Sunday, 29 September 2013

Research update #2

I haven't posted a while, but that was because I have been reading, doing research for the book and writing it. I thought I'd post a quick update.

I do have several partially written posts that I plan to finish and gradually release. Mostly they will provide topics related to Bitcoin in a more looser way, such as hypothetical changes in the future or effects of Bitcoin, or critiques of some non-core critiques of Bitcoin.

In August, I started working part time at Megion Research & Development, which you might know under the name mycelium, the makers of the mycelium bitcoin wallet and the Bitcoincard. Once I finish the book I plant to work there full time. My role is business development.

I would like to thank a generous donor who bought me 13 books out of my Bitcoin Research wishlist on amazon. Also to people who donate Bitcoins (see in the right column for link). Thank you. I exchanged some of the donations for cash to offset the costs of my server and books. I used bitcoins from the donation wallet directly to pay for the renewal of the domain.

Earlier this week I attended the Future of money 2.0 conference in Bratislava, organised by the F. A. Hayek foundation. It was a conference about the risks of our financial system and possible consequences and outcomes, and how to protect one's assets. I was introducing the mostly Slovak and Czech audience into Bitcoin. I hope it helped people to understand the potential of it. You can download my slides (in English), the talk was in Slovak and it should be available soon (I'll update this post and the publication subpage once that's ready). I met with Jim Rickards (keynote speaker) and Philipp Bagus (he was on my panel). I was lucky because I had read both Currency Wars and The Tragedy of the Euro so I was familiar with both of their backgrounds. I had asked professor Bagus to read my thesis prior to the conference and he told me that it shows deep knowledge of Austrian economics. I actually promised him back in 2011 when I asked him some questions about Bitcoin that I'll post a review of his book on the German Amazon site, which I didn't do yet because I'm lazy. So go and buy his book, it's good. Jim Rickards liked my talk (I guess the translators did a good job too then) and asked if he can forward journalists to me because they keep asking him about Bitcoin and he's not a specialist on it. He also told me that his debate with Micky Malka about Bitcoin from earlier this year has been misinterpreted. He's not anti-bitcoin, he was just taking the anti- side of the debate because that's how a debate is supposed to work. I attempted to explain to him that some of the points he brought up are being addressed, and that it differs from country to country. I mentioned the taxation guide prepared by Trace Mayer and Bill Rounds, among other things. Jim seems like a smart and pragmatic guy. At a pre-conference dinner I also met Ivan Svejna, a libertarian-leaning member of the Slovak parliament. He was skeptical about Bitcoin, but luckily I had Bitbills and Casascius coins with me to "show" bitcoin, so he took a picture of them (Rickards also saw the coins and bills).

Now I'm in a hostel in Amsterdam where I was at European Bitcoin Conference 2013. I had a presentation about economic myths and Bitcoin. The slides (in English) are available for download, the recording will be put up by the organisers later. Today Eli Sklar couldn't make it for his presentation so Moe arranged an impromptu economics panel, where I was with Tuur Demeester (Macrotrends newsletter), Johann Gevers (Monetas/OpenTransactions) and Vitalik Buterin (Bitcoin Magazine). Both were a very enjoyable experience with participation of the audience and I thank you for your feedback.

During the conference, I met some old friends, like molecular and Dominik, Jorge Timon from the Freicoin project (we were actually able to clarify some of our positions better to each other after having a sort of flamewar in August at the linkedin Bitcoin group), Hakim Mamoni, slush, Tamas Blummer from Bits of Proof, Patrick van Zuijlen, Meni Rosenfeld, Gary Rowe, Dmitry and many others (if I forgot to mention you, complain and I'll add you to the list). There were also some which I either met for the first time or spoke to for the first time even though we saw each other at previous conferences. I spoke with Tony Gallippi of BitPay, Charlie Lee (Litecoin/Coinbase), Ron Gross from Bitblu, Tomer Kantor's (he's making a documentary), Jörg Platzer (ROOM77) and many others. Thank you Moe, Dmitry and the rest of the organisers, thank to all the panelists and of course all attendees. I always look forward to yet another Bitcoin conference.

I had the very pleasant surprise of meeting Konrad S. Graf in person, a fellow Austrian researcher interested in Bitcoin and we spoke at length about many of the facets of the Austrian School and praxeology. There was a funny scene where Konrad and n8rwJeTt8TrrLKPa55eU (I always forget his real name, sorry) were talking about the Austrian school and Konrad asked me if I read The Ethics of Money Production. I said that I read it twice, he laughed and said he read it twice too and told n8rwJeTt8TrrLKPa55eU that he should "witness this historical moment" and it's unlikely to ever happen that people like this are at the same place.

I also had a great experience meeting the inventor of hashcash, Adam Back (also, one of the few people who were in contact with Satoshi before he published his paper). Among other interesting things he told me his experience with DigiCash. DigiCash was a predecessor of Bitcoin in the early 90s. It was also a cryptographic currency that from economic point of view was a pseudo-commodity, like Bitcoin. And people did start to use it in trades, such as for t-shirts. There were no fiat-exchanges and no real time price. Adam said he just mimicked the approximate ratios that others were using, and traded t-shirts for DigiCash. The experiment however was shut down by the Dutch regulators and since then, cryptocash enthusiasts knew that you can't have a centralised server. Based on his description, I'm hesitant to classify DigiCash as "medium of exchange" or "liquid", but it appears to have become a good even though it was a completely virtual "thing" without non-monetary uses. So Bitcoin wasn't even the first wannabe-money to overcome the first step. Rather, Bitcoin was the first one to manage to overcome all the obstacles to become a medium of exchange, and to resist the regulators' attempt to shut it down for a significant amount of time. One thing Adam recollected that I found funny was that after Bitcoin launched, Satoshi emailed him again and Adam wasn't able to get excited because "we already know that it can work". Adam also doesn't want to own any Bitcoins and got "angry" when people used the bitcointip reddit bot to send him Bitcoins anyway (maybe he was joking, I'm not sure).

Next week I'm in Atlanta at the Crypto-Currency Con 2013, I have a presentation about sound money. I try to create a new presentation for each conference I go to, so look forward to it. See you there.

Sunday, 22 September 2013

Professor Walter Block is clueless about Bitcoin

This is a second article in a series (the first being Mises Institute is clueless about Bitcoin). Sadly, one of my favourite Austrian economists, Walter Block, seems to be making the same blunders as some of the other economists associated with the institute. The purpose of the post is to address some of the fallacies he produced and explain where exactly the error is.

Some of the arguments were not actually made by professor Block but by people talking with him and he did not subscribe to them. However, they are common fallacies and show cluelessness of their proponents, so I decide to pool all of them together

The source

The primary source of my complaint is the following video, published about a week ago couple of days ago on youtube. The relevant part starts at 4:21 (transcript on the right side):

  • 4:21 - Caller: We also seem to agree that it only exist because they've suppressed gold. And my question I guess is this is the biggest one, doesn't that make it by definition malinvestment?
  • 4:35 - Block: Doesn't it make Bitcoin malinvestment?
  • 4:39 - Caller: Yes. If it only exists because of the fiat, and the artificially lowered interest rates, and the counterfeiting and all the rest, isn't that by definition malinvestment?
  • 4:53 - Block: Yes, I think it's malinvesment and it's contrary to Menger's theory.

Now to the individual issues.

Bitcoin shows that Austrians do not really understand Menger

I am still baffled how an Austrian economist, in particular one who researched money, can invoke Menger as a method of "disproving" Bitcoin. Research in this area has been done and published by Konrad S. GrafDaniel Krawisz, and of course me. One might argue that I'm a nobody and can be ignored. However, Graf had a paper published in Libertarian Papers and met with professor Block. Daniel Krawisz had articles published on

What happened with Bitcoin and how does it match what Menger wrote

One of the most irritating things is the sheer ignorance of "Mengerian critics" of Bitcoin. They do not take the time to collect historical data, yet proclaim certain judgement about what did or didn't happen. The information is public and reachable with not much more than a search engine (not to mention that in my master's thesis I already did a lot of the work and summarised the findings for the lazier ones). Another summary for the lazy ones is the "History" page on the Bitcoin wiki site. Let's take it step by step and iterate through what actually happened with Bitcoin, and how that matches the writings of Menger and Mises.

On October 31st 2008, "Satoshi Nakamoto" published his paper. At that time, Bitcoin as a "thing" did not exist yet. There was only an idea of Bitcoin. Ideas are not catallactic phenomena, so it's not really important, it just is a milestone that helps us in our understanding.

On January 3rd 2009, the "Genesis Block" of Bitcoin was created by Nakamoto. From that moment on, bitcoins have existed as "things". However, a bitcoin was not a good at that time yet, it did not fulfil the four Mengerian requirements for goods. People did not know how to use bitcoins to satisfy their needs. One of the early adopters, Mike Hearn, reminisces (at 4:27):
"I found it very early on, when noone was using it, so noone, no exchanges, had no exchange rate at all, so they were just completely floating in an abstract space. You know, what was one coin? Well, nothing really." [emphasis added]
On October 5th 2009, one of the early miners, "NewLibertyStandard", published the exchange rates he was using to sell bitcoins. How did he know how much to charge? This is what he writes:
"During 2009 my exchange rate was calculated by dividing $1.00 by the average amount of electricity required to run a computer with high CPU for a year, 1331.5 kWh, multiplied by the the average residential cost of electricity in the United States for the previous year, $0.1136, divided by 12 months divided by the number of bitcoins generated by my computer over the past 30 days."
In other words, he was using his own variable production costs as his asking price. "Theymos", who was also one of the early adopters, did not like the price and three years later, wrote:
"His pricing methodology will seem very strange nowadays... At the time, I performed similar calculations and thought he was charging too much."
Theymos' objection exposes the fundamental problem with the critiques of Bitcoin (Theymos himself isn't a critic, he just exposes the problem). It does not matter what Theymos, Block, Korda, Smiling Dave and a whole bunch of other clueless critics think or thought. The fact is, sales occurred. That is the only relevant factor for an economist. There is no other way for prices to emerge than through catallactic processes. They cannot emerge by a critic liking it and disappear by a critic disliking it. That we do not like it or do not understand the reasons behind it is completely irrelevant. In Antifragile, Nassim Nicholas Taleb scolds theoreticians who imply that our understanding can influence whether something happens or not. Empirically, it did happen. I don't know if "NewLibertyStandard" was the first seller ever, but he probably is very close to being the first one. What we can safely say however is that from then on, Bitcoin was a good, which is demonstrated by people exchanging it for the US dollars.

On February 6th 2010, the first traditional Bitcoin exchange launched. Its founder, "dwdollar", announced:
"I am trying to create a market where Bitcoins are treated as a commodity.  People will be able to trade Bitcoins for dollars and speculate on the value.  In theory, this will establish a real-time exchange rate so we will all have a clue what the current value of a Bitcoin is, compared to a dollar.  I have an early version up at
This is only a small demonstration of what I have in mind and to show everyone I'm actively working on it.  Feel free to register and try it out.  You will get 10 phoney dollars and 10,000 phoney bitcoins to trade.  ONLY the limit orders work.  Market orders will come later. [emphasis added]
The reason why this was an important milestone is the emergence of bid and order books for Bitcoin, and an easy mechanism for trading. The exchanges are what Menger refers to as "organised markets", places where people trading congregate, and allow for a qualitatively more efficient way to obtain price information and execute trades. The bid and ask order books, together with a trading mechanism, make, in Menger's terms, it easier to sell at "economic prices" and make a good more saleable:
"A commodity is more or less saleable according as we are able, with more or less prospect of success, to dispose of it at prices corresponding to the general economic situation, at economic prices." [emphasis added]
Unlike Block, Menger recognised the connection between specialised markets and liquidity:
"Some commodities, in consequence of the development of markets and speculation, are able at any time to find a sale in practically any quantity at economic, approximately economic, prices." [emphasis added]
From the time Bitcoin exchanges with orderbooks existed, Bitcoin was not merely a good, but a liquid, or in Mengerian terms, saleable, good. And exactly as Menger predicted, specialised services that help buyers and sellers to coordinates their plans, played a significant role in the process. Many of the people attempting to determine the early motivations (e.g. Robert Murphy, who, unlike Block, definitely is not clueless about Bitcoin) theorise that speculation was one of the factors. And indeed, again exactly as Menger predicted.

On May 22nd 2010, Laszlo Henyecz, or just "laszlo", managed to purchase two pizzas for 10,000 bitcoins. The purchase was facilitated by a Bitcoin buyer "jercos", who used a credit card to order two pizzas, to be delivered to Laszlo. This example of a trade of Bitcoins for a pizza is indirect exchange and therefore, from that time on, Bitcoin has been a medium of exchangeThis trade was only logically possible because at that time, Bitcoin not only had a price but also was liquid (or saleable, as the Austrians say). It would have been logically impossible to do this otherwise. A good without a price cannot be a medium of exchange, and as Menger brilliantly figured out, an illiquid good cannot be a medium of exchange either. Furthermore, as Mises elaborates, liquidity must emerge as a catallactic phenomenon and cannot be made up.

I actually thought, based on his lecture (transcript right):
"You can’t have a piece of paper be money. Let’s suppose I wrote over on this piece of paper, I write "ten Blockheads". And I go around the room and I say, hey, Erin, will you give me your car I’ll give you ten Blockheads. You know she’s gonna look at me as if I'm a little weird. They don’t call me Walter Weird Block for nothing. That’s part and parcel of it. The point is that if somebody just printed up a piece of paper, noone would accept it, except in some sort of weird way. Murray Rothbard used to do this and he would say "Well, suppose I printed up ten Rothbards and tried to trade..." and I would raise my hand and say "I’ll accept them, I’ll give you my bicycle for one" and he would say "Shut up Block, I’m trying to make a point here". But the point is, you see, ten Rothbards, if I really had ten Rothbards, I could probably sell it for a lot of money. But it would not really be money, it would be more like, art or something like that, a unique kind of thing. But forget about that sort of thing. In any real case, if someone said "Here is ten Rothbards, give me your house, ..." Well, ten Blocks. Ten Rothbards I don’t know what you can do with it, if it was real ten Rothbards, but you get the point." [emphasis added]
that Block comprehends that liquidity makes goods into media of exchange. It was actually this lecture that made me comprehend the whole issue. We're now apparently in a weird situation where the teacher teaches a student something the teacher himself doesn't know.

While it was logically possible for "laszlo" and "jercos" to use Bitcoin as a medium of exchange, why did they actually do it? Let's just ask Menger:
"But the willing acceptance of the medium of exchange presupposes already a knowledge of these interest on the part of those economic subjects who are expected to accept in exchange for their wares a commodity which in and by itself is perhaps entirely useless to them. It is certain that this knowledge never arises in every part of a nation at the same time. It is only in the first instance a limited number of economic subjects who will recognize the advantage in such procedure, an advantage which, in and by itself, is independent of the general recognition of a commodity as a medium of exchange, inasmuch as such an exchange, always and under all circumstances, brings the economic unit a good deal nearer to his goal, to the acquisition of useful things of which he really stands in need." [emphasis added]
Because "laszlo" and "jercos" recognised that Bitcoin is a liquid good, this provided them with the knowledge to use it in indirect exchange. Just like this knowledge arises in some people first, it consequently arises in other (clueless) people late. The latter seem to be in a majority now, but that is not a fundamental issue for an economist.

What happens when a medium of exchange evolves into money?

Some of the "Mengerians" seem to think that the "regression" applies to the evolution of a medium of exchange to money. Regrettably, it is not always clear in either Menger's or Mises' writings whether the theorem is supposed to explain the origin of media of exchange as such, or only that of money. They both arbitrarily change between "medium of exchange" and "money", add and remove "general acceptance" and that money is, and isn't, praxeologically different from other media of exchange. However, we can produce the following quotes by Menger:
"If we grasp this, we shall be able to understand how the almost unlimited saleableness of money is only a special case,—presenting only a difference of degree—of a generic phenomenon of economic life—namely, the difference in the saleableness of commodities in general." [emphasis added]
If there is only a difference in degree (i.e. what nowadays would be called a quantitative difference), then we cannot make praxeological distinctions between a medium of exchange and money. If the regression theorem is a praxeological insight, it either applies to both a medium of exchange and money or neither. Another relevant quote by Menger is the following:
"The reason why the precious metals have become the generally current medium of exchange among here and there a nation prior to its appearance in history, and in the sequel among all peoples of advanced economic civilization, is because their saleableness is far and away superior to that of all other commodities, and at the same time because they are found to be specially qualified for the concomitant and subsidiary functions of money." [emphasis added]
Let me translate this into a more digestible form. Once a good becomes a medium of exchange (and we thus know it is saleable/liquid), then it competes with other media of exchange not on the basis of its origin, but on criteria unique to media of exchange, such as liquidity and transaction costs. The question of its origin becomes irrelevant. The Austrian critics of the origin of Bitcoin are too late. Their objection would only have been relevant in the narrow timeframe between October 2008 and May 2010. Since then, the criteria determining the future of Bitcoin, as Menger explains, have changed. Sadly, the Austrian critics didn't shift their attention accordingly, and remain silent on the issues of liquidity and transaction costs. This problem is emphasised in another video where Block comments on Bitcoin and the theorem:

37:47: Will it work? No, I don't think it will work either.
38:07: If you compare it to gold or silver, where you have some intrinsic value, not intrinsic, but market value, Bitcoin won't work. On the other hand, if you compare Bitcoin not to market money, but to fiat currency, well now it's a bit of a horse race. Now I'm not sure, that's an empirical issue. Bitcoin is not based on the Mengerian theory of the creation of money. But on the other hand, if you compare it to theft, which is fiat currency, maybe not so bad. So I don't know about that.

I fully agree that the issue "Bitcoin vs. fiat" is an empirical issue. What Block does not recognise however is that "gold vs. Bitcoin" is also an empirical issue. Not only is Bitcoin based on the Mengerian theory, it also already works. As I just said, Block's objection comes too late (in addition to, regrettably getting confused on the "market value" question and being silent on the issue of liquidity).

Is it possible to "violate" the regression theorem?

As Daniel Krawisz points out, if we interpret the regression theorem as a praxeological insight, then it must not be possible to violate it. If there is a disconnect between empirical data and a theory, then either we do not understand it or we do not correctly interpret the empirical data. Daniel Sanchez explains this in one of his articles:
"Yet the most history can do for an economist is to provide either an example with which to illustrate (but not prove) an economic theorem to help students grasp the concept by giving them a concrete manifestation of it, or a clue that perhaps he has performed fallacious reasoning in deriving the economic theorems he has been operating with. But even in the latter case, he must use discursive reasoning to catch the fallacy, and then to adjust his theory according to the corrected reasoning." [emphasis added]
The claim that Bitcoin can "violate" or "be contrary to" the regression theorem is methodologically absurd. Sadly, Sanchez himself allegedly is clueless about Bitcoin, and professor Block appears to commit all three offences (not understanding the theorem, not interpreting the empirical data, and claiming that you can "violate" praxeological fundamentals) togehter.

One could also argue, as Gary North in The Regression Theory as Conjectural History (was published in The Theory of Money and Fidicuary Media (ed. Jörg Guido Hülsmann), that the theorem is merely a probabilistic conjecture rather than an aprioristic argument. I do not agree with this, and I also do not think that Menger and Mises viewed their arguments regarding the theorem from the Northean point of view. Mises in particular wrote:
"And all these statements implied in the regression theorem are enounced apodictically as implied in the apriorism of praxeology. It must happen this way. Nobody can ever succeed in construction a hypothetical case in which things were to occur in a different way." [emphasis added]
And he also denied that there can be exceptions in other forms of money:
"This link with a preexisting exchange value is necessary not only for commodity money, but equally for credit money and fiat money. No fiat money could ever come to existence if it did not satisfy this condition."
Professor Block, and other Austrians clueless about Bitcoin should really spend some time on actually reading Menger and Mises. And of course, their own writings and lectures.

Conclusion regarding the regression theorem

As a medium of exchange, Bitcoin emerged exactly as Menger predicted. He and Mises also explained that it would not have been logically possible otherwise. It is regrettable, that people who proclaim to adhere to Menger's teachings do not recognise it when it happens right under their noses. It also is something which already happened over three years ago and cannot unhappen. My recommendation is that the "Mengerians" need to shut up and move on.

Is Bitcoin a "token" because it traded against the dollar first?

(presented by the caller rather than Block himself) This fallacious idea seems to have been popularised by Patrik Korda. I already posted several rebuttals to that argument, the most specific one is the second one, where I quote several Austrians, including Mises and Rothbard, in that token money must be a par value claim on the underlying base money. Bitcoin never was a claim on, or even had a peg to, any underlying base money, and its price was not derived from the price of the US dollar. However, that is not important here. Here another issue arose: the fact that it trades against money, seems to invoke in some observers the impression that that this somehow makes it suspicious.

On the contrary. There is nothing unusual about a new good to trade against money if we already live in a monetary economy. We do not have barter now anymore, and most exchanges occur with a medium of exchange. Indeed, from Mengerian and Misesian perspective it would be suspicious if Bitcoin did not at first trade against money, but against consumer and producers goods. As a new good, Bitcoin barely had a price and wasn't liquid. Such a good cannot act as a medium of exchange. What would such a good trade against in a monetary economy? Against consumer/producer goods rather than media of exchange? There would have been little motivation to use Bitcoin in barter (direct exchange). And as Menger explains, only as a good gains liquidity, do people start accepting it in a trade as indirect exchange. The fact that Bitcoin at first traded against fiat money (the most liquid one, the US dollar), is exactly what, according to Menger, happens at the beginning of the emergence of a good in a monetary economy. The other alternatives would have been either implausible or logically impossible.

That Bitcoin could "piggyback" on the US dollar is nothing strange. Different types of goods emerge in a monetary economy than in a barter economy. A barter economy has higher transaction costs, a lower specialisation of labour and does not allow for complex investment projects. A computer, for example, would not have likely been produced in a barter economy, and has to "piggyback" on a preexisting monetary system. Does that make computers suspicious?

Furthermore, even as it gains liquidity, there is still nothing unusual about a medium of exchange to trade against other media of exchange. Quite the opposite. The world forex market is the most liquid market that exists. According to wikipedia, the daily world forex volume was about four trillion USD in 2010. The article also lists the following characteristics that distinguish forex markets from others:
  1. its geographical dispersion;
  2. its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday;
  3. the variety of factors that affect exchange rates;
  4. the low margins of relative profit compared with other markets of fixed income; and
  5. the use of leverage to enhance profit and loss margins and with respect to account size.
Someone who spent at least five minutes researching the history and performance of Bitcoin exchanges can immediately recognise the first four points, and if you remember the now defunct Bitcoinica, you'll recognise the last one as well.

The critique that there is something suspicious about Bitcoin because it trades against other media of exchange has no basis in the Mengerian/Misesian approach to emergence of liquidity. It contradicts it, and is to be classified, using the same arguments as Mises in his own critique, as an acatallactic monetary doctrine, right next to the one which says that the opinion of an economist, rather than actual trades, determine prices and liquidity.

Can Bitcoin be used to discredit the Austrian school?

The caller submitted the hypothesis that Bitcoin can be used to discredit the Austrian school by associating it with illegal things (such as drug dealing). Well, gold-based payment systems have already been shut down (E-gold or Liberty_dollar) for exactly the same reasons, i.e. the Four Horsemen of the InfocalypseGoldMoney has been neutered, they probably choose to not actually provide a competing system in order to prevent being shut down. I don't see how Bitcoin can be used to discredit the Austrians more than the gold based systems.

Gold, not Bitcoin, is a malinvestment

Professor Block made the argument that Bitcoin is a malinvestment (i.e. he agreed with the caller). They are not the first ones making this argument, it has been made by Patrik Korda before, and some other guy in a youtube interview (which I did not save and can't find it anymore, I thought it was Chris Duane but it looks like it wasn't). I will take the opposite side and make the argument that gold, rather than Bitcoin, is the malinvestment.

The concept of malinvestment is popular in particular with the Austrian Business Cycle Theory. The argument is that artificially lowered interest rates make it appear to be profitable to invest into projects farther removed from the consumption, even thought the availability of capital and the time preference of consumers do not make such a project possible at such a price structure. Eventually, either the project will run out of actual resources, or the prices adjust in a way unpredictable by the investors making the project unprofitable (the latter is more likely to happen in a market economy, only if the price adjustment is prevented you'll actually run out of all resources). The investment into the projects farther removed from consumption is called malinvestment, because the structure of available capital does not allow it to satisfy the needs of the consumers. The project will fail and the investment has to be liquidated at a loss. If the interest rate wasn't disturbed by an increase of the money supply through lending to investors, this would have been recognisable in advance and wouldn't have happened.

Media of exchange are not producer goods. Furthermore, I don't know how about gold, but there appears to be little or no evidence that the purchasing of Bitcoins is fuelled by loans made at an artificially low interest rate. Certainly there is little reason to believe it is happening at a higher proportion with Bitcoin than with gold. So what other type of malinvestment can there be?

Media of exchange serve in indirect exchange. They allow it to mitigate the uncertainty by having liquid goods and thus the ability to make unpredictable purchases in the future easier than doing so with illiquid goods. We can therefore posit that for media of exchange, whether obtaining them is a malinvestment depends on their future liquidity.

Let us now compare the possible future liquidity of gold and Bitcoin.

Is gold evolving into money?

Many of the Austrians think or argue that the impeding fiat system collapse will make gold (or another "real" commodity) into money. There appears to make sense, doesn't it? Once fiat hyperinflates or actually stops working (banks go bankrupt), what will people use? The most liquid good that still works, i.e. gold.

Not so fast. First of all, the majority of transactions nowadays happen electronically, in particular in "western" countries. These transactions will need to find a replacement, not the physical exchange of a good. There would be a huge logistical issue of how to make gold, both in the physical sense as well as a clearing mechanism, work. Banks might have support for gold as a unit, but how will they gain gold-backed reserves? By people depositing their gold into the banks, right after a massive bank collapse? A more likely scenario is an increased role of gold in the assets of central banks, combined with a confiscation of physical gold from the populace, i.e. something like the gold exchange standard, where a normal guy never actually sees a gold in a transaction or has the ability to redeem his fiat for gold. GoldMoney would probably be one of the first stashes to be confiscated, accompanied by the statist propaganda how it is necessary to "fix" the economy.

One also needs to remember that normally, it is liquidity, rather than the use value or even the question of fraud, that determines the use of a medium of exchange. Even more strongly it is phrased by Hans-Hermann Hoppe:
"Driven by no more than narrow self-interest, man will always prefer a more general, and if possible, a universal medium of exchange to a less general or non-universal one."
If a fiat money collapses, it is thus replaced by a more liquid fiat money, because fiat money, whether we like it or not, is more liquid than gold. We've seen this empirically occur many times. The event is also called Dollarisation rather than "Goldisation". Collapsing fiat systems are spontaneously replaced by the US dollar, not by gold. In other words, for gold to gain liquidity, it is the US dollar that needs to collapse, not just any fiat currency.

Of course, it could actually get so bad that there is a global collapse of the supply chain, something that David Korowicz or Karen Hudes warn us about. Gold is not going to fix that, because what is needed to prevent it is a replacement for the financial system, not a replacement of the unit. Merely liquidating unsustainable debt, while a necessary step, is completely inadequate to address this issue.

The only possible scenario which is advantageous for gold is that the financial system collapses without having a replacement, while at the same time the economy still having a sufficient amount of division of labour, and at the same time finding out some way of permanently preventing the possibility of fiduciary media or fiat money. Unless this prevention can be put into place, the "reign of gold" will be short, and will be replaced by fiduciary media and/or fiat money, it would just take longer than in a case of an "orderly" reform of the financial system.

I am not the only one skeptical about gold being able to fulfill the requirements of the Austrian critics of our monetary system. Michael Suede, asked what the point of a gold standard is if we already know if failed. It is not money anymore, it is merely a highly liquid good. Did gold gain new features that make it more likely to resist substitution and confiscation? I haven't noticed any. Comparing gold to Bitcoin is indeed, as professor Block argues, silly. To be fair, there have been technological advancements in helping gold be a medium of exchange:
However, all of these are inadequate from the broader perspective. None of them allow gold to be sent electronically and none of them make it easier to transport, control, and with the exception of small change, resist substitution. And unless you find out how to violate the fundamental physics and chemistry laws, gold won't be able to overcome these obstacles (additionaly, if you find out how to violate these laws, then gold would become useless as money anyway). The situation is exactly the opposite as the caller and Block submit. Gold is amedium of exchange that does not solve any of the real issues (i.e. it does not work), while Bitcoin, so far, has been working. We don't know for sure how well it will be able to handle the issues in the future, however it has shown a path of how it is possible so solve them.

In summary, irrespective of a collapse of fiat money, the outlook for gold to gain more liquidity looks bleak.

Is Bitcoin evolving into money?

Bitcoin is, I would say, less liquid than gold. It has less people using it, less mature organised markets, more problems with cooperating with the banking sector or the regulators. However, there is nothing either fundamental or problematic with this. Bitcoin does not need the banking sector to work. It already can be traded in over 3000 cities in 169 countries. It does not need to cooperate with the regulators, because there is no middleman.

For Bitcoin, the issue is exactly the opposite as with gold. The reason why it has a comparative advantage as a medium of exchange is not because of liquidity rank, but because it decreases the transaction costs. It provides a payment processing system that is a replacement for the more common systems like POS terminals for debit cards, ATMs, paypal and so on. Except you don't need a middleman to either provide the service or to entrust your money to. The early adopters of Bitcoin are niches that can benefit from this decrease of transaction costs the most: online gamblingblack markets, donations, charityonline products and so on. Event the emergence of altcoins proves that Bitcoin decreases transaction costs: they piggybacked not on the US dollar, but on Bitcoin, and with small exceptions, they don't even have markets where they can be traded against the US dollar.

Not only does Bitcoin decrease transaction costs from the narrow point of view of a medium of exchange, it also does it from the point of view of a financial system. It provides a replacement for the Wall Streetnotariescorporations, and in general anything that has to do with transfer and enforcement property rights. It is a framework that implements an enforcement of transfer of property rights, analogous to the title-transfer theory of contract, where the transfer itself is transparent and enforced automatically or semi-automatically. All the problems with statist provision of services that has to do with property rights now have a competition not because the state permits it, but because it is more efficient.

What would happen to Bitcoin if the fiat system collapses? First of all, already the "dollarisation" is being amended by "bitcoinisation", such as in Argentina or Iran, despite the maybe overhyped media portrayal. In Kenya, which already has a high mobile payment penetration, Kipochi provides an integration between M-PESA and Bitcoin. Bitcoin also allows them to overcome capital controls in a way that neither the dollar nor gold can. People in those countries are then increasingly more likely to migrate to Bitcoin rather than dollar or gold as their monetary system collapses. The USA might well be the last country where Bitcoin reaches sufficient liquidity to be called "money", and at the greatest cost. If the financial system collapses and is not reformed quickly (by the state), Bitcoin will still continue working, while there won't be a gold-based alternative for a while.

To be sure, there are many obstacles that Bitcoin has to overcome during its growth, such as scalability, user friendliness and so on. But there are no fundamental problems here. These are empirical issues that can be solved by entrepreneurship, and the development is happening right now as I write this. Can gold do any of that? I don't think so. That is why the liquidity of Bitcoin will most likely rise, and the liquidity of gold will most likely remain at approximately the level it is now. Maybe calling gold a malinvestment is an exaggeration, but I wanted to provoke the reader.

Concluding remarks

It is interesting that Austrians understood money 100 years ago better than their successors living now. We have been confused by the existence of all kinds of forms of money and media of exchange. It's long past to confront the confusion and improve clarity.

Empirically, it ultimately does not matter whether Block is or isn't clueless about Bitcoin. The opinion of an economist does not take precedence over catallactic phenomena.