by Anthony Freeman
Proposition: Bitcoin is a new commodity invented to address the market demand for a better medium of exchange.
First some definitions for terms that I will be using in this post:
- Commodity: a) an article of commerce; b) something of use, advantage, or profit; c) economics – an exchangeable unit of economic wealth, esp a primary product or raw material
- Medium of Exchange: a) anything generally accepted as representing a standard of value and exchangeable for goods or services; b) a tool or means of exchanging what you have for what you want
- Hampered Market: a market where the voluntary exchanges between individuals are prohibited or restricted
- Government: a gang of individuals who collectively act to force their opinions and objectives upon everyone else
The great Austrian Economist Ludwig von Mises theorized:
“Before an economic good begins to function as money it must already possess exchange-value based on some other cause than its monetary function. But money that already functions as such may remain valuable even when the original source of its exchange-value has ceased to exist.”
I believe this theory (it’s only a theory) is false for the reasons I will describe below. But first, the elevation of an economic good to monetary status works best in an unhampered market. In this instance I further define the “hampered market” as one that prevents individuals from using their preferred medium of exchange. When individuals are hampered (restricted) from using their preferred medium of exchange they begin to look for alternatives that allow them to operate within the hampered market. In any market a new commodity can be created with its sole purpose being to serve as a better medium of exchange.
Bitcoin is a new invention, or creation, designed to address this market demand for a better medium of exchange. As a new creation, with its own use value, it becomes a new commodity.
Here is a list of several features and benefits that make bitcoin a highly desired medium of exchange:
- increased privacy – allows people to trade more freely with less interference by third parties
- lower transaction costs – saves money
- person to person payment functionality – bypasses traditional middlemen
- limited supply – may help preserve and even improve purchasing power over time
- compact – incredible wealth can be stored on a small area of disc space or flash drive
- portable – wealth can be transferred across the room or across the globe via an internet connection
- defensible when using encryption and other forms of concealment
- added protection against theft (which includes taxation)
- decentralized – less vulnerable to attacks since there is no central depository. Any seizure of bitcoin only serves to limit the supply further and increase the value of the remaining supply.
Bitcoin is a new invention created to serve the market demand for a better medium of exchange. It derives a great portion of its value from governmental restrictions on voluntary exchange. As long as governments interfere with individual voluntary exchange there will be demand for inventions like bitcoin. In the event of the disappearance of governments, bitcoin (or something similar) is likely to continue as a desired medium of exchange because it makes it difficult, if not impossible, for new governments to gain control of the monetary system.