Friday 26 December 2014

Direct utility of bitcoin

Austrian economic theory has a Regression theorem claiming that a functional medium of exchange must have had a direct utility described as
the utility not based on the function of the object as a medium of exchange
The difficulties to establish the direct utility of bitcoin are notorious. Jeffrey A. Tucker wrote
I toyed with the issue for more than a year. It puzzled me.
, and proposed that bitcoin is useful as
a unit of accounting attached to an innovative payment network
The problem is that a payment network must, by definition
provide the functionality for monetary exchange
The bitcoin network provides the functionality for exchange of bitcoins. The functionality for monetary exchange depends on moneyness of bitcoin, and in this sense it does not fit the definition of direct utility.

Terminology

To understand and overcome the difficulties we concentrate on two terms.
The first term is the immediate utility as money. It can be examined by going to a shop and trying to exchange the thing in question for a product on the shelf. This is what von Mises's wording “the function of the object as a medium of exchange” describes.
The second term looks similar, that is why it contributes to the observed puzzlement. It is the potential utility as money. This is the sum of properties that increase a chance that the thing becomes money. According to the classic knowledge, this property is an aggregate of recognizability, scarcity, durability, portability, divisibility, and fungibility.

Immediate utility as money

Applying the definition of immediate utility as money, the observation that bitcoin did not have it at the time of its inception in January 2009 is undisputed and in accordance with von Mises's regression theorem. It is a matter of dispute and immaterial for this text whether bitcoin does have the property at present.

Potential utility as money

Bitcoin software makes bitcoin recognizable. Software implementation makes recognizability of bitcoin higher than the recognizability of any type of money used in the past.
Bitcoin software is known to predictably limit the supply of bitcoins. There have been attempts to modify the software to change the supply limit creating several so-called altcoins with different supply rules. Due to recognizability built into the original software, the creation of altcoins can not influence the supply of bitcoin.
Bitcoin is durable, provided a reliable data backup policy is applied. Bitcoin also has a minimal storage cost.
Transportability over Internet without assistance of a trusted third party allows bitcoin transactions regardless of the geographic distance.
Divisibility of bitcoin allows a prospective owner to acquire the exact quantity she wants.
The block chain ledger is public and distinct bitcoins have different histories. The software, however, makes bitcons fungible ignoring the differences between them.

Bitcoin and humans

To find the direct utility means to determine how can acting humans use bitcoin when it is not immediately useful as money. The observed properties suggest that humans may be tempted to collect it. Can that be the elusive direct utility? It turns out that the use as a collectible is a direct use since it is independent on the function of the object as a medium of exchange:
A collectible is any object regarded as being of interest to a collector. The urge to collect unusual and fascinating objects is primeval and not limited to humans.

Interest in bitcoin

  • Due to its recognizability, scarcity, durability, portability, divisibility and fungibility, bitcoin has a potential to become money. People are fascinated by such objects since time immemorial.
  • Bitcoin is the first medium of its kind. Priority makes bitcoin interesting for collectors, more interesting than altcoins, which are derived from it.
  • People are into significant inventions, and before bitcoin was invented, the existence of a peer-to-peer transferable informational medium with limited supply was deemed impossible due to the Byzantine generals problem. This distinguishes bitcoin from altcoins, which can not be considered significant inventions.
  • The quantity of altcoins derived from bitcoin indirectly indicates that bitcoin is interesting. Humans do not tend to copy uninteresting objects.
  • Past attempts prove interest in a medium of this type preceding the creation of bitcoin.
  • Milton Friedman outlined the possibility that a medium having the fundamental properties of bitcoin becomes money and disintermediates central banks.
  • Central banks and financial authorities in the world publish detailed bitcoin-related analyses and warnings.
  • Economists and analysts publish their opinions on bitcoin.
  • Bitcoin is frequently mentioned in the news.
  • Google statistics reveal interest in bitcoin.
  • Bitcoin appeals to libertarians, because it can exist outside of the institutional banking system and the control of governments.
  • Bitcoin appeals to left wing critics, who perceive the state and banking sector as representing the same elite interests.
  • Bitcoin appeals to socialists proposing their own states complete with currencies.
  • Bitcoin appeals to right-wingers thinking that governments are not fully living up to the responsibility that comes with state-sponsored money.
  • Bitcoin appeals to criminals wanting to misuse it for illegal activities.

Additional evidence


  • People collect many objects, bitcoin is neither the first nor the last. For example, the utility of gold as a collectible looks as the main contributor to its value, since gold is not used as money at present, and industrial uses can only explain a minor part of its value.
  • It is natural for collectibles to be used as a hedge against inflation or financial crises. Bitcoin is known to have been used as a hedge against inflation in Argentina or bank crisis in Cyprus.
  • Use as a collectible corresponds well with the low initial liquidity and high initial volatility of bitcoin price.
  • Numismatists and other collectors generally agree that objects having similar properties as bitcoin are directly useful as collectibles even when they are not useful as money.

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