Bitcoin:

the future of money?

BSc thesis

Name: Roan Laenen

Supervisors: Liesbeth Noordegraaf-Eelens, Julien Kloeg & Elvira Sojli
Subject: Bitcoin and the Austrian School of Economics
Major: Economics & Business
Date: 01-05-2016
Grade: A (85%)
Capstone project
Erasmus University College

 Abstract

This thesis aims to explore whether Bitcoin can be considered money from the perspective of
the Austrian School of Economics. Within the Austrian School, there have been numerous
concerns whether Bitcoin could be classified as money, as it may not be in congruence with
the regression theorem set forward by Ludwig von Mises. The main question in this debate
seems to revolve around the question, is Bitcoin valued in direct use? This paper presents a
categorized overview of the original regression theorem, and the various arguments provided
in this debate. An argument will be made that Bitcoin does not violate the regression theorem
and can thus be considered money from the perspective of the Austrian School, as it had prior
direct-use. However, a broadening of the regression theorem is necessary in order to be fully
compatible with Bitcoin. From an Austrian perspective, Bitcoin is currently not considered
money, as it is nowhere the most liquid medium of exchange. I maintain that this is because
Bitcoin lacks a distinct geographical boundary in which it operates. Aside from other
hindrances, this lack of confined spatial space appears to be an important hurdle for Bitcoin to
be considered money according to the Austrian School.

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 Table of Contents

Abstract .................................................................................................................... 2

Chapter 1 - Introduction .......................................... Error! Bookmark not defined.

Chapter 1.1 – The Appearance of Bitcoin ..... Error! Bookmark not defined.

Chapter 1.2 – Methodology ........................................................................... 5

Chapter 1.3 – Social & Academic relevance ................................................. 6

Chapter 2 - Bitcoin ................................................................................................... 8

Chapter 2.1 – What is Bitcoin? ...................................................................... 8

Chapter 2.2 – What is the blockchain? .......................................................... 8

Chapter 2.3 – The political side of Bitcoin .................................................. 10

Chapter 3 – The Regression Theorem ................................................................... 11

Chapter 3.1 – The Origin of Money............................................................. 11

Chapter 3.2 – The Regression Theorem ...................................................... 13

Chapter 4 – Bitcoin & Regression Theorem .......................................................... 16

Chapter 4.1 – Current debate on Regression Theorem ................................ 16

Chapter 4.2 – Conclusion............................................................................. 19

Chapter 5 – Is Bitcoin currently considered money? ............................................. 21

Chapter 5.1 – Definition of money .............................................................. 21

Chapter 5.2 – Important hurdle: geographical location ............................... 21

Chapter 6 – Conclusion.......................................................................................... 24

Bibliography .......................................................................................................... 26

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 Bitcoin: the future of money?
“Bitcoin is to banks, what e-mail was to postal offices.”
~ Mihai Alisie, The Guardian, 2013

Chapter 1 – Introduction
Chapter 1.1 – The appearance of Bitcoin
Mihai Alisie, editor-in-chief of Bitcoin Magazine, proclaimed these words in his interview
with The Guardian on a new type of electronic currency: Bitcoin. It describes how some
Bitcoin enthusiasts feel about this new digital currency; capable of reshaping our financial
system. However, numerous critical voices point towards the negative aspects of Bitcoin, such
as its role in black markets. With Bitcoin reaching the front page of a recent edition of The
Economist (31st October 2015), it becomes clear that Bitcoin is a relevant topic in today’s
society.

Bitcoin is an open source, peer-to-peer digital currency developed in 2008 by a

pseudonymous developer known as “Satoshi Nakamoto”. It is the first peer-to-peer payment
network that requires no central authority or intermediary. Bitcoin is called a cryptocurrency
since cryptography is at the heart of its technology to prevent double-spending. Strong Bitcoin
proponents view the currency as a better alternative to our current monetary system, which is
why the viability whether Bitcoin could become money is widely discussed. This thesis aims
to examine this question from the perspective of the Austrian School of Economics. The
reason for this approach is that the theoretical roots of Bitcoin are most in line with the
Austrian School.

This thesis will primarily focus on one specific theorem of the Austrian School; the regression
theorem set forward by Ludwig von Mises. The regression theorem explains the emergence of
money, and how money achieves its value. A common criticism on Bitcoin from the
perspective of the Austrian School is that Bitcoin does not to follow this theorem, and
therefore some claim that Bitcoin could never become money. Others however, maintain that
Bitcoin does not violate the regression theorem, and see no problem in the question whether
Bitcoin could be considered money.

This thesis attempts to provide an overview of this incongruence between Bitcoin and the
regression theorem, and will focus on providing a coherent overview of the original problem
and the various arguments given in this debate. In doing so, I will be able to provide my own

4
synthesis and conclusion, and provide additional insight on the question whether Bitcoin
could become money according to the Austrian School. The leading question throughout this
thesis is; Can Bitcoin be considered money according to the Austrian School of Economic
thought, and if so, is it currently considered to be money?

Chapter 1.2 – Methodology

Before approaching the topic in more depth, it is necessary to elaborate the choice for the
Austrian School of Economics as the applied theoretical framework. Bitcoin is essentially
conceived by a mathematical equation and works through peer-to-peer networks, meaning it is
possible to transact without an intermediary and does not require any government body to
‘create’ the money – in contrast to fiat money we know today. The Austrian School of
Economics is one of the only schools that views money as something that can be apart from
the state. Most other economic schools view money as something that is closely intertwined
with the state. North (2011, p.136) explains:

"This theory of endogenous money is unique to Mises and his followers. No other school of
economic opinion accepts it. Every other school appeals to the State, as an exogenous
coercive power, to regulate the money supply and create enough new fiat or credit money to
keep the free market operational at nearly full employment with nearly stable prices. Every
other theory of money invokes the use of the State's monopolistic power to supply the optimum
quantity of money."

Furthermore, the European Central Bank also notes that the theoretical roots of Bitcoin are
most in line with the Austrian School of Economics (ECB, 2012). They agree that the
ideological underpinnings of Bitcoin, as a private medium of exchange, can be directly linked
to the criticism of the Austrian School on the current fiat money system.

It is important to note that the Austrian School is being used as the applied theoretical
perspective, which does not imply that the school and the theories mentioned in this paper are
correct. It is also not claimed that other schools of economics have nothing worthy to say on
the topic of Bitcoin. This point of view is merely being used to analyzing Bitcoin, as its
theoretical foundations provide an interesting basis to analyze Bitcoin.

This thesis consists of four distinct levels, namely; Bitcoin, the Regression Theorem, Bitcoin
and the Regression Theorem and Bitcoin and Money. Firstly, as the technology and structure
of Bitcoin makes the currency different from other types of money, it is essential to properly

5
understand these different facets in order to theorize about it on an economic level. Therefore,
this thesis will continue with an overview of what Bitcoin exactly is and how it works.
Secondly, an depth analysis of the regression theorem will be provided. For this, a good
understanding of Carl Menger’s On the Origins of Money (1892) is required, as the regression
theorem is built upon this theory. Only then can we fully understand regression theorem set
forward by Ludwig von Mises. By using quotations of the original authors, we can gain a
better understanding of what the original intention of the authors were. Thirdly, I will provide
a categorized overview of the various ways others have analyzed Bitcoin and the regression
theorem, followed by my own synthesis and conclusion. The literature in these four topics is
presented chronologically, as the research tends to be cumulative. Lastly, in chapter six, I will
summarize my findings in the conclusion.

Chapter 1.3 – Social and Academic relevance

Social relevance
As a result of the increasing complexity of our financial system and the resulting collapse of
our economy in 2008, many people have lost faith in our current financial systems and its
surrounding institutions. The Chicago Booth/Kellog School Financial Trust Index (2014)
shows that only 22% of Americans trust the nation’s financial system, and an annual “trust
barometer” published by Edelman, a PR firm, finds that overall trust has declined in the
leaders of government institutions, businesses and media (The Economist, 2012). Because of
this distrust, there has been a search for alternatives, and some claim to have found the
solution in Bitcoin. As mentioned before, Bitcoin is fully transparent, requires no
intermediary and is fully denationalized; therefore some believe that the cryptocurrency is an
attractive alternative to our current financial system. Through this analysis of Bitcoin using
the theoretical foundations of the Austrian School, we may find interesting conclusions
whether Bitcoin has a future and assess its possibility of being an alternative to our current
monetary system.

Academic relevance
Since Bitcoin is such a new invention (invented in 2008, published in 2009 and reached the
mainstream around 2012), there is still a lot to be written and investigated on the subject.
Almost all relevant sources on Bitcoin and the Austrian School date from less than three years
ago. Quite some authors have written about the regression theorem and Bitcoin, but as it is
such an underdeveloped field, I believe it misses a general synthesis and a categorical
overview of the various arguments given so far. Some argue that the regression theorem states

6
that Bitcoin has no intrinsic value and thus can never evolve to a point of money (Dave,
2011). Others argue that Mises could not have foreseen this technological development and
thus refute the regression theorem (Murphy, 2014), while others believe Bitcoin fits the
regression theorem by searching for its prior direct-use (Graf, 2013). As the field is so new
and divided, I believe I can make a valuable contribution by clearly stating the original
problem, reviewing the diverse arguments and providing my own synthesis and conclusion. I
also believe I can make a valuable contribution myself about the topic of whether Bitcoin can
become money according to the Austrian School.

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Chapter 2 – Bitcoin
Chapter 2.1 – What is Bitcoin?
Bitcoin is an open-source, peer-to-peer digital currency. In November 2008, Satoshi
Nakamoto (a pseudonym) posted his original paper Bitcoin: A Peer-to-Peer Electronic Cash
System. This paper outlines the mechanism of Bitcoin; a peer-to-peer network which is able to
provide electronic transactions without an intermediary. Nakamoto is the name used by the
person (or group) who invented bitcoin, and this paper is the earliest known record which
describes the Bitcoin mechanism. It describes the core ideas of Bitcoin and forms the
theoretical basis of the actual Bitcoin network launched a year later. As it only outlines the
technical side of Bitcoin, it does not explain its economic implications. For this reason, a wide
variety of academic papers attempts to fill this gap by explaining the economic aspects of the
Bitcoin system.

What makes Bitcoin unique is that it solves the so-called ‘double-spending’ problem. When I
trade 10 euro physically with another person, I have to give away my physical bill of 10 euro.
However, when I trade money online, there is nothing physical that I am giving away; so how
can we be sure that I will not use that same €10 for something else? This is in its essence the
double-spending problem. Before the Bitcoin system, a third-party intermediary was needed
to ‘check’ the transaction of two people over the internet, such as Paypal or Mastercard, or a
financial bank. These intermediaries have a ledger in which they track all transactions and
thus prevent double spending. With Bitcoin, this ledger is made public, and every transaction
that occurs in the bitcoin economy is registered in this public, distributed ledger, which is
called the block chain. New transactions are checked against the block chain to verify that
Bitcoins have not been previously spent, thus eliminating the double-spending problem (Brito
& Castillo, 2013, p.4).

Chapter 2.2 – What is the blockchain?

The block chain is a distributed database that maintains a continuously growing list of
transaction records, in this case Bitcoin transactions. The Bitcoin block chain is a big peer-to-
peer network, made up of thousands of users, which all check whether Bitcoins are not being
double-spend. This peer-to-peer network can thus be seen as the ‘intermediary’ in the Bitcoin
system (Kelly, 2014, p.75). Because the ledger is public and transactions are verified by
thousands of computers, it is almost impossible to double-spend bitcoins. The only way how
this could theoretically happen is if one user has more than 51% of the total computational

8
power of the Bitcoin network, also known as a Sybil attack (Miers, Garman, Green, & Rubin,
2013, p. 8-9). However, for one user to have 51% of the computational power is extremely
unlikely, as Bitcoin is the world’s most powerful computer network, with 11.000 times more
power than the top 500 supercomputers combined (Rowley, 2015). The expected value of
gathering so much computational power is less than simply using these resources in legal
operations (Andresen, 2012).

To fully understand how the blockchain works, it is necessary to understand the basics of
public key cryptography. Transactions are verified, and double-spending is prevented, through
the use of this type of cryptography. Paar, Pelzl and Preneel (2010) describe this process
extensively. Public-key cryptography entails that each user is assigned two ‘keys’ - a private
key which is secret, and a public key that is open and public. When person A decides to
transfer bitcoins to person B, the transaction contains person B’s public key (which is needed
for the network to know where to send the bitcoins to), and person A’s private key (which is
needed for the network to verify that person A indeed sends his/her bitcoins away). By
looking at person A’s public key, anyone can verify that the transaction was indeed signed
with his/her private key, that it is an authentic exchange, and that person B now is the new
owner of the bitcoins. This transfer of ownership is then recorded, time-stamped, and
displayed in one ‘block’ of the blockchain. What public-key cryptography ensures it that all
computers in the network maintain a public ledger that is constantly updated and contains a
verified record of all transactions within the Bitcoin network, which prevents double-spending
and fraud.

This network depends on users who use their computing power to verify these transactions.
These users are called ‘miners’ (Kelly, 2014, p.75). At first, these miners were ordinary
computer hobbyists interested in the concept of Bitcoin, but nowadays this activity is reserved
for serious businesses with big data centers full of computers specifically designed to mine
Bitcoins.1 The incentive for these users to provide its computational power to the bitcoin
network is that they are rewarded with newly created bitcoins. This process of creating new
bitcoins is called mining, and happens as thousands of computers all over the world solve
complex math problems that verify the transactions in the blockchain (Brito & Castillo, 2013,
p.5). What these math problems exactly are and why they are math problems is beyond the
scope of this paper; Crossen (2015) discusses this in much greater detail. The bottom line is

1
Motherboard released an interesting mini-documentary on the life inside a secret chinese bitcoin mine. To
get an idea about such data centers, it is an interesting video to watch.

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that miners get rewarded with newly created bitcoins for contributing their processing power
for verifying transactions in the blockchain. Since there is an incentive to mine bitcoins,
numerous users will provide their computational power, making the whole network more
secure, as there are more users that approve transactions. This process of mining bitcoins will
not continue forever; there is a finite supply of 21 million bitcoins, which is projected to be
mined in the year 2140. This makes Bitcoin inherently deflationary – at least when that cap is
hit (Torpey, 2015). These math problems become more difficult over time, and the size of the
reward for mining also decreases. These two effects mimic the production rate of a
commodity like gold (Tendell, 2013).

Another feature is that since the third-party intermediary is removed from the process, the
transaction costs of Bitcoin are lower than other financial systems. With cheaper transactions
and a theoretical ability of quicker transactions, the possibility of micro transactions becomes
feasible, which is an important advantage of Bitcoin (Cawrey, 2013).

Chapter 2.3 – The political side of Bitcoin

As mentioned before, various Bitcoin proponents appreciate Bitcoin because of political
reasons. Among these proponents it is common to find supporters of the Austrian School of
Economics. The reason why some Austrians2 favor Bitcoin is because it enables a financial
system without state involvement. Austrians believe that state involvement in money clashes
with some basic principles of the Austrian School, such as the cause of inflation, the theory of
money creation and their views on business cycles (Taylor, 1980). More specifically, Barta
and Murphy (2014) describe how they are skeptical of the modern state, and consider it a
threat to both civil and financial liberties. They argue that problems such as hyperinflation,
the corrupt banking system and the 2008 financial crisis are caused by the state dominating
the economic system. Furthermore, they believe that the state pushing interest rates artificially
low during periods of recession is detrimental for the economy. An economic system that runs
on Bitcoin could potentially solve these problems, as it removes the need for an entity that
controls the monetary system. Since the Bitcoin protocol is built on a peer-to-peer framework,
nobody is “in charge” of Bitcoin, so there is nobody with power to break its rules or
manipulate it.

2
For the sake of simplicity, with Austrians I refer to partisans of the Austrian School of Economics.

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Chapter 3 – Regression theorem
One would therefore assume that Bitcoin is an attractive alternative development to state
controlled currency in the eyes of most Austrian School partisans. However, this is not the
case, and followers of the school are greatly divided on the issue of Bitcoin. As mentioned
before, the reason is that - according to some - Bitcoin does not adhere to an important theory
within the Austrian School; the regression theorem set forward by Ludwig von Mises. The
regression theorem attempts to explain the emergence of money, and how money achieves its
value. Some maintain that since Bitcoin violates the regression theorem, it is and can never
become money, and therefore cannot be seen as an attractive alternative. Others however,
argue in various ways that Bitcoin does fit the regression theorem, and see no reason why
Bitcoin could not be or become money. In order to evaluate these different arguments, it is
necessary to state the original regression theorem and its main theories. As the regression
theorem builds on the theory of the origin of money by Carl Menger, the following section
will describe this in detail.

Chapter 3.1 – The Origin of Money

Many academics have attempted to explain the origin of money, and there is a sizable amount
of literature which tackles this topic. For the purpose of this paper, the focus will be on the
Austrian School explanation of the origin of money, set forward by Carl Menger, the founder
of the Austrian School of Economics, in his book On The Origin of Money (1892).

The benefits of a universally accepted medium of exchange are widely recognized. The
question however is, how could money come into existence? After all, there is no clear
incentive for an individual to accept something worthless (such as a piece of paper), or
relatively worthless (such as metal coins). If everyone else would use money in exchange,
then there is a clear incentive for an individual to do so as well. But how do human beings
reach such a position in the first place?

One possible explanation, which thinkers such as Plato, Aristotle and Roman jurists have
provided, is that a powerful ruler decided that instating money would benefit his people, and
consequently ordered its citizens to accept some particular thing as money (Menger, 1892, p.
16). That way, citizens will start using that specific currency and as that currency can be used
in trade, it attains its value. However, Menger points out that there are several problems with
this notion. First of all, there is a lack of historical record of such an important event, even
though money was used in all ancient civilizations. In Menger’s words: ‘No historical

11
monument gives us trustworthy tidings of any transactions either conferring distinct
recognition on media of exchange already in use, or referring to their adoption by peoples of
comparatively recent culture.’ (Menger, 1892, p. 17). Secondly, how would the state
distribute such a medium of exchange? If the medium of exchange existed before, it would
make some individuals rich and some individuals poor, which would likely lead to
disharmony and citizens rebelling against the state. If the medium of exchange did not exist
before, it would be almost impossible for the state to determine how to distribute it.
Furthermore, how would the purchasing power of this new medium of exchange be
determined? There is no previous reference of value as it is a new medium of exchange.
Thirdly, it is unlikely that someone could have invented the idea of money without ever
experiencing it (Murphy, 2003).

Carl Menger, provides an alternative theory which avoids these difficulties. He claims that
money is not generated by a state through law, but spontaneously through social interaction of
individuals. Money is in the end the most liquid medium of exchange, and comes into being
from a barter economy. In a pure barter economy, different items have variable degrees of
saleableness or saleability (closely related terms would be marketability or liquidity). The
more saleable a good, the easier it is to exchange it for other goods at an economic price. To
provide an example, bread has much more saleability, or liquidity, than a telescope. The
reason for that is that it is much more likely to find someone who is willing to exchange bread
(as it is a basic necessity) for other items - in contrast to a telescope which is a very specific
item. These most saleable goods will be traded more frequently, thereby increasing its
marketability even further. At some point, the most liquid good will become universally
acceptable as a medium of exchange which we then call ‘money’. What medium of exchange
becomes money depends on various factors aside from liquidity, such as store of value (unit
of account), transaction cost, divisibility, durability and homogeneity (Murphy, 2014).

Another important contribution by Menger is the marginal subjective value theory. Before,
classical economists explained relative prices in the market by their cost of production. The
cost of a bicycle would be explained by the costs of the materials, the costs of labor for
crafting it, the cost for renting a hall where the bicycle could be made and so on. Because of
all these costs, they would be inclined to charge a certain price for that bicycle. Menger
however, explained the price of a bicycle in terms of its subjective value to an individual. A
bicycle has a certain price because it gives people a certain utility. Because of that, bicycle
makers are willing to spend these previously mentioned costs to craft a bike. This is the

12
opposite way of viewing relative prices. The marginal subjective value theory, or marginal
utility theory, is now the economic consensus for explaining relative prices (Murphy, 2014).

Chapter 3.2 – The Regression Theorem

With marginal utility economists were able to explain relative prices, such as why a telescope
would trade for so many pieces of bread, but no one was able to explain the purchasing power
of money with marginal subjective value. If marginal utility were applicable to money, its
demand schedule could only be explained by analyzing it in terms of all other goods in the
market. A circular argument would then arise; all goods are valued in terms of money, and
money is valued in terms of them. In other words, Menger’s contribution did not explain how
money derived its (subjective) value. Ludwig von Mises accomplished to avoid this circular
argument in his book The Theory of Money and Credit (1912). As Mises (1912, p. 116) states;

Neither Menger, nor any of the many investigators who have tried to follow him, have even so
much as attempted to solve the fundamental problem of the value of money. Broadly speaking,
they have occupied themselves with checking and developing the traditional views and here
and there expounding them more correctly and precisely, but they have not provided an
answer to the question: What are the determinants of the objective exchange-value of money?

Mises states that we trade away real goods and services for units of money, because these
money units have a higher marginal utility than the commodities given away. We value
money because of its expected purchasing power. As we know that we are able to buy goods
with money yesterday, we expect to be able to buy those goods with money tomorrow. That is
why we are willing to give up real goods and services in exchange for money now. Thus, the
expected future purchasing power of money explains its current purchasing power. However,
this cannot explain how money has come into existence, as it is a circular argument; “It is
illogical, they said, to explain the purchasing power of money by reference to the demand for
money, and the demand for money by reference to its purchasing power.” (Mises 1912, p.
110)

Mises pointed out that we can escape this circular logic by using the element of time. People
expect money to have purchasing power tomorrow (t+1), because of its purchasing power
yesterday (t-1). This then can be traced back one step further, which is that yesterday (t-1) we
anticipated today’s (t) purchasing power, because we remembered that money could be
exchanged for other goods and services two days ago (t-2). Now if we would follow this line
of reasoning it appears to involve an infinite regress.

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This is not the case, because Mises builds on the theory of the origin of money by Carl
Menger explained earlier. If we ‘regress’ far enough, there comes a point at which money first
emerges as a medium of exchange out of a pure barter economy. At that point, it is valued for
its non-monetary use as a commodity. People valued gold for its inherent properties before it
became a money, and thus to find the current market value of gold we must trace back its
development until the point when gold was not a medium of exchange. The crux of the
regression theorem is presented by Mises: “Before an economic good begins to function as
money it must already possess exchange-value based on some other cause than its monetary
function.” (Mises 1912, p. 110). The temporal element of the regression theorem ends at the
point where goods are traded only in direct exchange, solving the circular argument.

One could then criticize this theory by stating that today’s fiat money did not have any prior
value before it started to function as money, rendering the regression theorem false. However,
fiat moneys have always emerged through their initial ties to commodity moneys. These
commodity moneys which fiat currencies were redeemable for such as gold and silver, were
valued for its intrinsic qualities, such as its value in ornaments or industrial uses. In turn, gold
and silver got its purchasing power how any other commodity achieves its purchasing power;
by what people are willing to exchange for it. A smith may have exchanged a sword for a
piece of gold, and thus we can see how the purchasing power of money can be traced back to
a pure barter economy. Schematically one could view it as such:

Fiat money Monetized Commodity Pure Barter

(€, $, ¥) Gold & Silver Gold & Silver Economy

This link to commodity moneys of fiat was to create confidence in the public that the new fiat
currency would be accepted in exchange. Slowly this gold standard was abandoned, until the
last gold standard disappeared in 1971 (Elwell, 2011). Fiat currencies then started to function
solely as money, and could continue its monetary function despite not being redeemable
anymore.

Mises writes (1912, p.110): 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

14
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. [emphasis mine]

It is thus logically impossible for any new money to emerge unless there is some sort of
existing price structure in place. Without prior prices in some form, individuals cannot
calculate using this new form of money. Therefore, if no price ratios have been established
between various goods and services, they can only arise through a process of direct exchange
in a barter economy.

To summarize, not all moneys must necessarily have prior non-monetary use, as seen with fiat
currencies. In this case, fiat currencies do need to piggyback on the existing price structure of
previous commodity moneys, which do have exchange-value on another cause than its
monetary function. To summarize, according to the regression theorem, new moneys can only
arise in two ways:

1. By possessing exchange-value based on some other cause than its monetary function
2. By ‘piggybacking’ onto an existing price framework of a money that fulfils
requirement (1)

Bitcoin, as a new medium of exchange, is essentially conceived out of a system of computers

with certain algorithms; and thus from the ground up designed to be money. It did therefore
not come organically into being, like commodity moneys did, or were not created by the state
with the authority of legal tender laws. For this reason, some argue that Bitcoin does not
adhere to the regression theorem. To give an example, Pattison (2011) writes: “When these
characteristics are analyzed against Austrian monetary theory, Bitcoin does not hold up as a
legitimate money, as many in the popular literature have suggested, because it did not begin
as a commodity money and therefore has no intrinsic value and violates Mises’ Regression
Theorem.”(Patisson 2011, p. 9). This incongruence with Bitcoin and the regression theorem
has sparked much debate in particularly Austrian circles, and various explanations have been
given on how Bitcoin fits (or does not fit) the regression theorem.

15
Chapter 4 – Bitcoin & Regression Theorem
Chapter 4.1 – Current debate on Regression Theorem
The current debate on Bitcoin and the Regression Theorem contains a wide variety of
arguments and different interpretations of the theorem. In general, most commentators agree
that the regression theorem refers to how money comes into being, where a medium of
exchange that was once valued only for its services in some direct use (either in consumption
or production), becomes valued for its function in indirect exchange. The various arguments
could be classified in two main categories; Bitcoin does fit the regression theorem, or Bitcoin
does not fit the regression theorem. These two main categories can then be categorized in two
distinct elements, and for the sake of clarity are organized in the following table:

Bitcoin does fit the Regression Theorem
Because it had prior direct-use
Although it is necessary to broaden it
Bitcoin does not fit the Regression Theorem
And therefore the Regression Theorem contains
flaws
Because it does not have prior direct-use, and
therefore bitcoin can never become money

Bitcoin does fit the Regression Theorem

Because it had prior direct-use
Šurda (2012, 2014) was one of the first to write about Bitcoin and the regression theorem.
Šurda maintains that Mises implies with his theorem that a medium of exchange must start out
as a commodity. As it is undeniable that bitcoin is a medium of exchange (since it is used to
exchange goods and services), the only logical explanation is that bitcoin was valued as a
commodity prior to it being used in indirect exchange. The fact that we do not know the
motivations of the original actors, or why or on what grounds they valued Bitcoin, has no
bearing on the issue. Šurda thus believes that Bitcoin does not violate the regression theorem.

Graf (2013) maintains that Bitcoin did have a prior direct-use value, and therefore does not
violate the regression theorem. He scrutinizes the history of Bitcoin, and looks for reasons
why actors may have valued bitcoin before it became a medium of exchange. He provides
some examples of how Bitcoins could have had value for early adopters: such as it being
used as a digital object for testing the network (as a type of social interaction within the
project), as a toy-like set of digital objects (like a game), as a badge of membership and
commitment (to the bitcoin project, as artifacts of participation) or as simply advancing a

16
cause (for more ideological reasons). Furthermore, Graf believes that there is no economic
reason why a medium of exchange has to start out as a physical material as opposed to an
intangible good.

Bitcoin fits the regression theorem, although it is necessary to broaden it

Onge (2014) argues that the benefits provided by a money needn’t be non-monetary. The
benefits can reside in the good’s use as money itself, thereby giving it value and thus satisfies
the regression theorem. A benefit such as anonymous wire transfer, he claims, is a money-
related benefit and also a service that didn’t previously exist. This benefit would count as the
antecedent demand giving the spark of life to a scarce cryptocurrency. Other benefits he states
are cryptocurrencies’ anonymity, regulatory treatment, algorithmically fixed rate of growth,
fee structure, and irreversibility of transfers, many monetary benefits that were unrealized
before cryptocurrencies came along. These benefits function as “employments,” giving
cryptocurrencies demand via transaction and store of-value benefits, which in turn import
durable purchasing power. In summary, Onge states that cryptocurrencies are not a challenge
to the regression theorem, rather a confirmation. We must however broaden the regression
theorem to allow the benefits of a money to reside in the good’s use as money itself.

Bitcoin does not fit the Regression Theorem

And therefore the Regression Theorem contains flaws
Murphy (2014) takes a different approach, and believes there is a loophole in Mises’s
argument. He says that people can be willing to give up something of market value in order to
acquire a completely new good (such as bitcoin), simply because it has the potential for
becoming a medium of exchange. Therefore, Murphy believes that for a medium of exchange
to become money, it does not necessarily need to be valued for anything other than its use in
indirect exchange.

Albright (2014) writes that the fact that Bitcoin, a fully digital currency with no commodity
backing, is now being adopted by increasing numbers of people as an alternative currency,
seems to cast a doubt on the Mises’ claim that money need to have value independent as a
medium of exchange. He believes that when a theory, however logical, finds itself at odds
with observed reality, there are two possible courses of action for a rational thinking, namely;
discard the theory in favour of a better one, or find reason to doubt the reality of our
observations. Albright claims that if Bitcoin ends up succeeding, we should go for the former;

17
discard the theory in favour of a better one, as Bitcoin casts doubt on the inevitability of
commodity money.

Because it does not have prior direct-use, and therefore bitcoin can never become money
Pattison (2011) maintains that because Bitcoin is not based in a commodity, it cannot have
modern exchange value. Mises shows that money cannot be created out of nothing; it must be
derived from a commodity on the market. Therefore, Pattison argues that Bitcoin does not
hold up as legitimate money, as it has no intrinsic value and violates the regression theorem.

In the same vein, Dave (2013) states that Mises' Regression theorem proves that Bitcoin has
no future as money or even as medium of exchange, since it did not have any value besides its
value for being a medium of exchange. Mises states that people who consider acquiring or
giving away money are interested in its future purchasing power and the future structure of
prices. Dave uses this point to show that with money, you can get an inkling of its future
value from its past value. He then claims that it is almost impossible to estimate its future
value, as Bitcoin has a wild history of fluctuations with no reason to assume stability in the
future. This is for Dave even more proof that Bitcoin will never have any value as a medium
of exchange or money. He therefore believes, like Pattinson, that Bitcoin violates the
regression theorem.

Chapter 4.2 – Conclusion

I believe that a correct analysis of Bitcoin and the regression theorem requires a thorough
analysis of the two aspects mentioned earlier;
1. By possessing exchange-value based on some other cause than its monetary function
2. By ‘piggybacking’ onto an existing price framework of a money that fulfils requirement (1)

In my opinion, all previous sources miss an analysis of the second point. The regression
theorem states that not all money must necessarily have prior non-monetary use, as long as it
is able to piggyback on the existing price structure of previous commodity moneys, which do
have exchange-value on another cause than its monetary function. Therefore, I believe it is
necessary to analyze whether this is the case for Bitcoin. To illustrate, a comparison will be
made between Bitcoin and the euro.

The euro is essentially a new currency, which was ‘made up’ to function as money. Unlike the
US dollar, which does have a direct connection to the gold standard and commodity money,
the euro has replaced national fiat currencies, meaning it does no longer have this direct link

18
to commodity money. In that sense, the euro is, like Bitcoin, a completely new type of money
conceived from the ground up. The euro came into existence in 1999, and the euro conversion
rates were determined in reference to all the existing exchange rates of the national currencies,
who were analyzed in reference to each other, and to the euro (European Central Bank, 1998).

In other words, the euro had an existing price structure it could latch on to, which is the price
structure of all these different national currencies. These national currencies, in turn, can be
regressed further to their historical link with commodity money, and then traced back to a
pure barter economy.3 Bitcoin on the other hand, did not have this similar price structure.
There was no state or entity that legally enforced a certain exchange rate to Bitcoin, like the
euro. Bitcoin was conceived out of nowhere, and as it does not have a state enforcing its
exchange rate, we could argue that for Bitcoin there is no existing price framework that it
could piggyback onto.

Knowing this, it is therefore necessary to turn to the other option; the question whether
Bitcoin possess value on some other cause than its monetary function. With this regard, my
own views are most in line with the arguments of Graf (2013). Nowhere in the regression
theorem does Ludwig von Mises state that these non-monetary uses need to be physical.
Mises merely states money needs to already possess an objective exchange-value based on
some other use (Mises 1912, p.110). Historically, it was mostly the case that this other use
was indeed physical, as is the case for example with gold. However, as Bitcoin is not in the
physical sphere, I believe the right approach is to look for this non-monetary value for Bitcoin
that is not physical. As the regression theorem uses history to come to its conclusion, it is
therefore also necessary to look at the history of Bitcoin, and analyze exactly where it began
to have value. These values at the beginning of Bitcoin which Graf mentions are convincing
to me, such as it being used as a digital object for testing the network, as a toy-like set of
digital objects, as a badge of membership and commitment or as simply advancing a cause.

The arguments given by those who believe that Bitcoin does not have prior-direct use, and
therefore believe that Bitcoin can never become money are in my opinion erroneous, as they
see this value as being necessarily physical, while Mises nowhere states that this needs to be
the case. The other arguments provided by Murphy (2014) and Onge (2014) however, make a
good case for the fact that individuals can also value a good solely on the benefits of that good
as being useful as money. These monetary benefits such as anonymity, low transaction costs

3
For example: Euro > Gulden > Gold (from the Gold standard) > Pure barter economy

19
or security can therefore be antecedents to give value to Bitcoin. An important difference with
Bitcoin and other currencies, is that Bitcoin as a currency is inextricably linked to its broader
payment system, whereas this is not the case for gold or fiat currencies. My overall conclusion
is that I believe Mises could not have conceived of the possibility of Bitcoin, as it was an
unthinkable invention in 1912. Therefore, we must broaden the regression theorem to allow a
money to gain value because of its benefits as its use of money. I believe it is a combination
of the non-monetary benefits that Graf (2013) mentioned and the benefits Bitcoin has for its
use as money is what enabled Bitcoin to gain value. In conclusion, to answer the question;
could Bitcoin be considered money according to the Austrian School? My answer would be:
yes, as Bitcoin had prior-exchange value, and with a broadening of the regression theorem
which allows money to be valued for its benefits in its use as money, Bitcoin does not violate
the regression theorem. Therefore, there is no reason why Bitcoin could not be considered
money according to the Austrian School. Having established this, the question arises; is
Bitcoin currently considered to be money according to the Austrian School?

20
Chapter 5 – Is Bitcoin currently considered money?
Chapter 5.1 – Definition of money
Historically, the most common way to define whether a good could be considered money is
through its functionality, with the three main functions being: store of value, a medium of
exchange, and a unit of account. (Ali, Barrdear, Clews, & Southgate, 2014, p.3)

Mises however, uses a different definition of money, namely; money is the most universal
medium of exchange, the most liquid good. Mises (1912, p. 31) writes: Thus there would be
an inevitable tendency for the less marketable of the series of goods used as media of
exchange to be one by one rejected until at last only a single commodity remained, which was
universally employed as a medium of exchange; in a word, money. [emphasis mine]

When, however, a medium of exchange is considered to be ‘universally employed’ is

according to Mises determined arbitrarily by a defined standard. Mises does not specifically
explain what this standard is, which makes it difficult to pin point whether Bitcoin would
currently be considered money. In my view, geographical boundaries play an important role
for a money to adhere to Mises’ definition of money. To illustrate my point, I will compare
Bitcoin with the Gambian dalasi.

Chapter 5.2 – Important hurdle: geographical location

Bitcoin vs. dalasi
It is difficult to make an exact estimate of how many users Bitcoin has. One possible way
would be to count all the Bitcoin wallets that exist, but a lot of users hold multiple Bitcoin
wallets, and a considerable part may have a wallet but do not actively use it. Therefore, for the
sake of argument, let us take the current Bitcoin market capitalization which as of now
(24/04/2016) is ~$7 billion (Mizrahi, 2016).

Gambia’s GDP (PPP) is currently $3,49 billion (International Monetary Fund, 2016), and its
population is 2,043,318 (Worldometers, 2016). Gambia’s GDP is thus lower than the market
capitalization of Bitcoin, but is a close representation of an economy of the same scale, and
therefore may represent approximately the same amount of users.

Is Bitcoin money according to the Austrian school? Bitcoin is, as far as I know, nowhere in
the world the most liquid medium of exchange, as the individuals who use bitcoins live in
nation-states which all have their own fiat currencies. These fiat currencies, such as the euro
and the dollar, are more liquid than bitcoin. Here I define liquidity as the degree of

21
marketability, or in other words, how many people are willing to accept a medium of
exchange. With euros, it is clear that one can buy a much larger variety of items than with
Bitcoin, because of its acceptability as a medium of exchange. Therefore, Bitcoin is not the
most liquid medium of exchange, and according to the Austrian School not considered
money, but a medium of exchange.

To contrast this, is the Gambian dalasi considered money? In the geographic region of
Gambia, the dalasi is the most liquid medium of exchange, as it is recognized by the state as
legal-tender, and consequently recognized by the people of Gambia to be the main medium to
exchange with. According to definition of Mises’, I would therefore argue that the dalasi
would be considered as money.

As we saw before, Bitcoin has a bigger market capitalization than the economy of Gambia,
and has perhaps roughly the same amount of users. The fundamental difference here is that
Bitcoin – because of its technology and design – has not emerged in a distinct geographical
area. All other moneys that we know today have emerged in a fixed geographical region.
Although the strength and uniqueness of Bitcoin is that anyone in the world with access to the
internet can open a Bitcoin wallet, this is also its weakness, as it therefore will be very
difficult to become the most marketable medium of exchange due to this lack of boundaries.
Other currencies which are considered legal-tender in the various nation-states will take this
position.

If we bring this argument out of the Austrian perspective and to a more general perspective of
economic theory, the argument is still accurate. As mentioned before, an important factor
whether a currency may be considered money depends on the extent to which it acts as a store
of value, a medium of exchange, and most importantly, a unit of account. (Ali, Barrdear,
Clews, Southgate, 2014, p.3). For an asset to be considered a unit of account, it must be able –
in principle, at least – to be used as a medium of exchange across a variety of transactions
between several people and thus represents a form of co-ordination across society. For this
reason, some economists consider the operation as a unit of account to be the most important
characteristic of money (Woodford, 2003).

Bitcoin is currently mainly used as a store of value, and to some extent as a medium of
exchange. But it is rarely used as a unit of account, and in my view this is again due to the
lack of geographical boundary. As Bitcoin is nowhere the most marketable medium of
exchange, fiat currencies will remain the basic unit of account, which individuals use in their

22
daily lives. I would argue that even in a store where all prices are denominated in Bitcoins,
almost all Bitcoin users (even the most active) will determine the prices by first calculating it
in their own national currency – as that is the relative price structure they are used to. In
Gambia on the other hand, the dalasi is used on a daily basis, and therefore is the main
calculative framework and unit of account for the people of Gambia.

Hypothetically, Bitcoin could become money, if there was a confined spatial space in which it
operated, large enough to consider it money. If a country’s national currency were to succumb
to hyperinflation because of bad monetary policy, people could potentially switch to Bitcoin
as an alternative, and use its exchange value with other fiat currencies as a reference for its
price structure. If enough people see Bitcoin as a more valuable medium of exchange than the
current national currency, and enough people start exchanging it and using it as the primary
unit of account, there is no reason why Bitcoin would not be considered money at that point.
As explained before, it is however necessary that this happens in a confined spatial space, as
that is the only way a medium of exchange will be used as the primary unit of account.

Other than the wide array of barriers for Bitcoin becoming mainstream (regulatory issues,
volatility, network effects, infrastructural problems, psychological barriers and so on), this
lack of geographical boundary also seems to be an important hurdle for bitcoin to become
money.

23
Chapter 6 – Conclusion
Can Bitcoin be considered money according to the Austrian School? To summarize, by
providing an in depth analysis of the regression theorem with original quotations, we were
able to get a thorough understanding of its workings and the authors original intentions.
Through a categorized overview of the various arguments given by others on this debate and
careful deliberation, I argued that Bitcoin can be considered money according to the Austrian
School, as it does fit the regression theorem. Firstly we could see how Bitcoin did not have an
existing price structure it could latch on to, which is why we turned to the question whether
Bitcoin had value on some other cause than its monetary function. In this respect, I mostly
agree with the perspective of Graf (2013), who argues that Bitcoin had various non-physical
prior exchange-value, including being used as a digital object for testing the network, as a toy-
like set of digital objects, as a badge of membership and commitment or as simply advancing
a cause. However, the argument given by Murphy (2014) and Onge (2014) on the fact that
individuals can also value a good solely on the benefits of that good as money is also
convincing. For this reason, I stated that it is a combination of Graf’s non-monetary values
and the benefits Bitcoin has for its use in money is what has enabled Bitcoin to gain the value
it has today.

This raised the question, is Bitcoin currently considered money according to the Austrian
School? By looking at the relation between geographical boundaries and media of exchange,
we were able to see how Bitcoin is nowhere considered to be the most universal medium of
exchange, as the national fiat currencies take that position. In my opinion, this is because
Bitcoin did not emerge in a confined spatial area, as Bitcoin makes use of information
technology and P2P networks, making it a global medium of exchange. As Bitcoin is not a
legal-tender in any nation-state, it is unlikely that Bitcoin will develop in a specific
geographic area. Hypothetically, this could happen if a country’s national currency were to
succumb to hyperinflation or such, where people would then switch if they see Bitcoin as a
more valuable medium of exchange. Until Bitcoin will be used in a confined geographical
space as the main medium of exchange, I would argue that Bitcoin is not considered money
by the Austrian School at this point in time. However, as Bitcoin can be reconciled with the
Regression Theorem, it is not theoretically impossible for Bitcoin to become money according
to the Austrian school.

It is important to note that throughout my thesis I have mainly used an Austrian perspective.
The broader and more practical question of whether Bitcoin could actually become money

24
deals with academic fields such as human psychology, sociology, law and other schools of
economics. Therefore, my analysis from the Austrian School is very narrow, and says little
about the practical possibility of Bitcoin becoming money in the future. It did however, serve
as an interesting theoretical thought experiment on the question when something is considered
to be a medium of exchange, or money.

25
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