Observing the discussion of the Austrian school economists regarding the nature of the Bitcoin, one can see a noticeable shift toward positive assessments and generally optimistic prospects for cryptocurrency. Although shortly after its inception, most opinions were extremely critical, over the past decade, cryptocurrency has attracted more and more enthusiasts from the Austrian circles. Are the questions regarding the regression theorem finally resolved? Recall, the theorem posits that a non-fiat money must have had value before it became money. Do we have a consensus that cryptocurrency is indeed money?
The answer to the first question is affirmative. Austrian economists seem to agree that the emergence of virtual currency does not contradict the regression theorem. Laura Davidson and Walter E. Block not only resolved a controversy between the emergence of Bitcoin as a medium of exchange and Mises’s regression theorem but also proposed a generalized interpretation of the latter. Thus, general Mises’s regression theorem “should imply that when money first emerges from a pure state of barter—and a cardinal calculational framework is created for the first time—the good in question must have prior value in the direct use.”
A generalized interpretation of the regression theorem extends to both tangible and intangible goods, which had direct-use value. Undoubtedly, Bitcoin had a prior value as a digital object for a narrow circle of “crypto-punks” even before attracting the attention of a broader audience.
The second question is still hotly debated. The current consensus is that cryptocurrency is a medium of exchange but not money yet. It has reached, however, a status of “secondary medium of exchange,” according to Mises’s definition of commodity—money that has not reached a level of universal usage. Therefore, the question remains: Can cryptocurrency win a competition against real money and be promoted to the level of the primary and universal medium of exchange?
In order to deal with this issue, let us back up and conduct a thought experiment. If we take for our working hypothesis the fact that the world is a multiverse, that is, it consists of an infinite number of universes, then an endless combination of different physical realms and exotic societies of the people inhabiting these worlds is possible. In one of these worlds, there may be a high-tech society that exchanges goods and services through barter; that is, despite its development, society has not yet invented money. Let us imagine that this is a hypothetical society on the verge of discovering money. Suppose also that two goods suitable for the role of money reached the final stage: one a tangible commodity and another a virtual one; moreover, all other parameters correspond to the requirements for money. Let us ask ourselves, under what conditions could a virtual commodity become money in such a society?
It seems that ceteris paribus, an intangible object will have an advantage over a material one only if virtual reality is valued in society more than the physical world itself. Members of society should spend more time in the virtual realm than in the real world and get more satisfaction for their needs in the artificial reality than in nature. We would have to observe the isolation of people from the real world because the majority of them receive gratification in the interaction with an artificial world. Under these conditions, the exchange between tangible goods through virtual money is not only possible but also desirable. The intangible good would win over the material one and become money mostly because of behavioral habits and psychological preferences of the society as a whole. The historical development of such a society had to form an inclination for artificial reality over a physical one.
The ubiquitous interaction in the virtual world presupposes a comprehensive and reliable network, inexhaustible energy sources, and a highly intelligent and professional society for which an understanding of information technology is as basic as a knowledge of the alphabet and arithmetic for earthlings. And now, let us go back to the sinful Earth and see how the development of humanity differs from that hypothetical society.
People, for the most part, are quite mundane creatures, finding satisfaction in material reality, such as buying food, clothing, and housing. The vast majority of humans prefer to satisfy their needs in the physical world rather than finding comfort in consuming intangible goods. They use the digital world as a game or to aid in solving various problems while realizing that the virtual world is not a substitute for the real one. In the case of the malfunction of computer systems or networks, there is always a way to conduct business on a primitive level. The same attitude is observed in understanding and using money. Thus, the owner of a store who hands over his proceeds to the bank at the end of the day understands that the money in his account is real, and the electronic record on his phone banking application represents information about his real money.
Cryptocurrency is competing against real money, and this competition started with a significant disadvantage for the Bitcoin. Some computer enthusiasts are spending most of the day in virtual reality, but their numbers are not enough to change the behavioral pattern and mentality of society. Bitcoin suggests that a record of money is money. People must overcome a severe psychological barrier in order to accept that idea en masse. Humanity is not there yet.
The artificial reality is a simulation of the natural world. Thus, Bitcoin was designed to be money that mimics a scarcity of economic goods. Let us compare the scarcity of gold and Bitcoin. Gold is a product of the supernova explosions that synthesize all chemical elements heavier than iron and spread them into intergalactic space. Later on, from the dust, gas, and debris, new stars and planets formed, including our Sun and the Earth. The Earth randomly amassed a certain amount of gold, which was deposited in different parts of the planet. Therefore, it is principally impossible to increase deposits of gold, as it is not produced by nature anymore. Gold mining is difficult, uncertain, time-consuming, and capital and labor-intensive.
In virtual reality, the scarcity of Bitcoin is obtained by a mathematical algorithm and corresponding software. It is coded that the number of Bitcoins will not exceed 21 million. The process of mining is simulated by solving complicated mathematical puzzles and obtaining a bundle of Bitcoins as a reward. The algorithm reduces the progressiveness of the reward by halving the bundle of Bitcoins every four years and increasing the difficulty of the puzzles. This is undoubtedly a clever algorithm and superb computer science. However, there is no principal impossibility to alter the parameters of the algorithm or logic of the programs.
Peter Surda argues that changing the quantity of Bitcoin supply would result in a branching off—a creation of a “new Bitcoin” with its own infrastructure along with the existence of the “old Bitcoin.” However, the decision as to direction will be made at the discretion of the owner of the algorithm. It could be a branching if he wants, or it could just be an increase in the supply of bitcoins. There is the fundamental difference between the simulation and the real world: In the former, one can appeal to the creator of the software; in the latter, there is nobody to ask. As such, the natural scarcity of gold is real and principally unchangeable, whereas artificial scarcity of any cryptocurrency is not principally determined. A human cannot change nature, but a human can change man-made algorithms. This leads to some degree of anxiety and psychological discomfort for ordinary people to accept Bitcoin as money on par to scarce gold.
Further, using money involves an elementary level of literacy. A commodity becomes money only if the majority of the population begins to use it as a medium of exchange. That is, the two conditions should converge: basic literacy of society and simplicity of money. The simplicity of money means, above all else, a minimum effort from the owner to count, keep, maintain, and transfer it at will. The commodity could become money if both money and usage skills are met at the lowest energy level or, in other words, both are more primitive than an alternative. Primitivism could be regarded as yet another vital characteristic of a commodity to serve as money.
Here, by the level of energy, we understand the expenditure of energy and resources to bring society to such a degree of literacy that it could easily use money universally. In order to freely use fiat money, an elementary level of literacy is needed. Thus, a third-grader in most countries can confidently use money up to thousands. In the case of cryptocurrency, the requirement for the level of education increases significantly. Here not only elementary arithmetic knowledge is needed, but also specific knowledge in information technology. In other words, specific knowledge in computer science must become universal.
Since illiterate people cannot effectively use money, people who do not possess great skills in information technology cannot effectively manage cryptocurrency. It is an enormous fallacy to suggest that an increase in the number of computer and smartphone users make people computer science savvy. Most people are end-users, and when something happens to their devices or software, they cannot fix it on their own. Some of my readers have probably encountered hard-drive malfunctions and the device’s “blue screen of death.” Undoubtedly, people experience an unpleasant feeling, almost like panic, when they assume that all their work, contacts, photos, and videos could be gone. Now, envision the magnitude of frustration and nervousness when one’s digital wallet happened to be on an unresponsive device.
In the event of a breakdown of the personal electronic equipment, which is used as the custodian of a digital wallet, or the lack of incoming energy, one temporarily loses not only the ability to manage money but remains without money for all practical purposes. Luckily, the digital wallet is almost indestructible. If one has enough knowledge and paper backup of the wallet ID, one can restore the wallet and cryptocurrency it contains. However, for “non-techie” individuals, the problem with the device or software malfunction would be painful and stress-inducing.
Equally important is the energy cost of maintaining money. For example, after the extraction and refining of gold, it does not require any additional energy to sustain itself in a stable state. The same can be said about fiat money. Cryptocurrency is a product of the virtual world. The virtual world comes to existence only when electric energy is applied. It dies when the source of energy runs out or is interrupted. Therefore, cryptocurrency is something that continually requires energy to maintain its existence.
In the history of mankind, there has been commodity-money, whose maintenance required a constant influx of energy. The prime example is livestock. Livestock lost to other goods in the competition to become money, not least because of the difficulty in maintaining them and constant need to supply energy.
The infrastructure is capital-intensive for both business and individual users. Bitcoin turnover depends on this infrastructure, which is not uniform for different market agents. Some agents might decide not to allocate funds at this time or simply have no available capital to invest in new technologies. In order to increase the circulation of cryptocurrency, the technological level of all market players must be more or less homogeneous. The widespread use of smartphones brings humanity closer to such technological uniformity, but if we talk about the entire infrastructure, which includes an uninterrupted supply of electricity, wired and wireless data networks – humanity is not there yet.
Some Austrian economists became fans of cryptocurrency because it has nothing to do with government and Central Banks. If Bitcoin was an invention of the government, what would be a reaction of economists regarding cryptocurrency as a replacement for fiat money? I have no doubt that economists would regard cryptocurrency as something that even worse than fiat money. They would be accusing the government of inventing something that makes it even easier to create money out of thin air because it requires just a few keystrokes to increase the money supply. They would be claiming that both inflation and business cycles would terrorize the economy with increased ease and frequency.
In the end, I would like to reiterate that the emergence of cryptocurrency does not contradict Mises’s regression theorem in its generalized interpretation. At present, we are observing a real-time competition between virtual currency and fiat money, while the former is trying to replace the latter as the primary medium of exchange. Despite the significant progress of Bitcoin over the last decade, it still has some disadvantages compared real money.
The main drawback is that cryptocurrencies do not meet the requirement of primitive money. Demand for this type of medium of exchange is limited by society’s educational and technological level, the complexity and reliability of infrastructures, and the uninterrupted supply of energy, on which the circulation of cryptocurrency depends. At the same time, the virtual world has not entered our life to the extent that it has changed human behavioral patterns to cause appreciation of virtual reality more than physical reality. All of the above create a significant psychological barrier for most people in accepting cryptocurrency as real money. Changing behavioral patterns, overcoming the psychological barrier, raising the educational level, and ensuring an uninterrupted supply of energy can take decades. After all, the above requirements require a quantum leap in the development of both technology and the cognitive level of humanity.
That being said, it’s worth mentioning that the value of cryptocurrency has risen significantly lately, although it is still subject to significant volatility. Cryptocurrency is used primarily as a speculative instrument rather than a means of payment. Thus, it seems to me, cryptocurrency will occupy a narrow niche and remain a secondary medium of exchange for the foreseeable future.