Home » Uncategorized » “Bitcoin is right now a medium of exchange, no doubt about it.” Not quite.

“Bitcoin is right now a medium of exchange, no doubt about it.” Not quite.

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The quote in the title is from Robert Murphy in a blog post.

He also gives great importance to some poll of “professional economists”, some of whom are actually Austrians, who all think bitcoin is just fine. He goes so far to say that the positive opinion about bitcoin is unanimous, except for maybe some ignorant internet bloggers. But any professional economist worth his salt knows with certainty that bitcoin is marvelous, a triumph, a masterpiece, in short, a medium of exchange.

Let’s quote his key paragraph in full:

So my point is, the certain group of Misesians who keep deriding Bitcoin and saying it will eventually collapse, it’s a passing fad, it will never take off beyond internet geeks, etc. etc., because of Mises’ regression theorem, aren’t making any sense. Mises’ regression theorem wasn’t making an empirical prediction about a medium of exchange never attaining the status of money, unless it started out as a regular commodity. No, Mises is saying we can’t conceive of even a medium of exchange (which is a weaker condition than money) that didn’t start out as a regular commodity. Bitcoin is clearly, unequivocally a medium of exchange right now. There are websites where people trade Bitcoins directly for “real” goods. There are people who will sell a “real” good for Bitcoin, intending only to trade away the Bitcoin in the future for something else “real.” Thus Bitcoin is right now a medium of exchange, no doubt about it.

Let’s look at what Mises actually said, emphases mine:

If the objective exchange-value of money must always be linked with a pre-existing market exchange-ratio between money and other economic goods (since otherwise individuals would not be in a position to estimate the value of the money), it follows that an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange-value based on some other use.

There you have it. None of this “we can’t conceive” stuff.

Here’s another one:
Before an economic good begins to function as money it must already possess exchange-value based on some other cause than its monetary function.

That’s right, “must”. Not “we cannot conceive”.

So that’s Mr Murphy’s first unfortunate error, simple reading comprehension.

The economic errors are in the rest of the paragraph. He thinks the current situation of bitcoin is such that is already, as we speak, a medium of exchange.

Here’s why he’s wrong. And I mean clearly, unequivocally wrong. We are not talking little quibbles here.

I sent in a response to his website. It’s “awaiting moderation”. For those who cannot wait, or in case the moderator decides to reject the response, here it is:

Key blunder is this part right here:

“Bitcoin is clearly, unequivocally a medium of exchange right now. There are websites where people trade Bitcoins directly for “real” goods. There are people who will sell a “real” good for Bitcoin, intending only to trade away the Bitcoin in the future for something else “real.” Thus Bitcoin is right now a medium of exchange, no doubt about it.”

So many huge mistakes in so few lines.

First of all, the bitcoin pizza shops and such do not price things in bitcoin. They all price them in local currency, and then translate that price into bitcoin at the current mtgox rate. Think about it. A few months ago bitcoin dropped in a few hours from $266 to less than $100, and to this day has never risen back above $150. Do you think all those stores will give you $266 worth of whatever they sell for $150? Do you think they can survive with such a business model? They make good and sure that every change in bitcoin’s price instantly converts to a change in the price of their wares. If a bitcoin drops 5% in value at 12:00:00 PM, then the price of their wares will not be the same in bitcoins, but will change by 12:00:01 PM to reflect that drop. What will be the constant price of their pizza through all the vagaries of bitcoins wanderings? The dollar price.

Same thing with the customer. If bitcoin rises by 10% today, but the price of the widget in bitcoins does not drop by 10%, do you think he will still buy at the bitcoin store? Or will he go to amazon.com?

So that the bitcoin is not the medium of exchange, the dollar is. Or do you think that credit cards are a medium of exchange, and travelers checks too? If you do, let me correct you. Credit cards, traveler’s checks, and bitcoins are all means of transmission of the real medium of exchange, the dollar. If you send a messenger boy to buy you a coffee, and give him a dollar to pay for the coffee, the medium of exchange is not the messenger boy. It is the dollar. Bitcoins are messenger boys, as we have shown in the previous paragraph.

That poll of so called professional economists, some of whom are Austrians, forgot to poll Frank Shostak, an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies.

Here is what he has to say in his article The Bitcoin Money Myth [=exactly what I am saying]:

“Contrary to the recent hype, we hold that Bitcoin is not money but rather a new way of employing existent money in transactions.”

[As an aside, Peter Schiff, who has schooled Bob in the past about practical economics, forcing Bob to admit Peter was right, also was not polled, because Peter has come out that bitcoin is garbage and always will be, because it violates the regression theorem. No intrinsic value, is how he puts it.

Doug Casey also was not polled, because he too has nothing but contempt for bitcoin, and for the same reason.

Timothy Terrell… but more about him later].

Second big mistake is thinking that those stores that get payment in bitcoins take the bitcoins in order to buy something else. Remember, if A trades his horse for B’s cow, neither the horse nor the cow are media of exchange. Only if B doesn’t really want the horse, but wants to trade it later on for clothing, say, is the horse a medium of exchange. But those stores don’t take bitcoins to buy things. [There is not enough stuff out there to buy if they they are taking in a serious volume of bitcoins. A pizza shop might take payment in bitcoins, but do you think the shop’s supplier of cheese and flour accepts bitcoins? No such place. Bitcoin is for people who deal with customers, not for wholesalers.]

They are accepting bitcoins either to convert them instantly into local currency, or to hoard them, hoping they will go up in price. In either case, they are like a horse or a cow [=to hoard], or a messenger boy [=to instantly convert to dollars], but not media of exchange.

Finally, the third big mistake, is forgetting, or not knowing in the first place, that a medium of exchange, in this context, means something that is widely used. This cannot be emphasized enough, because it is the key blunder all those “professional economists” in the poll Bob mentions are making. I’ve been saying it ever since the bitcoin fad began. But Timothy Terell has been saying it way before bitcoin even existed:

Twelve years ago, in 2001, when bitcoin was just a twinkle in the fraudulent eye of Namashaki or whatever his name is, Timothy Terrell, associate professor of economics at Wofford College in Spartanburg, SC, and an adjunct scholar with the Ludwig von Mises Institute, who was also not polled, anticipated the scam that is bitcoin and explained why it is doomed to fail.

His reason, and I quote: “One of the consequences of the regression theorem is that money must arise from a commodity already in general use. If there is no non monetary use for the good, it will not develop the widespread demand that must precede its use as a medium of exchange.”

Source: Is Digital Currency Viable? – Timothy D. Terrell – Mises Daily

[My many bitcoin writings elaborate on why widespread demand is so important. See link at end of this article.]

The Mises website also has an interesting take on bitcoins by Patrik Korda, and by Nikolay Gertchev, who holds a Ph.D. in economics from the University of Paris. The poll forgot him, too.

This whole fiasco is a lesson to us all. Look at the ideas, not at the credentials.
Look at the ideas, not at opinion polls. What a sad, sad way of examining the merit of ideas, taking a poll.

Is this what AE has become? Will all Austrian research be opinion polls from now on? Will the study guide to Human Action, when discussing Mises’s claims that we must look at the ideas, not the credentials of the person stating them, or the popularity of the ideas, contain a little section rejecting Mises, and explaining that the way to go is opinion polls?

Heck, all of Austrian Economics should be burned in a huge pile as ignorant rantings, if we go by opinion polls of “professional economists, some of them Austrians”. You really value their opinion, Bob?

Go to Smiling Dave’s website, do a search for Bitcoin All In One Place, and educate thyself. To make it easy, here’s the link:

Bitcoin, all in one place.



  1. logicchains says:

    How about the ‘intrinsic’ value of Bitcoin as a means of indirect exchange that is relatively anonymous and taxation free (compared to other alternatives)? Isn’t being able to transfer wealth to any part of the world without paying taxation or fees a service in and of itself?


  2. Smiling Dave says:

    “‘intrinsic’ value as a means of indirect exchange” is an oxymoron. Read my article Bitcoin Takes a Beating, or Mises in Money and Credit or in HA.


  3. logicchains says:

    Okay, how about ‘intrinsic value as a means of anonymous exchange’?

    “Before an economic good begins to function as money it must already possess exchange-value based on some other cause than its monetary function.” Bitcoin has value as a token that can be transferred anonymously and cannot be reproduced, similar to how something like bandwidth has value.


  4. Smiling Dave says:

    Anonymous exchange means you use it to pay for something, no? That is a monetary function. And as you quoted, it has to have some other value besides monetary function, which it doesn’t.

    Bandwidth is not used as money. You don’t pay for something with bandwidth.


  5. logicchains says:

    Bandwidth has value as a medium of exchange of information, but as you say it’s not money. If bandwidth can have value as a medium of exchange of information (it must have value, as people are willing to pay for it), could not Bitcoin have value as a medium of anonymous exchange of information? Perhaps I should say ‘medium of transfer’ rather than medium of exchange, to avoid confusion.

    Bitcoin has exchange value as a medium for anonymous transfer of a particular kind of information. How’s that?


  6. Smiling Dave says:

    If people would use it for that and be willing to pay for that use, sure. But right now, nobody has ever paid to use bitcoin to pass a love note to his beau, or whatever. If things change, and it starts being used for that, then we will have to rethink things.

    The only thing it has ever been used for is as money. And that use is bound to flop, according to the reg. th.


  7. Smiling Dave says:

    It’s a monetary service, and the reg. th. proves that is not enough.


  8. logicchains says:

    “If the objective exchange-value of money must always be linked with a pre-existing market exchange-ratio between money and other economic goods (since otherwise individuals would not be in a position to estimate the value of the money), it follows that an object cannot be used as money unless, at the moment when its use as money begins, it already possesses an objective exchange-value based on some other use.”

    I draw your attention to the line ‘since otherwise individuals would not be in a position to estimate the value of the money‘. Wouldn’t this imply that the suitability of a given pre-existing ‘objective exchange-value’ is determined by whether or not it is sufficient that individuals might use it for estimating the value of the money? If so, would not ‘potential future use as a means of exchange not subject to taxation or regulation’ be something which individuals could use to estimate the value of Bitcoin?


  9. Smiling Dave says:

    OK, let’s try it out. How much do you think ten million people will value a bitcoin at because of that feature? A dollar? A thousand dollars? Give me a reason why you chose the number you chose.


  10. logicchains says:

    How about, v = r * n/t * x * i * d , where v is the value an individual will place on a Bitcoin, r is their risk preferences, n/t is the number of merchants (or exchange opportunities) who accept Bitcoin and offer products they desire over the total number who accept the currency of their country of residence, x is their expected average tax rate as a fraction, i is their expected average yearly income, and d is the price of one unit of the currency of their country of residence. Something like that could approximate the savings they could make through Bitcoin, and hence the value they place on it.


  11. Smiling Dave says:

    So what is the bottom line actual number, not the formula?


  12. logicchains says:

    Lets fill in some numbers for two random individuals, with the same expected incomes and tax rates, at a time when Bitcoin offered them one ten-millionth of the purchasing options of their national currency:

    $0.001 = 0.5 * 1/10000000 * 0.4 * 50000 * 1
    $0.0006 = 0.3 * 1/10000000 * 0.4 * 50000 * 1

    In which case the number would be anywhere between 0.1 cents and 0.06 cents per Bitcoin.


  13. Smiling Dave says:

    1. Would you bother with a money that gives you one ten millionth of the purchasing options? What about a vendor, who has to take in many hundreds of dollars of the stuff every day? What will he do with that money? Indeed, that is the very problem that brought the Ithaca Hour to its knees. The vendors were all stuck with the Ithaca Hours, and had no where to spend them, so they stopped accepting them after a while. RIP, Ithaca Hour.

    2. So you are unsure, even after the formula, whether to value the money at 0.1 cents or at six times as much? Do you see a problem there?

    3. How many people do you think will use that formula? How many will sit there on their own and come up with that formula? And how many do you think will just shrug and say, “Why bother?” How many people will be confident everyone else will use that same exact formula? I know I am sceptical of most people’s ability to even READ that formula without their head spinning, at least most people I know, much less compute anything from it.


  14. logicchains says:

    1. The value I used there in terms of purchasing options was for when Bitcoin was first getting started. And it did in fact have an extremely low value like then, with trades generally involving large quantities of Bitcoins. Now the purchasing potential of Bitcoin is much greater, especially if taking into account that it can be exchanged into fiat currencies that can purchase anything, so the value now is correspondingly higher, making it less unattractive to vendors (presumably why some vendors now use it).

    2. Things don’t have an ‘objective value’. Rather they have a market value. If there were only two people in the market for apples, and one thought they were worth $3 per apple and the other thought they were worth $2 per apple, does that mean trade can’t occur and a market value can’t be reached? Not necessarily; if the one who valued them at $2 was the seller and the one who valued them at $3 was the buyer, a trade would certainly occur. The process is described here: http://mises.org/daily/5903.

    3. It’s not necessarily a formula people explicitly calculate. It’s a numerical approximation of people’s thought processes. When I buy an apple, I may not be doing a complex mathematical calculation in my head, but there is some kind of calculation that is done in order for me to determine what value is acceptable.


  15. Smiling Dave says:

    1. You can’t “buy anything”. I challenge you to stock your fridge and fill your gas tank and pay your rent with bitcoin.
    Vendors now use it either because they plan on hoarding it, or to convert instantly to dollars. They don’t accept it because it will make it easier for them to buy things. It won’t. So it does not serve as a medium of exchange, but as a way of gambling or as a way of moving dollars.

    2. About objective value and that mises daily article. I assume you are telling me there is no such thing as objective value because that phrase showed up in my humble article.

    You’ll notice he does not talk about buying money in that mises daily article, but about buying a horse. There is a difference between a horse or an apple and money. The price you are willing to pay for a horse or an apple depends ultimately on one thing only. How badly do I want this apple right now? If you want it badly enough, you will buy it. If not, not.

    But money is not like that. Because nobody wants money per se. They want what money can buy. Thus, when they ask themselves “How badly do I want this money?”, they must answer with “First I must know what I can buy with this money, meaning what other people are willing to give me for this money.” That’s why money, unlike other things, has an objective value. Mises in Chapter 2 of Money and Credit explains it all in detail. That’s where the quote about objective value comes from.

    3. About the formula. What you are saying, it seems to me, is that bitcoin has a convenience or whatever that is worth money, and everyone has some rough and ready way of deciding how much that convenience is worth. Fine. Let’s say that we can assume the universal convenience value is a dime, or maybe it’s a tenth of a percent of the total cash involved in the transaction. But that convenience is the convenience of transferring purchasing power. And how do we know how much purchasing power we should attribute to bitcoin? A dollar? A hundred dollars? How do we know what value people will assign to it, if there is no way of assigning value to it? This point shows up very clearly when we say the convenience is a percent of the sum involved, because then the question that cannot be answered is immediately obvious. A tenth of a percent of what?

    It’s like a Mom packing her son’s lunch box with drinking straws. “What am I going to eat, Mom?” “Those straws. They make it very convenient to drink without spilling.” “Fine but what am I going to actually drink with those straws?”

    Bitcoin is like the straw, but how much ‘food’ does it contain? No way of knowing what the other guy will think, therefore no way of deciding on any value at all. Therefore no one will accept it at all.

    I wrote about this point in this article: https://smilingdavesblog.wordpress.com/2012/12/08/bitcoin-yet-again/


  16. logicchains says:

    1. I think one could stock one’s fridge with pizza in certain places, but admittedly not pay one’s rent or fill one’s gas tank. Bitcoin’s acceptance has however steadily been increasing; if it reached the stage where you could buy gas and pay your rent with it, would that change your mind?

    2. Where you say “There is a difference between a horse or an apple and money.”, I’m arguing that the service provided by Bitcoin as a potential means of avoiding taxation/regulation is equivalent to a horse, apple or haircut, not money.

    3. My argument is that the ‘convenience’ of Bitcoin is not that of transferring purchasing power, but rather that of (potentially) facilitating the reduction of taxation/regulation applied to transfers of purchasing power. I suppose the central element of my argument is the notion that ‘potentially facilitating the reduction of taxation applied to transfers of purchasing power’ is a separate service to ‘transferring purchasing power’, and that it hence counts as a service like any other; haircuts, dentistry, etc.
    My argument differs from that of Aristippus in that the non-exchange value I’m attributing to Bitcoin is its potential to avoid taxation and regulation of purchases.


  17. Smiling Dave says:

    1. My usual reply to q’s of this nature is “if”.

    2. Is the value for a saving a dollar from tax/regulation the same as for saving a million dollars? I would answer no. Thus the service is a percentage of the amount of money saved. The amount of money saved is presumably the money you have turned into a bitcoin. Say the value of the service is one percent of the value of the money saved. So a bitcoin that you pay a dollar provides a service worth a penny. Then why is the bitcoin selling for a dollar in the first place, and not a penny?

    Only if a bitcoin was not the money itself, but a vehicle for hiding dollars, could the thing make sense. But then the bitcoin would just be a kind of traveler’s check denominated in dollars, which no one says is a new money.


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