This article is the third installment of a 4-part series on the theory and origin of Bitcoin value. In the first two articles, we looked at two different value theories presented by two prominent thinkers in the Bitcoin community, Konrad S. Graf and Detlev Schlichter.

In the last installment of this series, part 2, we looked at the Bitcoin value theory advanced by Detlev Schlichter. His theory holds that Bitcoin, or any other modern currency, does not need to posses a direct-use value in order to become a currency. The fact that other currencies already exist absolves Bitcoin from having to undergo the full transitory process of going from being a regular commodity, becoming a medium of exchange, and then becoming a widely accepted currency. Bitcon can merely “piggyback,” or bootstrap, onto the pre-existing currencies through their established price systems and can gradually replace them, eventually becoming a unit of account in itself. At the end of part 2, we concluded that Schlichter’s theory for the origin of Bitcoin value is a very accurate description of the value bootstrapping process, but it does not provide a satisfactory solution to the real problem at hand. Schlichter’s theory does not explain how Bitcoin became a medium of exchange that was capable of bootstrapping to fiat currency in the first place. In order to provide a sound economic theory for the origin of Bitcoin value, we must determine how Bitcoin became a valuable medium of exchange, rather than treating its value as a given and merely describing its linkage to fiat.

In this article, we will examine the theory advanced in part 1, Konrad S. Graf’s Bitcoin value theory.

A Summary of Graf’s Bitcoin Value Theory

Graf’s argument, as covered in part 1, states that Bitcoin does indeed have a direct-use value and is currently going through the transitory process entailed in Ludwig von Mises'(picture below) regression theorem. According to Graf, there is no question as to whether or not Bitcoin violates or adheres to the regression theorem; this issue is not a question of economic theory, but rather a question of history. The real question here is: At what point did Bitcoin go from being a consumer’s good to a medium of exchange, when was the last day of barter?

Once we recognize this question as the real problem involved in determining the existence of a direct use-value in Bitcoin, all we have to do is look to Bitcoin’s history in order to obtain a satisfactory solution to the problem at hand, according to Graf. If the solution to this conflict is as simple as identifying Bitcoin’s last day of barter, then we can say with complete confidence that Bitcoin had a direct-use value the day before the first fiat-for-bitcoins exchange ever took place. With a brief look at the “History” page of en.bitcoin.it, Bitcoin attained an official exchange rate on October 5th, 2009. If we adhere to Graf’s Bitcoin value theory, which maintains that Bitcoin did indeed have a direct-use use value, then October 4th, 2009 was the last day of barter for Bitcoin. At that point in time, Bitcoin was solely a consumer’s and was not a currency in any way.

However, answering this historical question does not reveal any information on the valuations imputed upon Bitcoin before it attained an exchange ratio with fiat currency. Graf says that this lack of data does not matter, though, because the regression theorem is an apoditic truth, it can never be violated by any good in the process of becoming a medium of exchange. So, even if we do not know explicitly what Bitcoin’s direct-use value was, we still know that one necessarily existed. Otherwise, it would never have become a medium of exchange and it would not have established a definite exchange rate with the various fiat currencies. Graf argues that as long as we can determine that there was a period of time in history when Bitcoin had no monetary value, then there was definitely a direct-use value present regardless of whether or not we can identify what that use-value was. Therefore, the regression theorem is satisfied.

Although Mr. Graf argues that identifying Bitcoin’s use-value is not a requirement in determining whether or not that value actually existed, he still attempts to identify this elusive use-value. He cites the historical work of Peter Surda in providing his hypothesis on the subjective valuations of the “pre-exchange-value” era in Bitcoin’s history. The early Bitcoin miners and users, he claims, did not value Bitcoin as a currency; rather, they likely had some other valuation that had something to do with an interest in the technology involved in Bitcoin or the protocol itself. The value came from the satisfaction experienced when solving a problem, exposing a bug or flaw in the system, or just tinkering with a new technology. Regardless, these valuations were entirely subjective and their contents do not matter for the purposes of praxeology. All that matters is that the valuations took place and that they had logical consequences, which of course resulted in Bitcoin embarking upon a journey of becoming a legitimate currency.

Confusing Motives and Ends

But, there is one major flaw in Graf’s theory and his speculations on the subjective valuations that made up the origin of Bitcoin value. In his theory, Graf has confused motives and ends. He speculated that the use-value of Bitcoin was the satisfaction, or fun, gained from solving a code, advancing computer science research, etc. However, those satisfactions were not ends, they were merely factors that motivated the early Bitcoin miners and developers to test its viability as a currency. Satoshi stated explicitly in the White Paper that his intent was to create a trustless, digital cash system. Because of this explicit statement of intent, the ends aimed at when working on Bitcoin are clear; anyone who decides to work on developing the protocol or testing its strength does so to determine Bitcoin’s validity as a currency. There is no question on that matter, the ends involved in working on Bitcoin have been unequivocally stated in the White Paper. Therefore, any kind of satisfaction gained from testing the viability of Bitcoin can only serve as a motivation for taking on the task, not an end in itself. The end is making Bitcoin a better currency, the motivation for doing so is advancing the scope of computer science. No matter what the circumstances are, “advancing the scope of computer science” can never be an end that is aimed at, it can only act as a form of social recognition which serves to motivate individuals to pursue ends. An individual cannot create a new coding language by advancing computer science, that is totally illogical. The individual advances computer science by creating a new coding language. The same logical rules apply to Bitcoin. One cannot strengthen Bitcoin by advancing cryptography, he or she must advance cryptography by strengthening Bitcoin.

Of course, Graf would very likely fall back on his argument that, no matter what, the regression theorem cannot be violated, so whether or not he has confused motives and ends is of no importance to the matter at hand. He would likely argue that Bitcoin is a currency, therefore it satisfies the regression theorem. The regression theorem can not be violated, nor can it be wrong because Ludwig von Mises said that it is a universal law. But is that argument not a resort to aggressive dogmatism? To say that Bitcoin fits into the regression theorem because the theorem says that it must do so engages an a bout of circular reasoning. Mises was indeed a brilliant man and is seen by many as an authority in Austrian theory, even in posterity, but that does not relegate Mises to a position of divinity or omniscience, so it does not absolve his theories from criticism. In order to keep economics scientific, all theorems must be examined with a critical eye no matter how fond we are of their authors. Arguing that the fact of Bitcoin being a medium of exchange confirms that it had direct use-value because the regression theorem is universal law does nothing for the problem at hand; such statements do nothing but lend more ammunition to the critics of Austrian economics who claim that its practitioners are unscientific. We should dismiss Graf’s Bitcoin value theory simply because he resorts to such dogmatic tactics

In conclusion, Konrad S. Graf’s theory on the origin of Bitcoin value does not satisfactorily answer the question at hand. Bitcoin was deliberately created to serve as a monetary system, with the bitcoins being intended to serve as currency. How can there be any direct use-value for a currency that was designed to function as a currency and nothing more? How can Bitcoin have a direct use-value if it was not made of any physical materials that could have been used as consumption or production goods? Is Mises’ regression theorem correct, or is it a fallacious theory? We will attempt to tackle these important theoretical problems in the fourth, and final, installment of this series on the origin of Bitcoin value.