Bitcoin's First Use as a Medium of Exchange?

Every May 22 bitcoin enthusiasts celebrate Bitcoin Pizza Day. In 2010, back when hardly anyone had heard of bitcoin, Laszlo Hanyecz used his bitcoins to buy two Papa John's pizzas. Hanyecz sent 10,000 BTC to a fellow BitcoinTalk forum user, jercos [sic], who bought the two pizzas from Papa John's using his credit card and had them delivered to Hanyecz's house. 

This Bitcoins-for-Pizzas transaction is often regarded as the first real-world bitcoin transaction or purchase, the first transaction in which bitcoin was actually used as a medium of exchange. Wired wrote:

Laszlo Hanyecz, a Florida programmer, conducted what bitcoiners think of as the first real-world bitcoin transaction

 And economic researcher Peter Surda had this to say:

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 exchange.

The odd thing, however, is that even though bitcoin is currently a medium of exchange and even though the Bitcoins-for-Pizzas transaction was an example of indirect exchange, in the transaction bitcoin was not actually used as the medium of exchange.

The Regression Theorem Is Neither A Priori Nor True

The regression theorem is one of the most celebrated contributions of the Austrian School of Economics. This is not surprising given what the theorem achieved in the eyes of many of its proponents:

1. The theorem showed for the first time how to use marginal utility analysis to explain the determination of the price of money. This integrated monetary economics with general economic theory, which in turn paved the way for some of the most important future contributions by the Austrian School, particularly in the area of business cycle theory.
2. The theorem showed that indirect exchange and money could only have originated out of market exchange and could not have been the creation of the state.
3. The theorem is a part of praxeology, which means 1) that it is an priori claim that is deduced from undeniably true axioms, and 2) that it is not possible to imagine, let alone observe, situations or events that contradict the theorem.

In this article I argue, however, that there are two main problems with the regression theorem: It is neither a priori nor true.

Bitcoin Is Not Like Yap Stone Money

For centuries the people on the island of Yap in the South Pacific used a currency that was both useless and inconvenient, which was probably part of the reason that they didn't even care whether they actually received the currency when somebody paid them in it.

Put like this, Yap money sure sounds weird, yet some economists and bitcoin experts claim that there are deep similarities between this primitive money on the one hand and the most innovative and hi-tech money that we know of, bitcoin, on the other.

To understand why this need not in fact be an unreasonable claim we need to have a closer look at the key features of Yap money that I hinted at above. 

To understand why the claim nonetheless is probably inaccurate it is necessary to show that there is surprisingly little evidence to think that Yap money in fact functioned the way economists think it did.

Yap Stone Money

Bitcoin's Store of Value Paradox

Can bitcoin succeed as a store of value even if it does not succeed as a medium of exchange?

In the early stages of bitcoin adoption that we are in now, bitcoin only has a very limited use as a medium of exchange, especially when you compare it to the dollar or the euro. The expectation, however, is that this will change, that bitcoin eventually becomes widely used as a medium of exchange in the future. If it does, then demand for bitcoin and hence the price of bitcoin will be much higher than they currently are.

There have been several estimates and studies that tried to determine how much 1 bitcoin could be worth in the future and it is not uncommon for these studies to say that a $100,000 bitcoin or even a $1,000,000 bitcoin are very well possible if bitcoin were to become widely used as a medium of exchange. And it is the possibility of this big future price increase that is what is behind the current price.

Now what would happen if it becomes clear that bitcoins will not become a widely used medium of exchange in the future? The obvious answer would seem to be that the price would crash.

But once we look more closely at the logic that explains the value of bitcoin, this suddenly does not seem so obvious anymore.

Podcast #1: Bitcoin and the Origins and Nature of Money

This week I had a conversation with Vijay Boyapati about how the emergence of Bitcoin has revealed some serious problems in the traditional Austrian account of the origins and nature of money.

Topics include: how Menger and the Austrians failed to understand the bubbliness of money; how speculation rather than use as a medium of exchange is what bootstraps bitcoin; what bitcoin can or cannot tell us about the origins of money; how money is actually better off without 'intrinsic value'; how the success of gold shows that bitcoin can have a future; how bitcoin isn't quite money yet and what this means; and much much more.