After many months of time away from the website, and many interesting developments in the state of the economy, I have decided to come back and analyze the current state of certain markets. Namely, this post is about Bitcoin. If you have been watching over the past few weeks we’ve seen a rollercoaster in the Bitcoin exchange. Going from roughly $900 to $1140 then all the way down to $783! All of this has happened over the past week, and the question keeps coming up as, why?
Well let’s start with Bitcoin as a currency. Ludwig V. Mises, the scholar of the Austrian credit cycle, points out in his ‘regression theorem’ that money can not exist until an existing starting point based on a commodity. Namely, that a unit must have ‘use-value’ before it can create a binary value of ‘exchange-value’. This certainly is an interesting concept that sets the cornerstone for many theorists conception of what money actually is and how it comes into existence. So if this regression theorem is true, deductively, how do we explain Bitcoin as money? Well it seems we can examine two propositions, either A) it is not a money but is just speculative asset or B) it is a money and we can find problems in our understanding of the regression theorem. Before we set out on our quest to uncover the true meaning behind Bitcoin. I have to suggest that this is in no way the scholarly article or platform worthy of introducing this theoretical application to understanding the phenomena of Bitcoin; and I assure you I will be performing much more research to hopefully bring fourth our theory to a more scholarly platform.
Initially, what we must define money as is a unit to facilitate several purposes. These purposes are a medium of exchange, unit of account, and a store of value. What this means is that money must be exchangeable throughout the general population between multiple goods, or as stated above it must have ‘exchange-value’. It must be a unit of account, or people must be able to use it as a divisor between transactions to evaluate transactions. Also, it must be a store of value or something that can be saved and then exchanged at a future date. By the definitions above we can theoretically assume that Bitcoin does in fact facilitate all three of the purposes, yet not very well. This is because the nature of Bitcoin is prone to volatility; $300 fall in one day. So economists can mainly agree that it might not be a ‘good money’ due to its volatile attributes, but we have to remember that the volatility associated with Bitcoin can be because it is relatively new and prone to more market spikes. The important knowledge we gain from understating that, though so far it is not a good money, it still facilitates all three specified above. Then we have to understand that there could be a problem with our understanding of the regression theorem. This has already been questioned by Daniel Sanchez’ great article on Bitcoin. Initially, Sanchez suggest:
“No. It does modify it. But the essential core of the Regression Theorem is completely true and indispensable to economic theory. Some proponents of Bitcoin think otherwise, but only because of a common misunderstanding of what the essence of the regression theorem is.”
Seemingly the problem with us understanding how Bitcoin became money, so to speak, is to mischaracterize what Mises was actually attempting to do with his regression theorem.
What was Mises talking about? Well, as Sanchez suggests, he was ‘tying up a loose-end’ in terms of the circular reasoning of subjective valuation into monetary theory. I.e., if money derives its value from utility, then why should money exist since utility creates value? Mises explains that money comes from a good that has use-value but engages in exchange value based on past price valuations in the onset of future orientated entrepreneurs.
What we wish to explore is not the feats this argumentation and insight of Mises brought, but rather what this actually entails. What we are suggesting here is that prices are an abstract structure, if you will, of relative relationships. Initially, what Hayek set fourth was the exploration of the subtle prices that Mises was suggesting but in a much more complex manner. Meaning, Hayek went much more in-depth in his explanation of the pricing phenomena as a way to cover-up what Mises failed to address. As Hayek shows in Prices and Production is the interconnectivity between prices and stages of orders in the production structure. What this suggests is that there is a multiplicity of prices rather than just a general price. So naturally, we must ask why must the regression theorem apply only to commodity prices? If there is a good with a ‘use-value’ which is an exchangeable good within the margins of the stages of the production then certainly there already exists a pricing structure based on historical objectivity. So naturally, there could come fourth an existence of money in the sense of a producer’s goods that is not a commodity. Perhaps Hayek’s assessment in Denationalization of Money is about this understanding that the prices within the interconnectivity of production can bring fourth currency in the market based not only on consumers goods, or commodities, but can be brought forth by any good that serves a purpose; therefore economically any good at all.
If this holds true, then we must ask what is the purpose of Bitcoin? Well it has qualities like gold, of course, though unlike gold it does not act as a ‘commodity’. Like gold, however, it acts as a hedge against inflation. Therefore understanding this aspect of the digital age there is no reason to assume that the free-market would not create multiple fiat currencies and would only resort to gold. This suggests then, that even with the highly volatile nature of Bitcoin we see that not only has Bitcoin not violated the regression theorem, but Bitcoin has grown our understanding of prices and how money can come fourth from prices.
What has been stated above is not the proper venue or construction of this theory, however it might help us further our understanding of what Bitcoin is; which this article is attempting.
Why all the volatility then? Well, the markets are suggesting that it is a Chinese induced buying spree that has skyrocketed the price and subsequently dropped it in a manner of days. Does this mean that the markets were anticipating a problem in the Chinese economy? Looking back a little under 2 years ago, we saw the trends rising on Chinese margin debts, and the massive liquidation of margin debt during the market crash in the summer of 2015, below is a graph shown:
We see a big drop in Chinese margin debt, which implies an economic scare due to leveraged trading. Below we see a chart of Chinese futures,
Here we see market volatility during the Chinese market crash of 2015, and therefor we can seemingly assume that the Chinese markets were attempting to hedge their losses with futures, then sold the futures in a way that flooded the market and caused a massive bubble then which burst in a manner of a short period of time.
However, it looks like Bitcoin might have bottomed out and might be back on the rise, could it be another volatile swing such as the two bounds above in the futures market? We will wait and see, in the meantime we have to ask what the Chinese markets are expecting and why they are using Bitcoin to hedge? The seeming answer would be a hedge against inflation as a means of protecting financial solvency due to a faulty currency. This could be a multitude of things, such as the USD or the Euro due to all the political havoc we have witnessed in the past year.
So to answer the daunting question, what is the ‘use-value’ of Bitcoin? Well, it seems empirically that it could simply be a hedge against inflation. Therefor the balance sheets of corporations with a multiplicity of reserves find a ‘use-value’ of Bitcoin as a hedge against inflation. So it would suggest that financial capital instruments can facilitate as money; demonstrated by Hayek in the Denationalization of Money. Therefore, this would not disrupt the regression theorem, but expand our knowledge on what it exactly entails.