The Economics of Bitcoin: On Regression

In a storyline sounding all too familiar, libertarian circles have been up in arms with each other over the emergence of Bitcoin, the cryptocurrency and payment system that burst on the scene in 2009. If you do not know much about Bitcoin, I direct you here; and if you do not know much about libertarianism, I direct you here. On that note, if you had to click either of these links, or are not particularly interested in the economics of Bitcoin, I suggest you skip this article, and continue to the article on the “Future”, which will be the next in this two part series on Bitcoin.

Though there have been a multitude of criticisms toward Bitcoin, it must be said that clearly the most important debate is whether or not it “can” be a money; namely, whether or not it violates Mises’ regression theorem. Examples of arguments of this type include those by The Mises Institute’s Frank Shostak and blogger “Smiling Dave” among others. This topic is by far the most significant of the lot, as those libertarians claiming that Bitcoin does violate the regression theorem are directly attacking the character of the formation of money prices put forth by Austrians. But why does it follow that this is important? Well, those libertarians who reject Bitcoin on the grounds of regression are not, and cannot be classified as, Austrian economists in this matter. The de facto Austrian position must be one in which Bitcoin does not violate the regression theorem, for reasons that will be explained later in the article. Thus, those libertarian arguments claiming that Bitcoin violates the regression theorem, and will therein implode in some spectacular crash for this reason, must quickly and emphatically be separated from holding any “Austrian” position. It is not, and cannot be the Austrian position, and to associate such claims with the Austrian school is slanderous to a degree. One may make the argument that Bitcoin will crash due to it being entirely based on the network effect and exchange value, but the classification of this argument must not be Austrian, but one of a speculative nature.

It must also be noted here that there will be a purposeful separation of “libertarian” and “Austrian” in these articles. It seems as though popular media regularly conflates the terms as they are somehow synonymous, when they surely are not. Austrian economics is a positive analysis of human action; libertarianism is an ethical and political philosophy rejecting aggression. Indeed, there is no apparent intersection of the two. Milton Friedman, perhaps the most popular pseudo-libertarian of all time was not an Austrian school economist, and there has, in the past, existed Austrian school economists who were closer to progressive liberalism than anything, von Weiser being a good example.

The Economics of Regression

Before we examine any arguments against Bitcoin’s capability as a money, we must first explain the basics of the regression theorem. The theorem is based on Austrian price formation, applied to a system of indirect exchange.

Under a system of direct exchange, or barter, prices are formed by the dynamics of supply and demand market schedules, which are made up of supply and demand schedules of individuals. These individual schedules consist of the ordinally ranked marginal utilities of the goods: thus, the crux of price formation in a system of barter is the weighing of individual marginal utilities of two goods against each other.

Under a system of indirect exchange, or one using money, the aforementioned price formation cannot occur. The price of x good against money is based on market supply and demand schedules, then individual schedules, and then the rankings of marginal utilities of good x against money. The issue arises when we realize that the marginal utility of money is based on existing prices of the array of all other goods in the economy, bringing us into circularity. In summation, the price of good x is based on the utility of money, which is based on the prices of all other goods, which is based on the utility of money.

Where do we escape this circularity? With the introduction of time. It is clear that the existence of prices for goods today, and thus the utility of money today, are based on the prices of goods yesterday. The prices of goods yesterday, which determine the utility of money yesterday, are based on the prices of goods the day before that. As we see, through the introduction of time, we enter into an infinite regression.

And here, we enter the brilliance of Mises in establishing the regression theorem. As we regress further back in time, Mises claims, we eventually will reach the point at which the utility of money isn’t in determined by its exchange value, but rather its direct use value. The price for a certain money good is thus established through the ordinal rankings of direct use value, which provide the basis for utility of the money good, allowing future prices to be set when the good is eventually used as a medium of exchange.  To put it a different way, a system of indirect exchange will always regress back to a system of barter. This process is perhaps best illustrated with a graphic provided in Rothbard’s “Man, Economy, and State”.

Screen Shot 2014-03-01 at 8.43.13 PM

Here we can see the entire process as described above. Looking at time period 7, the price of gold is shown to be based on the weighing of the utility of all other goods against the utility of gold, which in turn based on the price of gold on day 6, and so on. The key stage for this graphic is time period 3, shown as establishing the price of gold through the rankings of marginal utilities of gold and all other goods in the economy. This is the point at which the price of the money good, in this case gold, regresses back to. At this moment, all utility derived from the good is for direct use, as there is no exchange value for gold established as of yet. So finally, we may conclude that any medium of exchange or money must eventually regress back to a point in which its utility was determined by direct use value, as this direct use value establishes the money prices and exchange value of the money good.

Bitcoin’s Regression

We may now apply our knowledge of the regression theorem to Bitcoin. The foremost issue that must be pointed out is that it is empirically quite apparent that Bitcoin is being used as a medium of exchange. This fact alone defeats any argument claiming that Bitcoin “cannot be money” based on a violation of the regression theorem. There are currently prices for goods in terms of Bitcoins. Using this fact and our knowledge of the regression theorem, we can deduce that because Bitcoin prices for goods exist, Bitcoin must eventually regress back to a point in which its utility was based on direct use value. Those arguing against Bitcoin fail to understand this fundamental point: for Bitcoin prices of other goods to currently exist, as a prerequisite of these prices, there must have been some direct use value for Bitcoin. These prices could not ever have conceivably existed today without Bitcoin regressing to direct use value. Those arguing against Bitcoin from the basis of violating the regression theorem have already lost their argument due to Bitcoin prices for goods existing today. This is a crucial point made by Bob Murphy:

“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.”

The regression theorem isn’t a normative claim saying that for money to be “sound” it must have direct use value of some kind. It is an apodictic statement, established through a priori reasoning. In order for people to argue against Bitcoin, they must refute the chain of logic that brought Mises to the conclusion about regression that he came to. Any statement saying “the medium of exchange that is Bitcoin violates the regression theorem” is akin to saying “a circle is square”. The fact that Bitcoin currently is a medium of exchange implies that it doesn’t violate the regression theorem, as defined by the regression theorem. Austrian economists are certainly open to criticisms of the theorem itself; however, self-refuting arguments against Bitcoin such as the example given above need to be dismissed as a misunderstanding of both the basis of the regression theorem, and what Mises was trying to communicate. Until any such criticisms of the a priori logic are brought forth, we can establish that the de facto Austrian position on Bitcoin must be that it doesn’t violate the regression theorem.

With this being said, it seems apparent that the part that gives people trouble understanding this debate is what direct use value a good like Bitcoin could possibly have. As a caveat, it should be known that the character of Bitcoin’s direct use value is irrelevant to any discussion involving the regression theorem, which merely says that Bitcoin must have had direct use value at some point. However, it would not be totally useless to elaborate on this topic if it visualizes what the direct use value may have been, and for this visualization, I once again turn to Bob Murphy’s speculation of what may have happened at its inception:

“when Bitcoin was first introduced and no one had any idea of its purchasing power, the very first people to trade for it did so because it provided them with direct utility because they knew there was at least a chance that it would serve to chafe the governments of the world with their printing presses.”

Bitcoin’s utility, Murphy argues, might have derived from Bitcoin being capable of slaying the current government fiat system, which seems to be a very logical possibility. Utility from seemingly non-material uses like this may be hard for those against Bitcoin to grasp, as it is quite abstract, but this by no means is a negation of this point. It must be stressed once again that, material or non, Bitcoin must have had a direct use value of some kind.

Concerning Fallacious Economic Arguments

At this point, it seems necessary to refute a few of the many fallacious arguments floating around the Austrian community in regards to Bitcoin and the regression theorem. The first is an incorrect interpretation of the theorem in regards to Bitcoin put forth by the blogger “XC”. He/she asserts that the regression theorem is not violated because Bitcoin regresses back to fiat money, then to commodity (gold) money. This proposition entirely misinterprets the theorem, as it fails to ascribe any direct use value to Bitcoin; it doesn’t explain in any way why an actor would exchange his fiat money for an amount of Bitcoins in the first place. To establish a price for a Bitcoin, actors must weigh the utilities of a Bitcoin and a certain amount of fiat money. The regression theorem requires the utility of Bitcoin to regress to direct use value, and XC’s claim that Bitcoin regresses to fiat, then to commodity money fails to ascribe any direct use value to Bitcoin, and therefore misses the point.

The second argument currently being debated in Austrian circles comes from a post by blogger “Michael Suede”. In an slight improvement upon other criticisms of Bitcoin, Suede attempts to refute the regression theorem itself:

“So, once we have a perceived need in a free market for a trade facilitator and a store of wealth, what should we expect the market to do?  We can expect it to try and find a solution to this problem!  Mises attempts to argue that the market solved this problem because people valued gold for its own sake before it became a money, and it was this value they had for gold in ornamental use that allowed it to become a money.

This is patently wrong.  Consider that as soon as the market perceives a need for money, it wouldn’t matter if gold had a pre-existing value in ornamental use or not, because it would suddenly have value as a trade intermediary as soon as the need for a trade intermediary entered the public consciousness.”

Ironically, Suede’s interpretation of what Mises was claiming in the regression theorem is “patently wrong” in itself. Mises’ theorem does not say that the market solved the problem of trade facilitation and wealth storing through introducing money, though Mises would certainly agree that introducing money into an economy will solve these issues. These are but effects of introducing money. It in no way explains the origins of money, which is fundamentally the purpose of the regression theorem. Suede’s statement that “it wouldn’t matter if gold had a pre-existing value in ornamental use or not” is illogical in that if gold had no pre-existing direct use value, prices could not regress to anything. Thus, he offers no explanation for how prices for the medium of exchange could conceivably form without ever having a direct use value in the past, showing an inadequate understanding of what the regression theorem is, making his refutation of it fruitless.

The last important fallacy worth refuting is the notion that because a money or medium of exchange currently has no direct use value, or its direct use value is practically negligible in the face of its exchange value (such as Bitcoin), that it must therefore be a pyramid scheme based economic principle. On the surface, this claim appears to be in accordance with the regression theorem. This, however, isn’t the case, and a quote from Murray Rothbard shows us why:

“it does not follow that if an extant money were to lose its direct uses, it could no longer be used as money. Thus, if gold, after being established as money, were suddenly to lose its value in ornaments or industrial uses, it would not necessarily lose its character as a money. Once a medium of exchange has been established as a money, money prices continue to be set. If on day X gold loses its direct uses, there will still be previously existing money prices that had been established on day X – 1, and these prices form the basis for the marginal utility of gold on day X. Similarly, the money prices thereby determined on day X form the basis for the marginal utility of money on day X + 1. From X on, gold could be de­manded for its exchange value alone, and not at all for its direct use. Therefore, while it is absolutely necessary that a money originate as a commodity with direct uses, it is not absolutely necessary that the direct uses continue after the money has been established.”

Rothbard makes the obvious point that if money prices have already been set by direct use value in the past, there is no requirement that the money good continue to have its direct use value in regards to the regression theorem. Similarly, it does not follow that it is necessarily a “pyramid scheme” because it has no direct use value. A pyramid scheme is defined as “an unsustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services”. However, Bitcoin clearly does not fall under this definition, as it is potentially sustainable (as shown by Rothbard), and provides a service in the sense that it holds exchange value. Purveyors of this argument fail to understand that simply because Bitcoin doesn’t hold direct use value, or material uses, it does not imply that there is no “real services” provided. The exchange value it holds is the real service, and with this understanding, it is apparent that the “pyramid scheme” claim collapses under economic analysis.

In summation, with sufficient understanding of the regression theorem, we may conclude that, until Mises’ praxeological chain of logic is articulately challenged, the de facto Austrian position must be one in which Bitcoin does not violate the regression theorem, and thus may function as a medium of exchange or money. People may argue against Bitcoin on the basis of its merits as a money, in that it can’t be the most saleable good, or isn’t a reliable store of value, but these are not praxeological arguments against whether Bitcoin can be a money. They are arguments against whether Bitcoin is efficient as a money. As a community, we must stress the dissociating of Austrians with those libertarians who argue that Bitcoin cannot be a money; most people will associate these claims as being Austrian, whereas it has been made clear beyond reasonable doubt that they cannot possibly be so.

Stay tuned for the next article in this series, which will address the importance of Bitcoin to the libertarian movement, and to non-aggression as a whole!


~ Look On, Look On, Look On ~

The real sadness of existence is that each man must face the task of crushing all humanity into a neatly crafted, pop can carbonated, ivory painted four by four box of a worldview, while the truth in knowledge lay but a short walk away from this box, hidden somewhere in the tall-grass.

Some are said to never look up from their task; perhaps they take primal pleasure in it, or are too enchanted to lift their eyes. Some are said to have caught a mere glimpse of truth, seen, and ignored it; continuing to pulverize limb and flesh until their task is sufficiently complete, and their life is through.

And then there are those who take the walk.

Who are you?

The Economics of Bitcoin: A Response to “Smiling Dave”

It would appear that, of all regression-based criticisms of Bitcoin, blogger “Smiling Dave” has put forth the most convincing arguments, arguments that I failed to specifically address in my last post. Thus, I would think it is worth going through his criticisms and responding to them specifically.

Perhaps the most fundamental criticism Dave puts forth is the claim that a medium of exchange must be widely used. He quotes Mises as holding this definition as well, arguing that those Austrians who define a medium of exchange as a good which is held for its exchange value are simultaneously arguing against Mises himself on this matter:

“Remember, we are talking about what Mises meant by medium of exchange, not what [Bob] Murphy means or what I mean…Mises spells it all out explicitly, in Chapter 17, section 3, of Human Action:

A medium of exchange is a good which people acquire neither for
their own consumption nor for employment in their own production
activities, but with the intention of exchanging it at a later date
against those goods which they want to use either for consumption
or for production….Media of exchange are economic goods. They are scarce; there is
a demand for them
…There are on the market people who desire to
acquire them
and are ready to exchange goods and services against

them…People make sacrifices for their acquisitionThere exists a demand for media of exchange because people want to keep a store of them. Every member of a market society…”

Upon further analysis, we see that Dave is grasping at straws here. Where in this quote does Mises say that a medium of exchange has to be widely used? Not once. He says that a medium of exchange is a good which “people acquire…with intention of exchanging it at a later date”, which holds true mine and several other Austrians’ definition on the matter. Mises continues to speak to how media of exchange have demand for them, and how there exists other people on the market who desire them. But we must make note that not once does Mises explicitly say the scope to which this demand must be, but merely that this demand must exist. Thus, it is clear that Dave misinterprets Mises on this particular account. By his own quote, Mises never speaks to the width or extent of this demand, simply that there be demand for it to some degree. When Dave says: “Mises is talking about so many people wanting the thing that there is “a market” for it. So many people want it that we can say there is “a demand” for the stuff. The demand is so huge that people want oodles and oodles of the media of exchange”, he will need to clarify where in the quote that Mises claims “so many people” must have a demand for it, or that the demand must be “so huge”. In fact, this interpretation may probably be written off as invalid because a claim of this sort would be extremely out of character for Mises. Throughout all of Human Action, Mises stresses the chain of logic and deduction: how could one possibly deduce some arbitrarily “wide” demand that a good must pass before becoming a medium of exchange? Portraying Mises in this light is unfair, at least by the quote that Dave gives us in his article. He will have to explicitly point to where Mises says a medium of exchange must be “widely” used, and to what degree the scope of the demand must be.

Before moving on, it seems necessary to point out that if we complete Dave’s quote of Mises, we find that when he says “Every member of a market society…”, he is talking about money, not media of exchange:

“There exists a demand for media of exchange because people want to keep a store of them. Every member of a market society wants to have a definite amount of money in his pocket or box, a cash holding or cash balance of a definite height.”

Dave then proceeds to argue that it is not the style of Mises to frequently use the word “people” instead of “individuals”:

“Mises writes over and over that not just one person wants it, but “people” want it. “They” want it. And those are very odd phrase for Mises to use, “people” and “they”. Because Austrian Economics is all about the individual…Mises would never talk about “people” when analyzing an economic concept, if he could possibly talk about the proper context for all economic discussion, the individual. Thus, if he talks about “people’ and “they”, he must mean that the object is not a medium of exchange unless “people”…covet it.”

While this certainly is true, Dave fails to note which section of Human Action he quotes from. When writing about money, of course Mises will not say “individuals”. Media of exchange or money requires at least two or more actors to exist within the market; we cannot conceive of these things without having multiple actors. It is apparent that for an individual, in an autistic economy, money has no use, its only use being for multiple people. Thus, it is not out of character for Mises to talk in these terms as he referring to a good that demands, for its existence, people, or more than one actor. Again, we must make note that at no point does Mises speak to how many people there must be for media of exchange or money to develop in the market, rather that there must be “people”, or two or more actors.

As a final point in his post, Dave claims that when Mises discusses money and media of exchange, that there is no distinction between the two, rather they are one and the same:

“One last thing. Mises writes that there is a fine line between money and a medium of exchange. The line is so fine that the theory of money and the theory of media of exchange are one and the same:

A medium of  exchange which is commonly used  as  such is  called
money. The notion of  money is vague, as its definition refers to the
vague term “commonly  used.”  There are borderline cases in which
it cannot be decided whether a medium of  exchange is or is not “com-
monly”  used  and should be  called money. But this vagueness in the
denotation of  money in no way affects the exactitude and precision
required by praxeological theory. For all that is  to be predicated  of
money  is  valid  for every  medium  of  exchange.  It is  therefore  im-
material whether one preserves the traditional term theory of  money
or substitutes for it another term. The theory of  money was and  is
always the theory of  indirect exchange and of  the media of  exchange.

Now money, says Mises, is something everybody wants:

At any rate, the immense majority
of  people aim not only to own various vendible goods; they want no
less to hold money.

Now I ask you, dear reader. If by medium of exchange Mises meant something only a few geeks had any use for, would the theory of such a thing be EXACTLY the same as the theory of money, something everyone wants, as Mises wrote? I thought not. That difference, between a geek or two wanting it and everyone wanting it, would have huge theoretical repercussions.”

Here, we see that Dave once again unfortunately misinterprets what Mises was asserting. He was not saying that they are the same thing, as shown by this part of the first quote: “There are borderline cases in which it cannot be decided whether a medium of  exchange is or is not “commonly”  used  and should be called money.” Ironically, Dave’s quote here refutes his earlier claims that Mises defines a medium of exchange as something that must be “widely” used. Nevertheless, Mises makes it quite apparent here that the distinction between a medium of exchange and a money is common use, though this distinction is arbitrary, a fact that he fully accepts later in the first quote. It must be emphatically stated, however, that he is not saying that they are the same thing. He is saying that “all that is to be predicated of money is valid  for every medium of exchange.” Dave’s fallacy here is one of induction: though Mises says that all money must be a medium of exchange, it does not follow that all media of exchange are also money. He simply is saying that the distinction between the two is of “wide use”, and this distinction is arbitrarily determined.

With the idea that media of exchange must be “commonly used” sufficiently refuted, we may now turn to some of Dave’s other criticisms. In this post, Dave puts forth the argument that Bitcoin is not being used as a medium of exchange right now, because it isn’t being widely used:

“The latest claim is that bitcoin is ALREADY a money, or a medium of exchange at the very least, and so of course bitcoins very existence proves Mises wrong…[Mises’] regression theorem claims to prove bitcoin cannot exist as a money, because it is a money coming into existence with no intrinsic value, but here it is, existing and a money…Here’s what these guys don’t get. To be a medium of exchange, and certainly to be a money, a thing has to  generally accepted by a wide audience.”

Dave then continues on to give a hypothetical example of a man and his employer, where the employer attempts to pay the man with Bitcoin. The man then rejects the payment because only 10,000 people across the world use it. But as we have shown above, Mises does not say that a medium of exchange must be widely used. Only a money good must be. We find in general that many of Dave’s criticisms fall apart once we apply this knowledge.

It should also be said that, if we take Dave’s hypothetical example and reverse it so that the man accepts the payment, then proceeds to trade the bitcoins with the other 10,000 people who own them, what may we call Bitcoin then? It isn’t being used for its direct use value, but clearly for its exchange value with the other 10,000 people. So if it isn’t a good for direct use, and Dave doesn’t believe it to be a medium of exchange, then what could it possibly be? In addition to this, I would hope that economists as distinguished as Mises and Rothbard would elaborate on what goods that aren’t valued for direct use, but aren’t media of exchange either, would be defined as. Yet this ties in to the argument I was making earlier: Mises and Rothbard give no elaboration because they claim that the criteria for a medium of exchange is simply a good holding exchange value, and has nothing to do with the breadth of its use in the economy.

Moving on to this post by Dave, one in which he quite astutely refutes some of the ongoing confusion on the regression theorem’s application to both a barter and money economy, we find him partially change his definition of a medium of exchange. Remember that he, in an earlier post, argued that media of exchange must be widely used:

“If Mr A and Mr B use playing cards as their money, meaning that they buy and sell things to each other and accept payment in playing cards [which they don’t intend to play card games with, but to use as money at a later date with each other], but nobody else does, does that make playing cards a medium of exchange?

The answer is, yes it does, for those transactions in which it was used. But it is certainly not a medium of exchange for in those transactions in which it was not used…Why is this important? Because when people talk about something being a medium of exchange, they don’t mean it was used once. They mean it is used often.”

I do not know which people have been talking about a medium of exchange as something that must have been widely used, but as I elaborated earlier on, these people are mistakenly claiming that this view is Austrian, when they are not actually arguing from Mises’ framework. This being said, Dave admits that the playing cards are a medium of exchange for their micro-economy, however not for the “macro” as there are a large amount of people in the economy who would not accept the cards as money. However, by admitting in this instance that the cards are a medium for the two actors, Dave is also conceding that the cards could in the future be used as a money, as the only prerequisite for a money good is that it is also a medium of exchange according to Mises.

Perhaps here it would be useful to draw an analogy of my own, one that will highlight all the collective errors made by Dave as described above. In prison systems, it has been discovered that inmates use cigarettes to trade amongst each other, acting as a medium of exchange for that prison. It is obvious that the cigarettes, outside of prison, would not be accepted virtually anywhere in the economy. Thus, we may say that the cigarettes are not “widely used”. However, for the micro-economy that exists in prisons, the cigarettes hold exchange value, and thus clearly are a medium of exchange, despite not being widely accepted by the entire economy. Now imagine a prison where there are only three inmates. They use cigarettes for their exchange value, which are then defined as a medium of exchange. Now imagine a prison where 99% of the world’s population are inmates. They use cigarettes for their exchange value, and are then defined as a medium of exchange (or potentially money). Why is it that, under Dave’s definition, only the latter would classify as a medium of exchange, when both situations involve actors valuing cigarettes for their exchange value? And if the former case still, under his logic, cannot be classified as a medium of exchange, what exactly are the cigarettes? Hopefully Dave will offer some clarity in regards to this distinction.

Returning to Dave’s post, he then proceeds to attack Bitcoin for not having any direct use value, an assumption that I refute in an earlier post of my own, and thus will not belabour this point.

In a different post, Dave goes so far as to make the claim that Bitcoin has never been used as a medium of exchange. Though his argument is more nuanced, and requires more thought than to just make the point that this couple traveled the world purchasing things with Bitcoin, it is important to note that the acceptance of Bitcoin is definitely becoming more widespread with the passage of time. I urge readers to do some internet research, this website being a good place to start.

Now, the particular argument that Dave makes in this post is that those who buy and sell Bitcoin in terms of fiat are not truly using it as a medium of exchange, and that fiat is still the true medium of exchange (or money) in these cases:

“All the buying and selling of bitcoins for dollars or pesos or other currencies over at and other places are not, repeat not, transactions where bitcoins are media of exchange. Only instances where a person sells his apples in exchange for a bitcoin, and then buys oranges with the bitcoins, count as bitcoin being a medium of exchange.

I will take an educated guess and say that those events are extremely rare. I will go so far as to say they never happen. I think that everyone who sold something and accepted bitcoin in payment then went right ahead and redeemed them for dollars…If you look at the online catalogue of things for sale with bitcoin an acceptable payment, they are mostly useless knick knacks that the seller was unable to unload for dollars”

Ignoring the fallacious assumptions he makes in saying that such events “never happen”, we see that Dave’s fatal mistake in this situation is that he is not viewing the fiat dollar as a good in itself. A transaction in which an actor buys a bitcoin, paying with fiat dollars, and then uses that bitcoin in buying say, an apple, is by definition using the bitcoin as a medium of exchange. The fiat dollars as a good are not being used to buy the apple, and thus, in this transaction, cannot be defined as the medium of exchange in use. It is the marginal utility of the purchased bitcoin, not the fiat dollars, that are being weighed against the marginal utility of the then purchased apple.

His argument can be related to that of gold and fiat money. If I sell my fiat dollars to buy a bar of gold, and then use my bar of gold to buy an apple, what is the medium of exchange being used? Dave would say that it is the fiat dollars, and that it is not the gold, but this is incorrect. The dollars are not being valued for their exchange value in the transaction, rather the gold is. We could use Dave’s logic to similarly say that if I sold my apple to buy a bar of gold, then used my bar of gold to buy fiat money, that it is then the apple that is the medium of exchange in this transaction. This is patently untrue, as the apple was not being valued for its exchange value. In application to other examples as well, we find his conception of what truly is the medium of exchange to be illogical. If I sell my house to buy fiat money, then sell my fiat money to buy an apple, we do not say that the house is the medium of exchange. Clearly it is the fiat money. Or in another case, if I sell my labour to buy a bar of gold, then use that bar of gold to buy a house, the medium of exchange in this transaction isn’t my labour, but the bar of gold.

While I doubt I have covered every conceivable problem Smiling Dave may find in Bitcoin, it is needless to say that I believe this refutation of the fallacy that Bitcoin “isn’t”, or “can’t” be a medium of exchange is more than sufficient. Dave’s misunderstanding of Mises’ definition of a medium of exchange appears to be the central error in his analysis, and as I have shown, all other subsequent arguments made from this basis fall apart under the microscope of logic. I invite Dave, in good sport of course, to respond to any mistakes or potential straw-manning on my part, and thank him for exercising my mental capacity to the degree that his arguments did!