Form: Definition

DEFINING BITCOIN AS A MONEY SUBSTITUTE

(edited)(cross posted)

I’ve worked on this a bit. And, unfortunately, Bitcoin does not fit within the Misesian definition of money. It does fit within the definition of a money substitute. But it’s hard to articulate because of a weakness in the Misesian definition’s grammar.

The problem in defining Bitcoins under Misesian categories is that Bitcoins are not a claim against any deposit, yet they retain the fragility of a claim against a deposit, in that they are dependent upon the Bitcoin network and cannot be accepted without it.

So, Bitcoins, unlike commodity money, do not degrade gracefully into a commodity. Damage to the Bitcoin network is the same as damage to the reserve of a 100% reserve bank. Collapse of the network is the same as collapse of a 100% reserve bank.

It is more accurate to say that Bitcoins are shares in a corporation whose assets are leased servers used to mine and prove work, and the internet as communications If the Bitcoin corporation ceases to operate, then Bitcoins have no value. If the corporation continues to operate, then they have value.

So, like stocks, they are a medium of exchange dependent upon a network for the redemption of those exchanges. BItcoins store value as stocks, not as commodities, not as notes, for this reason.

Others have argued that bitcoins function largely as a clearing house independent of the state. But this is to describe effects, not causes. It doesn’t answer any questions about the durability of bitcoins as a store of value – which is the value of money.

So, in Misesian terms, bitcoins are a non-redeemable money substitute. They are, quite literally, a stock in a voluntary corporation with an open shareholder agreement, that if demand persists, can be used as a money substitute.

The reason for confusion is this two-stage process of monetization. Bitcoins are speculative shares, that if universally accepted as a medium of exchange, can function as a money substitute, by virtue of a low cost, low friction, means of clearance, that requires no human intervention and no reserve.

As a stock, I am not sure yet, whether Bitcoins are the equivalent of an Apple or Facebook stock, or a junk bond. I think they are more likely like buying shares in a non-dividend paying utility. And that current speculation is driving up the price of that stock.

What I am fairly sure of, is that if the illusion that credit money and fiat money can function as a money substitute, that Bitcoins, can also Function as a money substitute. However, I think Bitcoins are more fragile than blue chip stocks and more fragile than fiat money. This fragility will cease if the model becomes popular enough in that the network effect of Bitcoins (or some heir) is sufficient incentive for the miners and proof-of-workers to stay interested.

If the SWIFT network analogy can be reduced to commodity transactions by consumers, then I think that as an institution Bitcoin is very hard to criticize. Certainly no harder than the visa/mastercard networks.

At this point that is the best analysis that I can put forward.

(EDIT)

The logic says that the closest analogy for Bitcoin, is a stock that is highly liquid, and can function as a money substitute, cleared without conversion dependent upon a third party inventory, and insulated from regulatory capture and regulatory inflation.

(EDIT)

I’ll stick with the stock analogy in that the stock is valuable as long as the fundamentals tell me it is. Otherwise I can’t deduce much else without struggling to determine how much my cognitive biases are influencing my assessment. That would be… unscientific. So to speak.

I will say instead, that I wold like to see some form of insurance on the persistence of the bitcoin network once the mining windfall (ponzi criticism) is passed. But without that I can find no logical criticism for NOT using bitcoins. I mean, the SWIFT alliance does exactly the same thing but with privately owned hardware. There is really no reason that the bitcoin network could not be privatized the same way as SWIFT. In that sense, the value of bitcoins will be determined by the number of commercial enterprises that accept it. And there is a high incentive for commercial enterprises to accept it if the fee for participation is a fraction of one percent. Which is what I expect it will be.

In that sense it expands the credit and debit card system. And those systems persist because of the transaction value they provide (lack of necessity to carry cash).

(EDIT)

For those lacking in philosophical rigor, there is a vast difference between correspondence with reality and analogistic means of thinking. If you cannot reduce something to human action corresponding to reality then you do not understand it. Unfortunately, most philosophical discourse, because of its religious heritage, is conducted in this nonsensical mode.