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Mises Institute weighs in on Bitcoin.

I found this article to be very helpful and figured I'd pass it along:

The Moneyness of Bitcoins
Mises Daily: Thursday, April 04, 2013 by Nikolay Gertchev


Bitcoins have been much in the news lately. Against the background of renewed concerns about the integrity of the euro zone and the imposition of capital controls in Cyprus, the price of a bitcoin has tripled over the last month and reached more than $141 for 1 BTC. Are we witnessing the spontaneous emergence of an alternative virtual medium of exchange, as some would put it? This article offers an answer to this question by considering three aspects of the economy of bitcoins: their production process, their demand factors, and their capacity to compete with physical media of exchange.

The Production of Bitcoins



Bitcoins come about as the uncertain pay-off for an energy—and hardware—-consuming process that is extended through time. The per-time pay-off varies, based on the efficiency and sophistication of the more-or-less specific hardware used for the mining. Individual miners have started to pool their efforts, and this cooperation has tremendously reduced the uncertainty that each individual miner bears.

Due to this costly production process, bitcoins, although virtual, are constrained by scarcity. While a bitcoin has no material shape or content, the algorithm that generates it has been designed to replicate the competitive production of a scarce good. First, entry in the business of producing bitcoins is open to anybody. Second, the production process is capital and labor intensive, extended through time, and also uncertain. Third, production is subject to decreasing returns, thereby conforming to the generalized scarcity faced by acting individuals in the better-known physical world. Thus, bitcoins turn out to be the exact opposite of the “Linden dollars” of the Second Life “virtual world.” The latter are produced by a monopolist central authority, out of thin air, and without any other limitation but the very discretion of that same monopolist authority.

However, it is not their costs of production that bestow on bitcoins the status of an economic good. After all, scarcity is not rooted in the absolute quantitative limitation of something; it comes from the insufficiency of the stock of that something, perceived as useful in some regard, relative to the individuals’ needs. Hence, we must ask ourselves how bitcoins have come to be valued at all. This leads us to an analysis of their demand.

The Demand for Bitcoins

At their inception, bitcoins were created and first held within a “crypto-punk” community. It could then be safely assumed that they served the purpose of conveying a specific antiestablishment worldview. The first demand factor, initially for producing bitcoins, and then unavoidably but only indirectly for holding them, was rooted in their capacity to project a certain point of view. In a sense, bitcoins were comparable to an artistic medium of expression, such as music, literature, and painting.

Thanks to that initial source of value, bitcoins had a reference point that positioned them relative to other goods and services. From there onward, the technological features that characterize them led to an expansion of their demand. Bitcoins are imperishable. Storage and protection against theft or accidental loss come at a very low cost, as these are accessory services rendered by standard antivirus and back-up software. Marginal transaction costs are also practically zero, once the fixed cost of establishing and maintaining a network connection has been accounted for. All these aspects are common to real wealth assets. Thus, the second demand factor for bitcoins is explained by their capacity to store wealth at a low cost. From the status of a good which, as a “worldview-conveyor,” was largely used for personal enjoyment (and hence consumption), bitcoins evolved into an investment good that has become attractive well beyond its original crypto-punk community.

The growing investment demand also spurred the development of intermediary dealers in bitcoins. There are a number of exchanges where bitcoins can be bought and sold against currencies. Specialized online storage, presumably with increased security, has also been made available. Intermediation, though open to free entry, is likely to remain rather monopolistic, given the very low margins associated with transacting in and with bitcoins.

This latter aspect, namely the intrinsically low transaction fee, contributes to a third demand factor for bitcoins, namely as a means of payment. A number of online vendors, who are mostly specialized in web-related services and online sales of rather exotic items, accept final payment in bitcoins, not the least because of the guarantee for almost absolute anonymity. This last component of the demand for bitcoins is still nascent. After all, a very limited set of items can be purchased with bitcoins, and sellers still price their goods in dollars, euros, etc. The price is then converted into bitcoins, according to the prevailing exchange rate, at the final stage of finalizing the payment method of the transaction. Thus, while bitcoins do appear to serve as a means of payment, they are definitely not used yet for business calculation. This is most certainly attributable to their still very limited demand to hold as a means of exchange. Nevertheless, couldn’t they become full-fledged money in the foreseeable future?

Bitcoins as Money

Prima facie, bitcoins possess all the qualities required from a money (a generally-used medium of exchange). They are perfectly homogeneous, easily cognizable, conveniently divisible, storable at practically no cost, and imperishable. Also, they seem to be fully shielded from counterfeiting. In addition, because they exist as a consumption and investment good, they are appraised on their own, thereby satisfying the Misesian regression criterion for the free-market inception of a medium of exchange. However, in order to become a viable alternative to existing monies, bitcoins must generate a sufficiently large demand so that their usage becomes generalized. Without the certainty that they can be transacted for any other good in the economy, a demand to hold them as money could not develop. It is with respect to their capacity to become and remain commonly used that bitcoins suffer from a relative disadvantage.

Indeed, bitcoins are embodied in a specific and highly capital-intensive technology. They can become convenient enough for standard personalized transactions only if both parties of the exchange possess the necessary technology that gives access to bitcoins. Bitcoins can do the job already for internet-based impersonalized purchases, because the marginal cost of the exchange technology they go along with is already almost zero for those who possess it. However, the transposition of that technology in the physical world of common face-to-face shopping (getting a haircut, buying a sandwich, or purchasing vegetables at the local grocery shop) would imply extra costs. True, these costs would decrease progressively as portable smartphones with permanent internet access become more widely used, not only by buyers, but also by sellers. The key point, however, is that bitcoins could become a generalized medium of exchange only through the accessory use of other, specific and physical, goods in an economy that has reached a very high level of technological development. This is a tremendous disadvantage, for at least two reasons.

First, at any given moment, the level of technological development is not uniform for all individuals within the same (national) economy. While some have access to the latest technology in a given field of activity, others prefer to stick to older versions. This is definitely due to the cost of replacing existing capital goods, but also to individual preferences, and sometimes to personal wealth. Consequently, bitcoins could become money only at the point when the technology that embodies them becomes commonly used. We are not there yet.

Second, an economy in which the medium of exchange is dependent so much upon the widespread use of a specific technology would be extremely vulnerable. Technologies are not given; they are the result of individual choices with respect to capital accumulation and allocation that must be made time and again, and are subject to reversal. Then, if the medium-of-exchange-linked technology is abandoned, because for instance no sufficient savings are available any longer, the economy will have to find another medium of exchange. This transition phase might then involve significant disruptions in the structure of production. A technology-linked medium of exchange does not provide enough flexibility to economic relations and might be viewed as complicating, rather than facilitating, some actions, such as shifting from one technology to another. This is a significant drawback of any virtual currency.

In trying to understand whether the increased popularity of bitcoins is reflecting the emergence of a new money, we have actually come to a fundamental distinction between virtual and material media of exchange. The latter are technology-independent and matter-embodied; the former are technology-embodied and matter independent. This distinction is not trivial as it emphasizes the great advantage that material money offers: it is good enough for anybody and at any time, and is independent from individual choices with respect to investment, allocation and maintenance of capital. Virtual monies could be programmed to reproduce some aspects of material, whether commodity or fiat, monies. However, they will always be dependent on specific capital investment decisions. The latter reduce their degree of commonality as well as of adaptability to changing economic conditions.

In conclusion, virtual monies, of which bitcoins seem to be the most perfected specimen up to date, do not allow acting individuals to manage the uncertainty of the future as well as material monies do. They could serve to intermediate exchanges among those who invest in the technology that creates them, stores them, and transfers them. Nevertheless, they could never achieve that degree of universality and flexibility that material monies carry with them by nature. Thus, on the free market, commodity monies, and presumably gold and silver, still have a great comparative advantage.

Comment on this article.

Nikolay Gertchev holds a Ph.D. in economics from the University of Paris 2 Panthéon-Assas and currently lives in Belgium, where he works for an international organisation. Send him mail. See Nikolay Gertchev's article archives.

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Comment viewing options


"you're an idiot", not "your an Idiot"

"you're an idiot", not "your an Idiot"

Thanks for your opinion, it is very appreciated.

Signed, a zombie sheep.


is a fallacy.

Stop insulting someone's intelligence based on "spelling" when your argument is a fallacy.

If you are actually going to argue someone's point do so, but fallacious attacks are pointless.

Do some research and you'll

Do some research and you'll understand why it's not a ponzi scheme. Don't be a zombie grammar police sheep. Or maybe try reading the original post instead of trolling.

Ron Paul brought me here.

It seems to me that bitcoin

It seems to me that bitcoin is easier to use and transport than precious metals are. The biggest negative is how complicated it is.

never invest in something you cant comprehend

The Golden rule for investing.

Never invest in "nothing" if you want to store or create value.

That's why I suggest ByteTurds instead of BitCoins. ByteTurds are easier to understand.

ByteTurds are better because there really are people who consider an Anarchist eating turds to be something of value. I see mining BitCoins as creating nothing of value.

That makes ByteTurds better than BitCoins in my book.

Imagine it... An entire economy based on a digital currency born from an Anarchist eating a conman's shit rather than trying to buy something with it. It's perfect. Anarchists will find their proper place in the world and the rest of us will have a sound digital currency to barter with.

Without government force, I'd laugh in a conman's face if they tried to settle a debt with BitCoins or FRN's, but I'd have to think twice if they offered me ByteTurds.

The beauty is that it's the conmen themselves who create the value from nothing, and they get to freely trade that value in a free market. Everybody wants to use fake money to buy something with nothing, so let the BitConners create something of value for once.

Do I profit from an Anarchist eating my turds? No, but the Aanrchist will.

I say people will recognize ByteTurds as money because they'll understand how it was created and recognize the value in it.

Guess that rules out dollars.

Guess that rules out dollars. Who here can accurately explain the process by which dollars come into existence? I find bitcoin much easier to comprehend, overall.


You are so right!



Great advice.

Good thing "someone" here on the DP is explaining it in a way that's easy to understand! http://www.dailypaul.com/279662/getting-started-with-bitcoin...

As an avid Bitcoiner,

As an avid Bitcoiner, I think this article put it perfectly.

My TL;DR summary is as follows:

Bitcoin has all the properties of money, but lacks ubiquity.

For Those That Make Quick Conclusions About Bitcoin

There are some serious scholars doing some serious explaining. So the scholars are taking this subject seriously. I think we may have something to learn.

It can't reach more than 21,000,000 bitcoins.

Currently there are 10,952,975 Bitcoins in circulation.

Supply is set by an algorithm.

But can the maximum capacity someday be arbitrarily changed?

If so, how would that be any different than printing currency which devalues the money?

It's an interesting concept but not necessarily immune from mischief.

Gold and silver (and some other precious metals) are still and probably forever the only "real" money known to man.

-Ron Paul

The maximum number of Bitcoins that can be created is irrelevant

because infinite number of material having identical properties to Bitcoin can be created. Brace yourself for Bitcoin2.

There's really another one

There's really another one here on the DP who figured that out, finally.

I talk about it all the time, but most Bitcoin followers don't want to listen or think that through to the end.

I thought even deeper about it and finally came to the conclusion that this is all a big scam:
Think about mining gold or silver. If the value of gold rises, there is an incentive to mine more. So a gold mine owner profits from this development while the additional supply brings the prices back down.

What happens when the price of Bitcoin rises and the people want to mine more? The algorithm adjusts its difficulty so that the overall Bitcoin creation rate stays the same. The individual mines less! This drives the price higher even more, because a miner now has higher production costs (electricity) and he won't sell it for a lower price.

Now, who profits from that? Do you smell something?

Miners profit from it. Um so

Miners profit from it. Um so what? Mining does not come without risk.

Bitcoin might not be the total answer (doing great so far).

Crypto currencies in general (and other uses of a public blockchain) will be around for a very long time. The cat is out of the bag.

That wasn't the point of my

That wasn't the point of my comment.
My point was Bitcoin mining costs going up for everybody if more people want to mine it. It's a socialist system in some way.

A miner profits from having bought his mine and calculated in advantage while a Bitcoin miner who invests in hardware can only lose if prices rise.

The only ones who profit are the early adopters. Those who are sitting on their Bitcoins and didn't pay anything for them. I think those are the forces behind that big hype. When they decide to sell their millions of coins, the price will go through the floor and Bitcoin is finished.

Bitcoin will never be

Bitcoin will never be finished unless something happens to the code itself. People will always use it to gamble, buy drugs, porn and other things. The price itself doesn't even matter.

As far as losing if prices rise, that is simply not true. Mining equipment and electricity costs are actually becoming cheaper and will continue to do.

Socialsim? really? lol

Bitcoin will never be


It's impossible for any good to be used as currency, if there are no people who want to hold the good over a longer time. If everybody only wants to use Bitcoins for payment, but not hold it, the price inflation rate of BC will rise to such a high amount, that your Bitcoins are completely worthless a few seconds after you got them.
This is because there are nearly all available Bitcoins as supply on the market, at any time, if nobody wants to hold them.


I didn't say that mining equipment and electricity aren't becoming cheaper.
However, in which way does this affect the difference between gold and Bitcoin mining, which I described? If electricity becomes cheaper, the individual mines still less when Bitcoin prices rise. But the gold miner mines the same when gold prices rise.

More than that, the Bitcoin miner even won't profit from electricity becoming cheaper. Because cheaper production costs means more miners and that means again less mining for the individual...

In general, Bitcoin adjusts the production costs of BC to the actual market price of itself, instead of letting the market work.

Socialsim? really? lol

There is a certain amount of Bitcoins mined every x minutes. This amount is divided among all miners. If the number of miners changes, there is still the same amount of Bitcoins created every x minutes. It's impossible to increase the supply, you can only affect the distribution.
Now, what's your definition of socialism? The scenario above fits mine very well...

No the bitcoins mined dont

No the bitcoins mined dont get divided up between all miners, only if they are in a pool, and even then its divided up proportional to how much power they gave to the block.

I can mine solo and if I find a Block I get 25 bitcoins, I dont have to share it with anyone.

It seems you don't fully

It seems you don't fully understand what I want to tell you.

I never said that the Bitcoins are divided up between all miners.
However, if there are 25 Bitcoins created every 10 minutes no matter how many miners participate in the mining process, the average time to create Bitcoins (=production costs) for the individual increases with the number of participants. This is simply because the probability to earn these 25 Bitcoins decreases when there are more miners.

...and even then its divided up proportional to how much power they gave to the block.

More power means also more production costs for the individual. If the algorithm adjusts it complexity in such a way that the production costs of one BC always approaches the actual market price, your profit approaches to zero. There is no profit for miners in the long run. They can only lose. That's the whole thing I wanted to tell you.

Well I dont know how many

Well I dont know how many years your "long run" is but mining has always been profitable. If it becomes where it is not profitable, bitcoin will fail.

Still dont see how you can compare it to socialism, its a stretch. One reason its not, cause its totally voluntary to play. :p

Not arbitrarily changed:

Sub-divided. Each Unit- bitcoin- is divisible. Just like one Lb. of Gold is divisible up to half a gram...


So you say it's divisible - like gold. But I still wonder how

...reliable is that maximum capacity (supposedly) of 21 million total Bitcoins.

Even if it's divisible, that would be fine - it would not make new ones - only fractional Bitcoins.

What's important is that maximum number created could not change which would devalue the number already available for use.

That is the number I'm curious about.

Now if you're saying whan they divide they are each still worth 1 Bitcoin, then that's a different thing (like an amoeba).

But still not a problem if the max number cannot change.

-Ron Paul

0.0075 BTC = $1 USD

0.0075 BTC = $1 USD *per the current market rate.

If you want to spend $0.10, you would spend 0.00075 BTC, or 750 mBTC.
And one cent is 0.000075 BTC or 75mBTC.

Yeah you are right.

Your first observations is correct; a single bitcoin can be divided into fractions; the smallest fraction of a bitcoin is known as a satoshis.

No, they are no divided like an ameoba.

Like you said the max number (21 million) cannot be change.


Bitcoin article in Bloomberg Businessweek Online...

Here's another perspective:


-Ron Paul

Great article

Cleared up a lot about Bitcoin for me

Summary of this Article

Bitcoins is money and a good free market medium of exchange but if the sky falls and shit hits the fan I would rather have gold and silver.

Yep that's what he's saying.

I would add that while bitcoin is not a fiat currency (no fiat, no fiat currency) and did emerge without central authority, I do not believe it would have if not for pre-existing fiat currencies which it competes with. It is a free market reaction, or solution, to a fascist problem, which is fiat currency. It would not evolve in a free market.

I don't think anything would ever compete with gold or silver backed debit cards in a free market, possibly hayekian asset basket backed debit cards.

Good point

Liberty Dollar was a very good idea reborn and may even have been able to go on-line in the form of cryptographically protected certificates. But everyone's too shy to risk having such a currency's backing raided. So we have to go to something that can't be seized so easily. Bitcoin's the best player we could send onto an unfair field, not the best player.

I'd throw in, though, that it'd exist just not catch on in a free market. Cryptocurrencies like bitcoin might even exist in many forms, no one getting a foothold.

Fiat currency could even someday have a crypto element to it, even quantum crypto.

Defend Liberty!