I by no means am an expert on Bitcoin. The more I hear the experts talk about it, the more I realize I don’t know. (And as an aside, when I hear a proponent of Bitcoin say on NPR, “This isn’t even version 1.0 yet,” it doesn’t make me want to rush out and embrace it.)

However, as I mentioned in this previous post, I am hearing a lot of self-described Misesians make arguments against Bitcoin that prove far too much. So in this post, I’m going to go over the following representative version of a very popular example of what I mean:

TYPICAL ARGUMENT AGAINST BITCOIN: Bitcoin is just a giant bubble; it’s tulip mania all over again. Since it’s essentially a private fiat currency, it has no fundamental value at all; any value it has is due to the speculative motive. People are only accepting it because they think they can unload it down the road to the bigger fool, for more money. This might last for a while, even years, but it’s built on sand and can collapse at any moment. In contrast, a commodity money like gold or silver is based on the fact that it’s genuinely useful in non-monetary outlets. So there is a floor holding up its exchange value.

OK, so the wording might vary from person to person, but during the last two years, I have definitely seen plenty of arguments similar to the above. Here’s my problem with it: This argument comes dangerously close to saying that all money, even commodity money, is always in a bubble, unless it ceases to be money.

It is standard Misesian monetary theory to say that a commodity (such as gold) gains in exchange value as it turns from a mere commodity into a medium of exchange and finally into money. This should be obvious: Originally, in a state of direct exchange, gold had a certain exchange value against other goods and services because of its direct uses (jewelry etc.). But then if people wanted to start holding it as a medium of exchange, this would increase the demand for gold, and hence drive up its “price” (i.e. how much it could fetch in the market in terms of other goods). Therefore, if a goldbug is arguing that having an exchange value above the “commodity value” (which in the case of Bitcoin is zero) makes something a bubble, then all money–including gold money–is always in a bubble.

Let me restate the argument like this: There are people claiming that Bitcoin’s non-monetary price is zero, and hence if it’s trading for anything at all, it is in a bubble. But by that logic, gold’s non-monetary price might be (say) $250, and so if it’s trading right now for $1,250, then $1,000 of that is clearly just due to a self-fulfilling prophecy, where people are willing to pay $1,250 for gold because they think that’s how much (at least) it will be worth in the future. If something were to shatter that expectation, then the price of gold would plummet back down to its fundamental value of $250. Thus, if we accept this line of reasoning, the only real difference between Bitcoin and gold is that Bitcoin has a floor of $0 while gold has a floor of (say) $250.

Last thing: One way out of this apparent bog is to make a distinction between holding commodity money for speculative purposes, versus holding it for exchange purposes. In other words, someone could accept a gold coin today not because he expects to unload it off on a “greater fool” tomorrow, but because he wants a more liquid form of wealth to make his purchases easier. (Indeed, we see that people hold paper money even knowing it will fall in purchasing power.) But if that’s the route one takes, then why can’t we say the same thing for Bitcoin? Sure, when it’s zooming up in price daily, people might be jumping on board primarily for speculative reasons, but in general how can we rule out a priori the possibility of a long-run equilibrium, in which Bitcoin is valuable precisely because it is a good medium of exchange that has an established purchasing power?