Why the Austrian opposition to Bitcoin?
Value is subjective. The subjective theory of value is one of the basic discoveries of Austrian Economics. Every human being has their own value scale, and this enables voluntary, mutually consensual transactions to be win-win for every party involved. When two goods are voluntarily exchanged, both of the participants to the exchange value the good they are exchanging for higher than the good they are giving up.
A simple barter exchange of my pen for your hat involves my subjective valuation of your hat as more valuable than my pen, while you would hold my pen to be of greater value than your hat. By exchanging the two, we are both satisfying our wants more than before, and as a result both of us are better off.
The subjective theory of value doesn’t just apply to all goods. It also holds true for the medium of exchange, whatever form it might take. Thus, seashells may be viewed as a valuable currency if other people also view it as such and are willing to trade for them. This is true even if seashells serve no other function besides currency.
Mises tried to argue that all currency must first be valued in and of itself, and not merely as a medium of exchange. This is his Regression Theorem.
While most currencies, like gold and silver, did indeed start out as commodities before they became common mediums of exchange (gold can also be used for jewelry, electronics, etc.), this doesn’t necessarily have to be the case. We must be careful not to confuse a particular historical case with a theoretical rule. Mises himself would often make this very same point when criticizing positivists and econometricians.
And if a hypothetical fiat currency were to exist which was not constantly being devalued, it too would be very successful. This is not because the paper currency was originally backed by gold, but because it has become universally accepted within a society as the medium of exchange. Most people nowadays have no idea that paper used to be redeemable for gold and silver.
Fiat currency would of course be immoral because of the coercive legal tender laws, but it will not fail so long as it is not debased. It is the perpetual devaluation of the currency that causes its failure.
A currency doesn’t need to have a pre-currency value to function well, since the market discovery process of value will function perfectly well even when a currency is created out of nowhere (although in the case of Bitcoins, their ability to be exchanged for any fiat currency imbues them with the price knowledge of that entire currency. More on that and why Mises’ Regression Theorem may be wrong here).
The value of a currency as a medium of exchange between goods does not stem from its alternative or original uses, but from the willingness of people to exchange their goods for it, and therefore a currency does not necessarily need to begin as a commodity, or have some value outside of its ability to overcome the troubles of barter.
Being subjectively valued as useful in exchange and accepted in return for a wide range of goods and services is more than sufficient for a currency to take hold; while the inability to subsequently counterfeit and debase the currency is what ensures its long life.
Therefore, I believe that Bitcoins can be a successful currency, as long as a sufficient critical mass of people who use it due to its inherent advantages is reached, after which a snowball effect of more and more people accepting the currency will lead to its widespread adoption.
The more one can sell and purchase for Bitcoins, the greater its value and probability of eventual success. And the more people use the currency, the more stability it will have.
The advantages of Bitcoin as a medium of exchange
Bitcoin already has a number of features required for a successful currency, and in many ways does so better than any metal could. Besides its basic features as a fungible, scarce, divisible, and increasingly recognized currency, Bitcoin has the following advantages:
1. Bitcoins can be instantly transferred to anyone through the internet, with zero transaction costs, besides the cost of having a computer plugged into the internet. But given a computer (in any form, e.g. a smartphone) with an internet connection – transactions take no time and cost nothing. This is significantly more advantageous than transferring money through the banking system, or even through a system like Hawala.
2. Unlike money physically stored in a vault or as a representation of real or virtual money in a bank account, Bitcoins cannot be forcibly confiscated by the State. Since Bitcoins stored in an encrypted wallet are basically inaccessible to the State, Bitcoins are the fastest way to put money out of the reach of government. Without the twin predations of taxation and inflation, the State will quickly collapse, whether there is a revolution of consciousness or not. Note that gold and silver are very much vulnerable to confiscation.
3. The decentralized and peer-to-peer nature of the Bitcoin network makes shutting it down virtually impossible. It would be as difficult to shut down as peer-to-peer file transfers (e.g. torrents), and that has so far been attempted and failed numerous times. Nothing short of shutting down the entire internet would be sufficient, and even then, I think there are ways Bitcoins can be used in smaller localized clusters (e.g. through a decentralized WiFi mesh network running within a city).
4. There is a decent level of anonymity present within the Bitcoin system. While it is certainly possible to figure out who is doing what, it isn’t all that easy to do, and certainly the anonymity is far greater than when you walk into a bank and hand them over all your personal details.
5. Divisibility. Bitcoins are very easily divisible, and at no cost. Unlike dividing a piece of metal, which would require re-minting, a Bitcoin can be split up into billions of little pieces, and this costs nothing. This makes the rising value of Bitcoins not a problem for the system, as it’s been designed to handle greater value from an influx of new users and from the limited supply.
6. Impossibility to counterfeit. Once an arbitrarily set number of Bitcoins has been created (around 21 million of them), no more can be made. Counterfeiting and “printing” Bitcoins is completely impossible, making the scarcity of Bitcoins an assured guarantee. The only guarantee a government currency can give is that of inflation and debasement.
How libertarians can use Bitcoin to dismantle the State
The faster Austrians and libertarians accept that Bitcoin, or a currency like it, is one of the most effective implementations of agorism, the sooner the State will be abolished through counter-economics.
If you think that Bitcoins can’t really be used to buy much of anything, I’m afraid you’re mistaken. Since there are numerous companies that will soon be providing Bitcoin-funded MasterCards, you will basically be able to buy anything that can be purchased using plastic. Any good online, any good in a store, you name it.
While the Bitcoins do temporarily become exchanged for government currency, this is only for a short period of time. That means you can hold the rest of your Bitcoins away from the grubby hands of the State, where it can’t devalue your time and money. While everyone else who holds any wealth in fiat currency is constantly being stolen from to fund the welfare and warfare State, you’re relatively safe from the criminal politicians.
That’s not to say that gold, silver, and other currencies shouldn’t be used. They should be and are free to compete between each other, and diversifying your holdings is certainly a good idea.
I imagine that in a future free market, gold and silver will be primarily used as stores of value, for example as pension savings, as well as backup insurance in case of disruptions to the internet (e.g. from a solar EMP), but that systems such as Bitcoin will be the preferred medium of exchange for all manner of exchange, due to their low transaction costs. Employment, investment in projects, crowd-sourcing, loans of any kind, and of course consumption of goods and services.
Gold and silver win out in their ability to hold value even if electronic systems fail, and Bitcoin wins out for the six reasons given above, not least of which being their inability to be confiscated, and that so long as Bitcoins or something similarly out of reach of coercive hands remain the standard medium of exchange, States will be unable to rise.
Bitcoin can be both the currency that dismantles the State, and the currency that prevents this putrid cancer from reoccurring in the future.
If the millions of libertarians around the world started using Bitcoin, even for minor things at first, we could achieve critical mass and enable the aforementioned snowball effect very quickly. I truly believe that the decentralized individualism of counter-economics is a far better use of time and money for achieving liberty than any kind of political action.
And counter-economics has the added advantage that, unlike political action, it isn’t immoral and doesn’t enable the coercive system.