondary medium of exchange. Nobody ever said, “Dang, I have too much cash in the house. I need to buy me some bitcoin to reduce my cash holdings”.

But hey, Smiling Dave is generous. he is willing to concede, for the sake of argument, that bitcoin is, maybe, if we really really stretch things, a secondary medium of exchange. But so what? If something is a secondary medium of exchange, then by the very definitions above, it is not a medium of exchange, and it certainly is not money. It is, by definition, something people want instead of money. They want it to reduce their cash holdings, not to serve as an alternate type of cash.

In other words, if we agree that bitcoin is a secondary medium of exchange, it is not money, and never will be, either. Because all money has to start off as a [primary, not secondary] medium of exchange. If the [primary] medium of exchange comes into universal use, it is defined as money.

But being a secondary medium of exchange means it is not used to buy stuff, by definition. Meaning it is not a primary medium of exchange, by definition. Meaning it has no chance of ever being money, by definition.

Bitcoin guys, you have shot yourselves in the foot.

Some have argued that maybe bitcoin can live forever as a secondary medium of exchange. But they do not realize that secondary media of exchange, too, are subject to the regression theorem. Thus, it is doomed. Again.

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