1

Department of Lconom|cs and I|nance

Andre nerman



1he Lconom|cs of 8|tco|n




10]03]2014



2
Lxecut|ve Summary

1hls dlsserLaLlon lnvesLlgaLes Lhe crypLo-currency known as 8lLcoln and provldes an
appralsal of a 8lLcoln based currency sysLem ln Lhe conLexL of LheoreLlcal AusLrlan
economlcs.
Are 8lLcolns money? uoes Lhe emergence of 8lLcoln vlolaLe Mlses regresslon Lheorem? ls
deflaLlon a problem for a LheoreLlcal 8lLcoln economlc sysLem? 1hls paper bullds upon boLh
modern works on crypLo-economlcs and Lheorles of Lhe AusLrlan school Lo undersLand and
answer Lhese crlLlques of Lhe 8lLcoln sysLem. lurLhermore Lhls paper goes on Lo analyse Lhe
areas of fuLure growLh of Lhe 8lLcoln sysLem ln con[uncLlon wlLh lLs llmlLaLlons and rlsks.
lL flnds LhaL 8lLcoln cannoL be classlfled as money buL remalns a medlum of exchange LhaL
Lhe markeL may choose Lo adopL aL a laLer sLage. lL also ldenLlfles a fallure of modern
AusLrlan economlcs ln appreclaLlng a sub[ecLlve valuaLlon approach Lo Lhe regresslon
Lheorem and concludes LhaL 8lLcolns emergence does noL vlolaLe lL. ln analyslng Lhe
deflaLlonary properLy of 8lLcoln lL hlghllghLs a greaL dlvlde ln LheoreLlcal economlcs and
concludes LhaL lL ls posslble Lo lmaglne a worklng deflaLlonary economlc sysLem based upon
Lhe 8lLcoln currency, one LhaL has a vasLly dlfferenL sLrucLure Lo Lhe sysLems we are famlllar
wlLh and observe ln Lhe world Loday.
llnally, lL concludes LhaL whllsL lL ls unllkely LhaL 8lLcoln wlll ever become money, Lhe
proLocol represenLs an lnnovaLlve Lechnologlcal breakLhrough and has Lhe poLenLlal Lo
revoluLlonlse remlLLance and paymenL soluLlons markeLs.







3
Lxecut|ve Summary ................................................................................................................. 2
L|st Cf I|gures ........................................................................................................................... 3
Chapter 1 - Introduct|on ......................................................................................................... 7
1.1 AlLernaLlve currency schemes ................................................................................................. 7
1.2 1he 8lLcoln SysLem .................................................................................................................. 9
1.3 MeLhodologlcal approach ...................................................................................................... 10
Chapter 2 - Are 8|tco|ns Money? .......................................................................................... 12
2.1 - Ceneral accepLance" ............................................................................................................. 13
2.2 - CompeLlLlve Currency ............................................................................................................. 14
2.3 - Concluslon ............................................................................................................................... 13
Chapter 3 - 8|tco|n and the kegress|on 1heorem ................................................................. 16
3.1 - lmpllcaLlons of Lhe 8egresslon 1heorem for 8lLcoln ............................................................... 17
3.2 - revlous aLLempLs Lo solve Lhe problem ................................................................................ 18
3.3 - My analysls ............................................................................................................................. 19
3.3.1 - Supply Slde ....................................................................................................................... 19
3.3.2 - uemand Slde .................................................................................................................... 20
3.4 - Concluslon ............................................................................................................................... 22
Chapter 4 - A 8|tco|n Monetary System ............................................................................... 23
4.1 - ulfferlng aLLlLudes Lo Lhe money supply ................................................................................. 23
4.2 - 1he money supply of 8lLcoln ................................................................................................... 24
4.3 - lmpllcaLlons of an lnelasLlc money supply .............................................................................. 23
4.4 - AuLomaLed vs. managed currency sysLems ............................................................................ 23
4.3 - AusLrlan 8uslness Cycle 1heory .............................................................................................. 26
4.6 - Concluslon ............................................................................................................................... 27
Chapter S - Is Def|at|on A rob|em W|th|n A 1heoret|ca| 8|tco|n System? ......................... 28
3.1 - ulfferlng aLLlLudes Lo deflaLlon ............................................................................................... 28
3.2 - usablllLy .................................................................................................................................. 30
3.3 - ueflaLlon Splral 1heory ........................................................................................................... 30
3.4 - uebL markeLs and lendlng ....................................................................................................... 31
3.3 - Case SLudy - lraql Swlss ulnar ................................................................................................ 33
3.6 - Concluslon ............................................................................................................................... 34

4
Chapter 6 - 1he Iuture of 8|tco|n .......................................................................................... 33
6.1 - SpeculaLlve 8ubble or Pyper moneLlsaLlon ............................................................................ 33
6.2 - CrowLh prospecLs of 8lLcoln ................................................................................................... 37
6.2.1 - Lxplalnlng 8lLcolns rapld growLh ...................................................................................... 37
6.2.2 - 8lLcoln as a paymenL mechanlsm ..................................................................................... 38
6.2.3 - 1he remlLLance lndusLry .................................................................................................. 40
6.3 - LlmlLaLlons and rlsks for 8lLcoln .............................................................................................. 41
6.3.1 - 8egulaLory rlsk ................................................................................................................. 41
6.3.2 - racLlcal usablllLy problems ............................................................................................. 42
6.3.3 - 1he proLocol ls absoluLe .................................................................................................. 42
6.3.4 - WhaL would replace 8lLcoln? ........................................................................................... 43
6.4 - Concluslon ............................................................................................................................... 44
Chapter 7 - Conc|us|on .......................................................................................................... 43
8|b||ography ........................................................................................................................... 47













3
L|st Cf I|gures

llgure 3.1 - lraql Swlss ulnar/$ agalnsL Llme (klng, 2004)......................................................33
llgure 6.1 - 8lLcoln uSu markeL prlce agalnsL Llme (blockchaln.lnfo, 2013)..........................33




















6



















7
Chapter 1 - Introduct|on

ln 2009 an anonymous programmer wlLh Lhe allas SaLoshl nakamoLo publlshed Lhe Lechnlcal
basls for a proLocol LhaL succeeded where crypLography had prevlously falled, a proLocol
LhaL solved Lhe lnfamous double spendlng problem of onllne currencles. Slnce Lhen, Lhe
decenLrallsed currency sysLem known as 8lLcoln has seen masslve lncreases ln adopLlon
along wlLh specLacular bubble-llke prlce behavlour. lrom a close prlce on Lhe 14
Lh
of Aprll
2011 of $1 per 8lLcoln, Lhe exchange raLe reached an all-Llme hlgh of $1242 ln uecember
2013.
Awareness of 8lLcoln rapldly prollferaLed Lhrough onllne communlLles, medla and academla.
lL has slnce spurred heavlly polarlsed debaLe beLween opposlng economlc schools of
LhoughL. 1he purpose of Lhls dlsserLaLlon ls Lo bulld upon Lhe currenL LheoreLlcal framework
of AusLrlan economlcs whllsL provldlng a crlLlcal analysls of a hypoLheLlcal 8lLcoln currency
sysLem and evaluaLlng lLs fuLure growLh poLenLlal and rlsks.

1.1 A|ternat|ve currency schemes

!"#$%& () * )#+(*, ($)-(-.-(#$/ * -##, +0%*-%1 *$1 2*03%1 4& )#+(%-&5) %6#,.-(#$7 89(+9 9*)
%:9(4(-%1 * ;0%*- +*<*+(-& -# %6#,6% *$1 *1*<- -# -9% +9*0*+-%0 #= -9% -(2%)> ?- () $#-
).0<0()($; -9*- 2#$%& 9*) 4%%$ *==%+-%1 4& 0%+%$- -%+9$#,#;(+*, 1%6%,#<2%$-) *$1
%)<%+(*,,& 4& -9% 8(1%)<0%*1 .)% #= -9% ?$-%0$%->@ ABCD7 EFGE <>GFH
Classlcal economlcs could noL have envlsaged Lhe exponenLlal growLh of Lechnology LhaL
occurred aL Lhe end of Lhe 20
Lh
cenLury and Lhe resulLlng lnnovaLlons ln credlL, money and
flnance. 8eLween Lhe end of Lhe year 2000 and Lhe second quarLer of 2012, Lhe number of
lnLerneL users ln Lhe world grew from 361 mllllon Lo 2403 mllllon, currenLly 34.3 of Lhe
global populaLlon (lnLerneLworldsLaLs.com as of !une 2012). 1hls represenLs a masslve
sLrucLural change ln soclal behavlour, affecLlng Lhe way people llve, lnLeracL wlLh each
oLher, gaLher lnformaLlon and, of course, Lhe way Lhey pay." (LC8, 2012 p.11)
8
1he dlsLlncLlon of whaL consLlLuLes a currency, or money, has become less clear. 1he
LconomlsL (2003) esLlmaLed LhaL Lhe LoLal value of all frequenL-fller mlles ln Lhe world was
over $700 bllllon, exceedlng Lhe number of physlcal dollars ln clrculaLlon aL Lhe Llme.
AddlLlonally Lhey argued LhaL Lhese were a form of money, Lhey exlsLed as a means of
exchange and a sLore of value, from a legal perspecLlve Lhey hlghllghLed Lhe moneLary value
placed upon Lhese frequenL fller mlles ln Lhe resoluLlon of dlvorce seLLlemenLs. lndeed aul
krugman (2010), clLlng lnnovaLlons ln credlL cards, elecLronlc money and repo, has sLaLed
LhaL lL ls amblguous LhaL any slngle number can be called 'Lhe' money supply.
Companles such as Amazon and lacebook have launched Lhelr own respecLlve vlrLual
currency schemes (vCS), known as Amazon Coln and lacebook CredlLs. 1he emergence of
vCS can also be seen ln Lhe medla. ln an arLlcle for Lhe Parvard 8uslness 8evlew 8onchek
and Cornfleld (2013) colned Lhe Lerm Lhe '8randed Currency 8evoluLlon', whllsL 8loomberg
has lmplemenLed a 8lLcoln prlce Llcker on lLs Lermlnals.
aul kemp-8oberLson's (2013) recenL 1ed Lalk from 1ed Ldlnburgh LlLled '8lLcoln. SweaL.
1lde. MeeL Lhe fuLure of branded currency' exceeded half a mllllon vlews ln Lhree monLhs.
WlLhln Lhe Lalk he hlghllghLs several examples of alLernaLlve currencles, such as Lhe facL LhaL
30 of u.S. SLarbucks purchases are made noL wlLh dollars buL wlLh SLarbucks 'SLar olnLs'.
Pe also hlghllghLed Lhe curlous phenomenon ln whlch 1lde deLergenL was found belng used
across Amerlca ln lleu of dollars Lo purchase lllegal drugs, aLLrlbuLlng Lhls sLrange behavlour
Lo Lhe LrusL placed ln Lhe producL due Lo sLrong brand loyalLy (a 2009 survey ranked 1lde
deLergenL ln Lhe Lop 3 brand names LhaL consumers aL all lncome levels were leasL llkely Lo
glve up regardless of recesslon).
1here has been a recenL emergence of academlc llLeraLure on Lhe sub[ecL of alLernaLlve
currency sysLems. ln 2012 Lhe Luropean CenLral 8ank (LC8) acknowledged Lhe prollferaLlon
of vlrLual communlLles and lald ouL a prellmlnary basls for academlc dlscusslon. 1he LC8
deflned vlrLual currency as A Lype of unregulaLed, dlglLal money, whlch ls lssued and
usually conLrolled by lLs developers, and used and accepLed among Lhe members of a
speclflc vlrLual communlLy", golng on Lo acknowledge LhaL vlrLual currencles can saLlsfy Lhe
funcLlons of money as medlums of exchange and as a unlL of accounL.

9
1.2 1he 8|tco|n System

ln an lnLervlew MllLon lrledman (1999) predlcLed Lhe emergence of an lnLerneL based
currency, propheslslng LhaL ln Lhe fuLure some form of e-cash would develop on Lhe
lnLerneL and would allow Lhe anonymous Lransfer of funds. lnLeresLlngly lrledman noLed
LhaL lLs emergence would be due ln parL by Lhe deslre Lo evade governmenL LaxaLlon. Some
years laLer nakamoLo (2009) publlshed plans for a purely peer-Lo-peer verslon of elecLronlc
cash, wlLh Lhe ablllLy Lo allow onllne paymenLs beLween parLles wlLhouL golng Lhrough a
Lhlrd parLy lnsLlLuLlon - 8lLcoln.
!I9*- () $%%1%1 () *$ %,%+-0#$(+ <*&2%$- )&)-%2 4*)%1 #$ +0&<-#;0*<9(+ <0##= ($)-%*1 #=
-0.)-@ AJ*3*2#-#7 EFFK <>GH
nakamoLo sLaLed Lhe necesslLy of such a sysLem ln order Lo bypass Lhe weaknesses of Lhe
currenL lnLerneL commerce model, ln whlch Lhere exlsLs Lhe problem of hlgh LransacLlon
cosLs and Lhe lnablllLy Lo conducL non reverslble LransacLlons, problems resulLlng from
rellance on a Lhlrd parLy LrusL based model.
1he LechnlcallLles of Lhe proLocol are beyond Lhe scope of Lhls dlsserLaLlon however Lhe
lmporLanL feaLures are as follows. 8lLcoln ls a decenLrallsed sysLem where no cenLral
moneLary auLhorlLy ls lnvolved" (LC8, 2012 p.24). 1he money supply ls exogenous of any
moneLary body, buL raLher comes lnLo exlsLence over Llme Lhrough a producLlon process
known as mloloq, compeLlng users employ Lechnologlcal hardware and power ln order Lo
solve a compuLaLlonal algorlLhm. Mlners are compensaLed for Lhelr efforLs ln Lhe form of
newly mlnLed 8lLcolns and LransacLlon fees.
As Lhe number of mlners lncreases, along wlLh lnnovaLlons ln hardware Lo galn fasLer
speeds, Lhe dlfflculLy parameLer ls lncreased such LhaL Lhe raLe of 8lLcoln creaLlon ls
approxlmaLely consLanL over Llme, one every Len mlnuLes. lL ls esLlmaLed Lhe lasL 8lLcoln wlll
be mlned around Lhe year 2140.
8lLcoln ls dlfferenL from oLher vlrLual currency schemes such as Lhe Amazon Coln as lL ls
decenLrallsed and lndependenL of pollLlcal, economlc and geographlc borders. Amazon Coln
has unldlrecLlonal flow (cannoL converL from Amazon coln Lo flaL) whllsL 8lLcoln has
10
bldlrecLlonal flow (boLh 8lLcoln Lo flaL and flaL Lo 8lLcoln are posslble). 1hls has parLlcular
LheoreLlcal lmpllcaLlons. ln a hypoLheLlcal world denomlnaLed ln Amazon Coln, Amazon
would have compleLe dlscreLlonary conLrol over Lhe money supply, hlghllghLed by Lhelr
glfLlng of 300 free colns Lo all klndle llre owners, 8lLcoln replaces dlscreLlon wlLh an open
source maLhemaLlcal proLocol.
!usL as 1lde deLergenL has been observed ln lleu of money due Lo LrusL and flaL currencles
are based upon a LrusL ln Lhe cenLral auLhorlLy, 8lLcoln replaces LrusL wlLh a maLhemaLlcal
proof. 1hls spllLs Lhe LheoreLlcal economlc debaLe surroundlng 8lLcoln, wlLh AusLrlan
economlsLs Lendlng Lo vlew Lhese decenLrallsed feaLures poslLlvely whllsL keyneslans hold a
much more negaLlve vlew (Surda, 2012a).

1.3 Methodo|og|ca| approach

Slnce 8lLcoln has emerged as a medla of exchange Lhrough markeL forces alone lL seems
only [usLlfled analyslng lL ln Lhe conLexL of Lhe AusLrlan school of economlcs, ldeas LhaL
dlscuss Lhe compeLlLlve lssue of currency and hold a lalssez falre aLLlLude Lowards moneLary
pollcy. 1he LC8 (2012) ldenLlfled LhaL Lhe LheoreLlcal rooLs of 8lLcoln lle heavlly wlLhln Lhls
school and lLs crlLlclsm of boLh flaL money and governmenL lnLervenLlons ln Lhe money
markeL. Surda (2012a) sLresses LhaL any analysls of 8lLcoln musL ulLlmaLely cenLre around
AusLrlan Lheorles, as every oLher economlc school appeals Lo Lhe sLaLe and neglecLs Lhe
concepL of money lnLroduced and chosen by free markeL forces.
!D(-+#($ )9#.,1 +9*$;% -9% ,*$1)+*<% #= L.)-0(*$ ,(-%0*-.0% =#0%6%07 *$1 #<%$ * 8(1%
)<%+-0.2 #= <#))(4(,(-(%) =#0 0%)%*0+9 *$1 #.0 .$1%0)-*$1($; #= 2#$%&>@ AM.01*7 EFGNH
WheLher Lhe 8lLcoln currency wlll ever replace flaL currencles ls an emplrlcal problem.
8lLcoln has undoubLedly reopened a largely closed dlscusslon surroundlng Lhe orlglns of
money and free markeL moneLary sysLems, Lheorles whlch have perhaps been neglecLed ln
Lhe posL-keyneslan economlc era.
1hls work wlll analyse 8lLcoln Lhrough Lhe lens of Lhese less malnsLream Lheorles. l
anLlclpaLe Lhere wlll be numerous Llmes ln whlch Lhe concluslon reached would depend
11
enLlrely on Lhe economlc school upon whlch analysls ls based, ln Lhese poslLlons l shall
appreclaLe Lhe full range of vlews before aLLempLlng Lo Lackle Lhe argumenLs uslng Lhe
works of AusLrlan economlcs and emplrlcal evldence.
l alm Lo answer key LheoreLlcal quesLlons surroundlng 8lLcoln and undersLand how well Lhe
sysLem conforms Lo Lhe wrlLlngs of promlnenL AusLrlan economlsLs. noLe LhaL noL all
AusLrlan school economlsLs are pro 8lLcoln, wlLh argumenLs surroundlng vlolaLlon of Lhe
regresslon Lheorem and Lhe lack of lnLrlnslc use value (MaLonls, 2011). l wlll lsolaLe and
address Lhese new AusLrlan crlLlclsms ln Lhls plece.
















12
Chapter 2 - Are 8|tco|ns Money?

8efore analyslng 8lLcoln as a moneLary sysLem lL ls lmporLanL Lo classlfy lL ln Lhe conLexL of
Lhe deflnlLlon of money.
Commonly money has been deflned ln Lerms of Lhe funcLlons LhaL lL performs (8oLhbard,
2008). Much of Loday's characLerlsaLlon ls based upon !evons (1873) where he analysed
money ln Lerms of four funcLlons, a medlum of exchange, unlL of accounL, sLandard of
deferred paymenL and a sLore of value. 1he AusLrlan school does noL share Lhls classlc
vlewpolnL, lnsLead lL vlews money wlLh one prlmary funcLlon, Lhe oLhers are slmply
corollarles of Lhe one greaL funcLlon: Lhe medlum of exchange." (8oLhbard, 2008 p.17)
!O9% =.$+-(#$ #= 2#$%& () -# =*+(,(-*-% -9% 4.)($%)) #= -9% 2*03%- 4& *+-($; *) * +#22#$
2%1(.2 #= %:+9*$;%@ A"()%)7 GKPN <>EKH
ln 1he 1heory of Money and CredlL, Mlses (1933, p.34) deems money Lo have one sole
funcLlon. Pe sarcasLlcally mocks oLher academlcs who do noL Lhlnk LhaL due regard has
been pald Lo Lhe slgnlflcance of money unLll Lhey have enumeraLed half a dozen furLher
'funcLlons'". Colng on Lo qulp, as lf, ln an economlc order founded on Lhe exchange of
goods, Lhere could be a more lmporLanL funcLlon Lhan LhaL of Lhe common medlum of
exchange." CLher funcLlons such as Lhe use of money as a prlce lndex are aLLrlbuLed by
Mlses Lo belng Lhe resulL of moneys employmenL as a medlum of exchange, whlch ln Lurn
faclllLaLes lLs oLher uses.
ln llghL of Lhls undersLandlng, l have Lo answer Lhe slmpler quesLlon - are 8lLcolns a medlum
of exchange? Well, emplrlcally, yes. WhllsL small, Lhe 8lLcoln ecosysLem has a growlng
number of companles, pro[ecLs and faclllLles ln whlch 8lLcolns are belng used ln lleu of flaL
currency for saLlsfylng lndlrecL exchange (examples of whlch can be found ln chapLer 6.2.2).





13
2.1 - "Genera| acceptance"

D(-+#($ () $#- * .$(6%0)*,,& *++%<-%1 2%1(.2 #= %:+9*$;%7 -9%0%=#0%7 =0#2 *$ L.)-0(*$
6(%8<#($-7 (- () $#- 2#$%&>@ AM.01*7 EFGE*H
1hls resulL LhaL 8lLcolns are a medlum of exchange comes wlLh a caveaL. luncLlonlng as a
medlum of exchange ls a necessary buL noL sufflclenL condlLlon for 8lLcoln Lo be classed as
money. A more conslsLenL deflnlLlon of money ls as a qeoetolly accepLable medlum of
exchange" (Menger, 2009, CerLchev, 2013). 8y addlng a sub[ecLlve elemenL, Lhe necesslLy
for 'general accepLance', lL ls clear LhaL whereas Lhe concepL of 'medlum of exchange' ls
preclse, Lhe concepL of 'money' ls less so (8oLhbard, 2008).
uLLlng Lhls ln conLexL of 8lLcoln, l argue Lhere are clear llmlLs Lo Lhe general accepLance of
8lLcoln as a medlum of exchange. 1hls ls apparenL when looklng aL reLall webslLes LhaL serve
Lhe 8lLcoln ecosysLem such as Lhe Sllk 8oad" drugs markeLplace and 8lLmlL, an aucLlon slLe.
1hese webslLes, alLhough prlmarlly 8lLcoln denomlnaLed, have popular opLlons Lo
auLomaLlcally LranslaLe all 8lLcoln prlces lnLo local flaL currency prlces (Craf, 2013a). 1he
need for consumers Lo vlew prlces of goods ln Lhelr own flaL currencles represenLs Lhls lack
of general accepLance wlLhln Lhe economy and leads Lo Lhe concluslon LhaL whllsL 8lLcoln
cerLalnly saLlsfles Lhe condlLlon of a medlum of exchange, lL does noL have enough
wldespread usage Lo be classlfled as money.
As confldence ln Lhe currency grows and lf we see lncreases ln boLh llquldlLy and exchange
raLe sLablllLy Lhen lL ls concelvable LhaL 8lLcolns may evenLually saLlsfy Lhls condlLlon of
general accepLance. lndeed 1ony Calllppl co-founder and CLC of 8lLay, a 8lLcoln paymenL
soluLlons company, has commenLed on an lncreaslng Lrend ln number of cusLomers holdlng
proporLlons of paymenLs ln 8lLcolns as opposed Lo converLlng Lhe whole sum Lo flaL upon
recelpL of paymenL (MaLonls, 2013), slmllar observaLlons surroundlng Lhe lncreaslng
'money-ness' of 8lLcoln have been made by 1ucker (2013).


14
2.2 - Compet|t|ve Currency

1he lmporLance of Lhe free markeL ls aL Lhe hearL of AusLrlan economlcs, lL can be seen
clearly when dlscusslng how medla of exchange compeLe Lo become lncreaslngly accepLed
and evenLually become money.
!"*$ 8(,, *,8*&) <0%=%0 * 2#0% ;%$%0*,7 *$1 (= <#))(4,%7 * .$(6%0)*, 2%1(.2 #= %:+9*$;%
-# * ,%)) ;%$%0*, #0 $#$Q.$(6%0)*, #$%@ AR#<<%7 GKKF <>PSH
Pans-Permann Poppe (1990) argues LhaL Lhere ls a Lendency for a slngle commodlLy Lo
emerge as money due Lo lLs preference as a more saleable good. 1ucker (2013) echoes Lhls
by saylng LhaL money beglns wlLh speculaLlon and goes Lhrough a perlod of gradual
adopLlon unLll lL ls unlversal". 1he facL LhaL 8lLcoln ls noL Lhe slngle unlversal medlum of
exchange ls noL Lhe reason LhaL lL ls noL money. Poppe's argumenL LhaL Lhere ls a soclal
Lendency Lowards a slngle unlversal currency lgnores Lhe legal resLrlcLlons and LransacLlon
cosLs LhaL exlsL ln world.
Some crlLlcs may be LempLed Lo compare 8lLcoln Lo a sysLem by whlch banks are permlLLed
Lo lssue Lhelr own currency so long Lhey hold reserves Lo back money ln clrculaLlon, perhaps
clLlng Lhe fallure of ScoLLlsh banks ln Lhe 18
Lh
cenLury who conslsLenLly over lssued money
(Ayr 8ank and 8anklng Company of Aberdeen Lo name Lwo). Such a comparlson ls a
mlsundersLandlng of Lhe proLocol. ln Lhe ScoLLlsh case Lhere was sLlll Lhe rellance ln LrusLlng
Lhe banks noL Lo lssue excess, ln 8lLcoln Lhls LrusL ls replaced by unbreakable maLhemaLlcal
proof (Lhe supply slde ls dlscussed furLher ln chapLer 3). l would also sLress LhaL aLLempLlng
Lo crlLlque a new Lechnology by aLLempLlng Lo draw upon fallures of vaguely relaLed pasL
experlence ls problemaLlc aL besL. Such an approach wlll be prone Lo noL appreclaLe Lhe
creaLlve dlfferences and Lechnology LhaL dlsLlngulsh Lhe lnnovaLlve new sysLem.




13
2.3 - Conc|us|on

8lLcoln exlsLs wlLhln a pool of medla of exchange, a pool from whlch Lhe markeL selecLs Lhe
mosL saleable and markeLable goods Lo be generally accepLed as money. 1he usage of
8lLcoln wlLhln Lhe world ls noL yeL wldespread enough Lo earn lL Lhe classlflcaLlon as money.
Powever unllkely lL may be, lL ls posslble Lo suggesL LhaL followlng masslve 8lLcoln
accepLance growLh Lhe sysLem could reach levels of general accepLance ln exchange whlch
allow lL Lo galn Lhls classlflcaLlon, granLed Lhls ls speculaLlve and an emplrlcal raLher Lhan
LheoreLlcal problem.















16
Chapter 3 - 8|tco|n and the kegress|on 1heorem

Slnce esLabllshlng LhaL 8lLcoln ls a medlum of exchange and a poLenLlal candldaLe Lo be
consldered money" ln Lhe AusLrlan sense, l wlsh Lo address a common crlLlque LhaL some
conLemporary AusLrlan economlsLs have for 8lLcoln - lL does noL adhere Lo Lhe regresslon
Lheorem.
!O9% 0%;0%))(#$ -9%#0%2 () * -%2<#0*,Q)%T.%$-(*, %:<,*$*-(#$ #= -9% ($(-(*, %2%0;%$+% #=
($1(0%+- %:+9*$;% 6*,.%@ AU0*=7 EFGN*H>
1he regresslon Lheorem posLulaLed by Mlses (1933) ls a praxeologlcal sLaLemenL LhaL Lles
LogeLher a comprehenslve Lheory of Lhe orlglnaLlon, formaLlon and developmenL of modern
day money. rlor Lo Lhe Lheorem, economlsLs explalned Lhe valuaLlon of money Lhrough
marglnal uLlllLy analysls and Lhe quanLlLy Lheory, creaLlng a clrcularlLy ln whlch Lhe exchange
value of money was explalned by lLs marglnal uLlllLy, derlved from lLs own purchaslng power
(Murphy, 2003).
Mlses solved Lhls clrcularlLy Lhrough Lhe regresslon Lheorem by bulldlng upon works of
8ohm-8awerk and Menger before hlm wlLh emphasls on Lhe sub[ecLlvlsL approach Lo
valuaLlons. Mlses acknowledged LhaL Lhe value of money ls Lhe resulL of Lhe marglnal uLlllLy
of goods for whlch lL can be exchanged, lLs expecLed purchaslng power. lollowlng Lhls he
ldenLlfles LhaL people expecL fuLure purchaslng power based upon currenL and prevlous
observed purchaslng powers. ln hls own words, Cb[ecLlve exchange value... Loday ls
derlved from yesLerday's under Lhe lnfluence of sub[ecLlve valuaLlons of lndlvlduals
frequenLlng Lhe markeL" (Mlses, 1933 p.121).
1he Lheorem shows LhaL lL ls posslble Lo regress Lo a polnL ln Llme where Lhe ob[ecLlve
exchange value of money has no componenL based upon lLs funcLlon as a medlum of
exchange, buL LhaL lLs value aL Lhls Llme ls only based on lLs use ln some oLher form (l.e. for
consumpLlon/producLlon). lL ls aL Lhls polnL ln Llme where people flrsL emerged from a sLaLe
of barLer, Mlses sLaLes LhaL Lhls ls an observable phenomenon of economlc hlsLory" and
noL merely an absLracLlon.
17
1he Lheorem Lles LogeLher aL Lhls momenL ln hlsLory wlLh Menger's orlgln of money
(Murphy, 2003). Menger argues LhaL money formed organlcally, slmllar Lo language, as Lhe
naLural resulL of Lraders overcomlng lnefflclencles ln a barLer economy, lnefflclencles
sLemmlng from Lhe dlfflculLy saLlsfylng Lhe double co-lncldence of wanLs. 1raders would
Lrade lndlrecLly for oLher goods, even lf Lhey galn no use value for Lhe goods recelved, so
long as Lhe acqulred goods had a hlgher 'markeLablllLy' Lhan Lhe goods Lhey forfelL. 1hls
process would conLlnue unLll Lhere would be an
!?$%6(-*4,% -%$1%$+& =#0 -9% ,%)) 2*03%-*4,% #= -9% )%0(%) #= ;##1) .)%1 *) 2%1(* #=
%:+9*$;% -# 4% #$% 4& #$% 0%V%+-%1 .$-(, *- ,*)- #$,& * )($;,% +#22#1(-& 0%2*($%17 89(+9
8*) .$(6%0)*,,& %2<,#&%1 *) * 2%1(.2 #= %:+9*$;%@ A"()%)7 GKPN <>NEH
lL aLLrlbuLes Lhe prevalllng of gold and sllver as early medla of exchange Lo Lhelr dlvlslblllLy,
ldenLlflably and durablllLy, all of whlch conLrlbuLed Lo Lhelr hlgh markeLablllLy.

3.1 - Imp||cat|ons of the kegress|on 1heorem for 8|tco|n

ln Mlses own words,
!D%=#0% *$ %+#$#2(+ ;##1 4%;($) -# =.$+-(#$ *) 2#$%& (- 2.)- *,0%*1& <#))%)) %:+9*$;%Q
6*,.% 4*)%1 #$ )#2% #-9%0 +*.)% -9*$ (-) 2#$%-*0& =.$+-(#$>@ A"()%)7 GKPN <>GGGH
AusLrlan crlLlcs of 8lLcoln argue LhaL lL has no lnLrlnslc value ouLslde of lLs use as a medlum
of exchange. 1hey go on Lo argue LhaL slnce 8lLcoln lacks a pre-exlsLlng prlce framework
based upon a non-moneLary funcLlon, lL Lherefore conLradlcLs Lhe regresslon Lheorem
(kramer, 2011).
!L++#01($; -# -9% L.)-0(*$ )+9##,7 * 2%1(.2 #= %:+9*$;% $#- *19%0($; -# -9% 0%;0%))(#$
-9%#0%2 ()$5- .$).)-*($*4,%7 0*-9%0 (- +*$$#- %:()->@ AM.01*7 EFGE* <>WGH
1hls seems Lo creaLe a paradox. lL ls posslble Lo observe 8lLcoln used as a medlum of
exchange and yeL Lhrough appllcaLlon of Lhe regresslon Lheorem, we are led Lo Lhe resulL
LhaL lL cannoL be one. l was drawn Lo Lwo posslble concluslons, elLher 8lLcoln ls evldence
LhaL Lhe regresslon Lheorem ls wrong or mlslnLerpreLed, or 8lLcoln does ln facL saLlsfy Lhe
18
Lheorem and has an lnLrlnslc value LhaL numerous academlcs and crlLlcs have falled Lo
observe.
1he former ls unseLLllng and Lhankfully, on lnspecLlon, noL posslble. AlLhough named a
Lheorem accordlng Lo Lhe AusLrlan school Lhe regresslon Lheorem ls a praxeologlcal
sLaLemenL, a sLudy of human acLlon and hence an observable facL LhaL ls noL ln need of
LesLlng (Craf, 2013a). 1he quesLlon when analyslng 8lLcoln Lhrough Lhe lens of Lhe
regresslon Lheorem should noL be do 8lLcolns have a prlor dlrecL-use value?" buL raLher
whaL ls lL?"

3.2 - rev|ous attempts to so|ve the prob|em

A user of hLLps://blLcolnLalk.org wlLh Lhe allas 'xC' provlded an early consLrucLlon of why
8lLcoln dld noL vlolaLe Lhe regresslon Lheorem. Pls argumenL was LhaL ln order for 8lLcoln Lo
serve as a medlum of exchange wlLhouL a commodlLy value Lhere musL be an observable
hlsLory of prlces. 1he flrsL observable buslnesses ln Lhe 8lLcoln ecosysLem were exchanges,
whlch fllled Lhls lnsLlLuLlonal and lnformaLlonal vold for prospecLlve users. Pe consldered
8lLcoln Lo be a mere exLenslon of Lhe regresslon Lheorem, ln LhaL [usL as we moved from
moneLlsed sllver and gold Lo flaL-based currencles, Lhe same process led Lo Lhe movemenL
Lowards 8lLcoln.
Craf (2013a) cauLlously pralsed Lhls approach and l have Lo agree wlLh hls analysls LhaL
whllsL lL dld aLLempL Lo explaln 8lLcolns emergence ln exchange, lL sLlll falled Lo glve
sufflclenL lnslghL lnLo a prlor dlrecL-use value and hence dld noL solve Lhe core problem.
lrom an AusLrlan perspecLlve lL appreclaLes Lhe lmporLance of a free markeL lnnovaLlon Lo
saLlsfy a vold buL falls Lo ldenLlfy speclflc supply and demand facLors behlnd Lhe
esLabllshmenL of a prlce.
Surda (2012a) approached Lhe problem ln a dlfferenL way. Pe analysed Lhe emergence of
prlce by breaklng down Lhe supply and demand of 8lLcolns prlor Lo Lhelr use ln exchange
and argued LhaL Lhere exlsLed facLors ln such a way as Lo esLabllsh a non-exchange use value
for 8lLcoln. Cnce esLabllshed, 8lLcoln emerged as a medlum of exchange ln llne wlLh Lhe
19
regresslon Lheorem due Lo lLs markeLablllLy derlved from Lhe properLles of Lhe sysLem.
Surda's meLhodologlcal approach ls parLlcularly good as lL beglns from a mlcroeconomlc
level and glves due appreclaLlon of sub[ecLlvlsm ln valuaLlon. l wlll aLLempL Lo bulld upon
Lhls framework and updaLe lL ln llne wlLh recenL llLeraLure.

3.3 - My ana|ys|s

My Lask ls Lo undersLand and esLabllsh Lhe forces LhaL drove Lhe supply and demand for
8lLcolns prlor Lo Lhelr use as a medlum of exchange. WhllsL 8lLcoln does noL have an
absoluLe use value ln producLlon Lhelr emergence as a medlum of exchange lmplles LhaL
from an AusLrlan perspecLlve Lhey musL have had a sub[ecLlve use value aL leasL ln
consumpLlon or ownershlp.

3.3.1 - Supp|y S|de

!I9(,% -9% (1%* #= *--%2<-($; -# ;%- 0(1 #= -9% 4*$3)-%0 2#$#<#,& #$ +0%*-($; 2#$%& #.-
#= -9($ *(0 () +#22%$1*4,%7 D(-+#($ () *,)# 2#$%& +0%*-%1 #.- #= -9($ *(0>@ AX0*2%07 EFGGH
An elemenLary crlLlque on Lhe supply slde of 8lLcoln ls LhaL Lhey are slmply an absLracLlon.
8y aLLempLlng Lo flnd an alLernaLlve Lo unbacked flaL currencles" all LhaL has occurred ls a
subsLlLuLlon Lo a dlfferenLly named unbacked currency (kramer, 2011). 1hls approach falls Lo
see 8lLcolns ln Lerms of ob[ecLs of human acLlon (Craf, 2013a). 1hey are noL spawned aL wlll
buL creaLed vla a caplLal and labour lnLenslve producLlon process, a process whlch has been
deslgned Lo repllcaLe Lhe compeLlLlve producLlon of a scarce good, wlLh free enLry Lo mlnlng
and decreaslng reLurns (Cerchev, 2013). Curlng and Crlgg (2011) ldenLlfy LhaL Lhe supply of
8lLcolns ls based upon very sLandard economlc Lheory. 1hey noLe LhaL for aggregaLe mlnlng
acLlvlLles Lo be proflLable Lhe below lnequallLy musL apply.
!"#$%& !" !"#$%& ! !"#$!%# !"#$% !"#! !"# !" !"#$%&'
! !"#$%& !" !"#$%"&' !"!#$%$ ! !"#$%& !"#$%
20
As a resulL of Lhls producLlon process, Lhe supply slde of 8lLcoln closely resembles Lhe
process of gold exLracLlon from Lhe ground.
Surda (2012a) observed LhaL Lhe flrsL Lrade beLween 8lLcoln and uSu occurred on Lhe 3
Lh
of
CcLober 2009. A mlner wlLh Lhe allas 'newLlberLySLandard' seL an exchange raLe aL 1309.03
8lLcolns for $1. 1hey calculaLed Lhls flgure by dlvldlng $1 by Lhe average elecLrlclLy Lo run a
compuLer wlLh hlgh compuLaLlonal power for a year, 1331.3kWh, mulLlplled by Lhe average
resldenLlal cosL of elecLrlclLy ln Lhe uSA of Lhe prevlous year, $0.1136, dlvlded by 12 monLhs
and dlvlded by Lhe number of 8lLcolns Lhe user mlned over Lhe pasL 30 days. l flnd lL
lnLeresLlng LhaL Lhe mlner dld noL seek Lo proflL on Lhe 8lLcoln LransacLlon. 1hls could be
explalned due Lo Lhe compeLlLlve markeL, slnce dlfflculLy of mlnlng was low any prlce seL
above varlable cosL would be undercuL. Powever, l would argue Lhere ls a slmpler
explanaLlon. As 'newLlberLySLandard' lgnored all sunk cosLs on hardware and cosLs of
labour, lL ls apparenL Lhey dld noL underLake 8lLcoln mlnlng for economlc beneflL buL for
some oLher hobby or perhaps ldeologlcal purpose, ln dolng so Lhey wlshed Lo esLabllsh a
prlce LhaL was slmply falr reward for Lhelr expense and no more.

3.3.2 - Demand S|de

AY(0%+- .)% 6*,.%)H !1# $#- 9*6% -# 4% 0%+#;$(Z%1 4& *$&#$% #-9%0 -9*$ -9#)% ($ * ;(6%$
).4 +.,-.0% *+-.*,,& 1#($; -9% 6*,.($;@> AU0*=7 EFGN*H
ln Lhe same way l proposed LhaL newLlberLySLandard galned sub[ecLlve value from
lnvolvemenL ln Lhe mlnlng process, Lhls sub[ecLlvlsL approach can be applled equally Lo Lhe
demand LhaL exlsLed prlor Lo any use as a medlum of exchange. Craf (2013a) makes an
lmporLanL observaLlon abouL Lhls ln Lhe above quoLe. Whlle much of Lhe AusLrlan crlLlclsm
of 8lLcoln resLed ln Lhe lack of dlrecL use value, Lhe lrony ls LhaL Lhese economlsLs falled Lo
look aL 8lLcoln Lhrough Lhe very phllosophles LhaL Lhe early AusLrlan Lheorles were based.
Sub[ecLlve value Lheory and meLhodologlcal lndlvlduallsm underpln Lhe works of Menger,
Mlses and Lhe AusLrlan economlsLs LhaL followed. ln aLLempLlng Lo undersLand early 8lLcoln
demand we Loo musL appreclaLe Lhe exlsLence of sub[ecLlve lnherenL dlrecL-consumpLlon
value LhaL may be psychologlcal or soclologlcal ln characLer" (Craf, 2013a).
21
CerLchev (2013) acknowledges Lhls lmporLance, he observes LhaL 8lLcolns were flrsL creaLed
and held wlLhln Lhe crypLo-punk" communlLy and LhaL Lhey orlglnally served a purpose of
conveylng a speclflc anLl-esLabllshmenL worldvlew, slmllar Lo an arLlsLlc medlum of
expresslon. 1hls elemenL could be known as lLs ldeologlcal blas, a blas LhaL has perhaps been
furLher sLrengLhened ln Lhe posL 07/08 flnanclal crlsls perlod due Lo lncreased opposlLlon Lo
banklng sysLems and a growlng anLl-esLabllshmenL senLlmenL, parLlcularly ln counLrles such
as Creece and Cyprus.
Secondly, prlor Lo 8lLcoln no vlrLual currency sysLem had ever managed Lo successfully solve
Lhe double spendlng problem. 1he lmporLance of such a soluLlon was profound wlLhln
crypLography communlLles and, slmllar Lo how gold's orlglnal dlrecL value ln consumpLlon
was Lhe beauLy seen by Lhe beholder, so Loo dld lndlvlduals lnvolved ln Lhese communlLles
see Lhe 8lLcoln proLocol as a Lhlng of beauLy or aL Lhe very leasL a poLenLlally useful
Lechnologlcal breakLhrough.
1he Lhlrd and flnal facLor l belleve conLrlbuLed Lo 8lLcolns dlrecL-use value was as a
speculaLlve vehlcle, even Lhough a unlque crypLographlc hash has no represenLaLlon ln
physlcal space and whllsL 8lLcoln had zero value as a medlum of exchange, Lhe properLles of
Lhe proLocol lnsLllled 8lLcoln wlLh a poslLlve non zero chance LhaL lL may have a poLenLlal
value as a medlum of exchange ln Lhe fuLure. lndlvlduals saw Lhe poLenLlal of 8lLcoln as a
medlum of exchange LhaL resulLs from lLs markeLablllLy and low LransacLlon cosLs,
demandlng Lhem based upon Lhls speculaLlve value. ln addlLlon, speculaLlve demand may be
drlven ln parL by curloslLy of exLernal onlookers (such as myself) who had no prlor vesLed
lnLeresL ln Lhe crypLography or llberLarlan llLeraLure buL saw Lhe quallLles of Lhe sysLem and
Lhe debaLe surroundlng Lhe currency Lo be fasclnaLlng.
ln summary, analysls of Lhe dlrecL-use value of 8lLcoln on Lhe demand slde Lhrough Lhe lens
of sub[ecLlve value Lheory can deconsLrucL Lhe demand lnLo Lhree maln areas:

- ldeologlcal demand
- Pobby demand
- SpeculaLlve or curloslLy demand
22
3.4 - Conc|us|on

![*-(#$*, %:<%+-*-(#$) #= -9% <#-%$-(*, .-(,(-& #= D(-+#($ =#0 -9% <#-%$-(*, 4.&%0) %:+%%1%1
-9% <0(+% 1%2*$1%1 4& -9% <0#1.+%0)7 *$1 -0*1% %2%0;%1>@ AM.01*7 EFGE* <>WEH
ln Lhe case of gold, lLs prlce ls composed of lLs dlrecL-use value and lLs value as a medlum of
exchange. Slmllarly, Lhe prlce of 8lLcoln ls currenLly Lhe aggregaLlon of Lhese Lwo sources of
value. rlor Lo 8lLcoln havlng any lndlrecL value as a medlum of exchange lL sLlll had dlrecL-
use value as a resulL of Lhe markeL lnLersecLlon of supply and demand wlLhln Lhe relevanL
Lechnologlcal, crypLography and llberLarlan clrcles. 1hls led Lo Lhe esLabllshmenL of a prlce
based solely on Lhese sub[ecLlve dlrecL-use values.
A good example ls Lhe Lrade on Lhe 22
nd
of May 2010. 1hls Lrade was Lhe flrsL example of
8lLcoln belng used as paymenL for real world goods, 'blLcolnLalk' user wlLh Lhe allas 'Laszlo'
Lraded 10,000 8lLcolns for plzza. lL ls posslble Lo argue LhaL Lhls LransacLlon was noL lndlrecL
exchange, buL ln facL a dlrecL barLer exchange. 1he recelver of Lhese colns made a sub[ecLlve
valuaLlon of 8lLcoln based on a comblnaLlon of Lhe Lhree sources of demand l have ouLllned
and deLermlned an exchange raLlo beLween 8lLcoln and a physlcal good wlLh moneLary
value.
lL ls from Lhese early barLer Lype valuaLlons LhaL allowed 8lLcoln Lo flL wlLhln Lhe scope of
Lhe regresslon Lheorem. Slmllar Lo how dlrecL exchange for gold allowed for a paLh of
hlsLorlcal prlces and faclllLaLed lLs use ln lndlrecL exchange (8oLhbard, 2008), Lhe
esLabllshmenL of dlrecL use value ln 8lLcoln has acLed as a seed for expecLed purchaslng
power and faclllLaLed lLs funcLlon as a medlum of exchange.
A furLher lmpllcaLlon ls LhaL lL allowed for Lhe formaLlon of organlsed markeLs. 1he flrsL
8lLcoln exchange began on Lhe 6
Lh
of lebruary 2010 and by allowlng lnLeresLed poLenLlal
parLlclpanLs Lo observe a formal record of hlsLorlcal prlces and enLer Lhe 8lLcoln ecosysLem,
llquldlLy and depLh of Lhe markeL lncreased.



23
Chapter 4 - A 8|tco|n Monetary System

AnoLher area of conLenLlon surroundlng Lhe LheoreLlcal vlablllLy of 8lLcoln ls lLs properLy of a
flnlLe money supply. Cver Llme Lhe raLe of growLh of moneLary base wlll slow down
asympLoLlcally Lo zero (Cobry, 2013) wlLh Lhe raLe of growLh belng so low ln 2021 LhaL Lo
approxlmaLlon Lhe money supply wlll be consLanL (Salmon, 2013). LvenLually Lhe LoLal sLock
of 8lLcolns wlll be lnelasLlc and capped aL 21 mllllon.
ln Lhls chapLer l shall lnvesLlgaLe Lhe properLles of Lhe money supply and also crlLlcally
analyse how well a hypoLheLlcal 8lLcoln based economlc sysLem would flL wlLhln Lhe
AusLrlan 8uslness Cycle 1heory works and llLeraLure surroundlng auLomaLed currency
sysLems.

4.1 - D|ffer|ng att|tudes to the money supp|y

AL Lhe hearL of Lhe debaLe on Lhe money supply are Lhe opposlng economlc schools of
LhoughL and Lhelr dlfferlng aLLlLudes Lo moneLary pollcy and deflaLlon. keyneslan economlcs
favours governmenL lnLervenLlon and belleves money supply lnflaLlon ls essenLlal Lo growLh
whereas Lhe AusLrlan school's vlew ranges from favourlng deflaLlonary sysLems Lo abhorrlng
boLh lnflaLlonary and deflaLlonary perlods alLogeLher.
AusLrlans are much sLrlcLer when deflnlng Lhe money supply Lhan malnsLream economlsLs
(Surda, 2012a). AusLrlans deflne Lhe money supply as clrculaLlng money ln Lhe narrow sense
or money subsLlLuLes of zero maLurlLy LhaL are readlly converLlble for use ln exchange.
Money subsLlLuLes are clalms Lo a deflnlLe amounL LhaL are redeemable on demand, wlLh
perfecL cerLalnLy LhaL Lhey can be exchanged aL every lnsLance agalnsL money (Mlses, 1996).




24
4.2 - 1he money supp|y of 8|tco|n

1he money supply can be broken down lnLo Lwo areas. 1he flrsL ls commodlLy credlL, whlch
ls Lhe commodlLy ln clrculaLlon (ln 8lLcolns case Lhls ls unequlvocally flxed aL 21 mllllon) and
Lhe second ls clrculaLlon credlL, addlLlonal money whlch resulLs from credlL expanslons ln a
fracLlonal reserve banklng sysLem (l88) where banks lssue credlL ln excess of Lhelr own
funds. 1o deLermlne Lhe Lrue elasLlclLy of Lhe 8lLcoln money supply lL ls lmporLanL Lo
undersLand wheLher lnnovaLlons ln clrculaLlon credlL and l88 are posslble or llkely ln Lhe
fuLure.
lor 8lLcoln Lo galn clrculaLlon credlL lL musL see Lhe emergence of money subsLlLuLes, whlch
currenLly do noL exlsL. Money subsLlLuLes exlsL as a resulL of Lhe compeLlLlve advanLage Lhey
have over money, such as bank accounLs belng used Lo economlse on sLorage and
LransacLlng cosLs (Poppe, 1994). Surda (2012a) argues LhaL Lhe posslblllLy of such subsLlLuLes
arlslng ls unllkely. Pe shows LhaL Lhe base currency of 8lLcoln already has lnLrlnslc feaLures
LhaL are convenLlonally provlded by money subsLlLuLes and Lhls reduces Lhe llkellhood LhaL
subsLlLuLes can emerge from compeLlLlon, for example Lhey could noL compeLe on
LransacLlon cosLs.
Surda (2013) also posLulaLes LhaL fuLure lnnovaLlons ln Lhe ecosysLem could saLlsfy Lhe
demand for properLles, reduclng Lhe need for subsLlLuLes furLher, an example of Lhls ls
lncreased securlLy from faclllLles such as mulLl-slgnaLure LransacLlons (allowlng Lhe conLrol
of a balance Lo be spllL ln 2 or more parLs, poLenLlally held by securlLy or an escrow servlce).
llnally, 8lLcoln has no lender of lasL resorL sysLem. 1he absence of such a sysLem decreases
Lhe probablllLy LhaL a fracLlonal reserve banklng sysLem wlll emerge as a resulL of Lhe
lnsolvency rlsk due Lo a poLenLlal bank run scenarlo. ln order Lo avold Lhe lnsolvency rlsk l
belleve lL ls more llkely LhaL should a banklng sysLem arlse lL would llkely be one of 100
reserve banklng, neverLheless lL ls sLlll dlfflculL Lo undersLand why an lndlvldual would
choose Lo place Lhelr colns ln a bank as opposed Lo holdlng funds Lhemselves.
1he probablllLy of credlL expanslon emerglng ln Lhe 8lLcoln economy ls low and Lherefore
Lhe money supply can be expecLed Lo be largely conslsLenL and equal Lo Lhe sLock of
commodlLy credlL wlLhln Lhe economy, whlch wlll evenLually be perfecLly lnelasLlc.
23

4.3 - Imp||cat|ons of an |ne|ast|c money supp|y

1he frozen moneLary base of 8lLcoln shows resemblance Lo Lhe proposal of lrledman (1984)
Lo freeze Lhe raLe of hlgh-powered money growLh ln Lhe u.S. (Selgln, 2013). 1he proposal
was Lo ellmlnaLe Lhe role of Lhe uS lederal 8eserve ln deLermlnlng Lhe quanLlLy of money by
seLLlng Lhe quanLlLy of hlgh-powered money Lo be flxed.
lrledman consldered wheLher zero hlgh-powered money growLh would be workable and
healLhy ln an economy. Pe posLulaLed LhaL ln Lhe long run lf flnanclal lnnovaLlons kepL pace
and Lhe money mulLlpller rose aL Lhe same raLe of ouLpuL, Lhen prlces would be sLable.
Powever, lf flnanclal lnnovaLlons ceased (such as whaL Surda (2012a, 2013) suggesLs ln Lhe
8lLcoln case) Lhen prlces would Lend Lo fall aL a magnlLude equal Lo Lhe raLe of ouLpuL
growLh ln Lhe economy. ln concluslon he sLaLed LhaL lf all was known, anLlclpaLed and
ouLpuL growLh was relaLlvely sLable Lhen Lhls sysLem of bullL ln deflaLlon would cause no
problems and lndeed would have some advanLages."
1he mosL lmporLanL lmpllcaLlon from Lhe lnelasLlc money supply ls LhaL lf generally used as a
medlum of exchange lL would have an lnbullL and anLlclpaLed deflaLlon raLe.

4.4 - Automated vs. managed currency systems

A lecLure l aLLended held by kevln uowd (2013) on free markeL money Louched upon an
lnLeresLlng polnL. 1he assumpLlon LhaL money has Lo be conLrolled by Lhe sLaLe or a cenLral
bank has been Laken for granLed ln recenL years and whllsL boLh lrledman and Payek held
Lhese vlews, boLh conceded Lhls poslLlon near Lhe ends of Lhelr works.
uowd also polnLed ouL LhaL Lhe fundamenLal problem of flaL currency sysLems ls LhaL of
conLrolllng Lhe supply, lncenLlve sysLems are creaLed ln order Lo solve problems relaLed Lo
Lhe lnflaLlon blas LhaL resulLs from Lhe LempLaLlon of cenLral bankers Lo devlaLe from
expecLaLlons ln order Lo manlpulaLe Lhe poslLlon of Lhe economy and ln essence Lo Lrlck
prlce and wage seLLers.
26
Selgln (2013) argues LhaL whllsL a money commodlLy such as 8lLcoln mlghL be regarded as
noLhlng more Lhan a rule-bound flaL, lL ls noL clear lf moneLary bodles have ever been
pracLlcally sub[ecL Lo any meanlngful enforcemenL aL all". 1he lncenLlves LhaL rule-bound
cenLral bankers face and Lhe lmperfecLlons ln moneLary rules lnevlLably LempL Lhem Lo
lnLerfere wlLh Lhe moneLary sLock.
A 8lLcoln currency sysLem does noL leave managemenL Lo a rule bound cenLral banker, nor
does lL leave lL Lo Lhe operaLlon of bllnd forces. Such a sysLem esLabllshes an auLomaLed
moneLary sysLem as deflned by 8uchanan (1962), whlch flxes Lhe moneLary supply Lo be
absoluLe wlLhouL dlscreLlon. An auLomaLed moneLary sysLem could be llkened Lo lrledman's
k-percenL rule, whlch provlded for a consLanL growLh raLe of Lhe moneLary base. lrledman
commenLed LhaL such a rule mlghL as well be lmplemenLed by a compuLer (Selgln, 2013).
8lLcoln ls such a proLocol, lL ls Lhe flrsL aLLempL aL esLabllshlng an auLomaLed moneLary
sysLem LhaL ls decenLrallsed of human conLrol and hence does noL requlre LrusL ln cenLral
bankers or Lhe sLaLe, lnsLead replaclng falLh wlLh an absoluLe maLhemaLlcal proof
(nakamoLo, 2009).

4.S - Austr|an 8us|ness Cyc|e 1heory

1he AusLrlan school argues LhaL buslness cycles are an lnevlLable consequence of moneLary
lnLervenLlons. Lxcesslve expanslons ln credlL as a resulL of Lhe fracLlonal reserve banklng
sysLem lead Lo arLlflclally low lnLeresL raLes (Pollenbeck, 2013). Low raLes lmpalr economlc
calculaLlon of enLrepreneurs and shlfL resources lnLo unsusLalnable lnvesLmenL pro[ecLs LhaL
do noL maLch consumers' opLlmal lnLer-Lemporal consumpLlon preferences. Cnce Lhese
lmbalances can no longer be susLalned, a palnful resLrucLurlng process occurs Lo brlng Lhe
markeL back ln llne wlLh lLs opLlmal allocaLlons (8oLhbard, 2009, LC8, 2012).
WhllsL malnsLream economlsLs vlew Lhe boom as poslLlve and busL as negaLlve, AusLrlans
vlew Lhe boom as equally negaLlve and argue LhaL an lnelasLlc money supply and
suppresslon of fracLlonal reserve banklng are requlred Lo prevenL such buslness cycles.
27
l have already concluded LhaL Lhe probablllLy of credlL expanslon occurrlng wlLhln a 8lLcoln
economy would be low due Lo Lhe lack of need for money subsLlLuLes. Slnce 8lLcoln leaves
moneLary forces and valuaLlons Lo Lhe free markeL, decenLrallsed of human conLrol, lL
saLlsfles Lhe condlLlons LhaL AusLrlan 8uslness Cycle LheorlsLs argue are requlred Lo avold
recurrlng buslness cycles.

4.6 - Conc|us|on

ln Lhls chapLer l have shown LhaL a 8lLcoln moneLary sysLem would have a perfecLly lnelasLlc
supply schedule, whlch ls equlvalenL Lo an auLomaLed currency sysLem wlLh zero growLh of
Lhe moneLary base.
lL ls lmporLanL Lo remember LhaL slnce Lhe 8lLcoln moneLary base ls flxed and does noL
ad[usL Lo changes ln demand, 8lLcoln wlll be requlred Lo lncrease ln value slgnlflcanLly
should adopLlon raLes lncrease. 1hls may lead Lo lLs usage as a speculaLlve lnvesLmenL
vehlcle over a currency (dlscussed furLher ln secLlon 6.1).
llnally, perhaps Lhe mosL lmporLanL lmpllcaLlon of Lhls chapLer ls LhaL lf 8lLcoln were Lo be
used as money lL would be an lnherenLly deflaLlonary sysLem.








28
Chapter S - Is Def|at|on A rob|em W|th|n A 1heoret|ca| 8|tco|n System?

lL ls flrsL and foremosL lmperaLlve Lo appreclaLe LhaL Lhe argumenL surroundlng deflaLlon ls
noL a 8lLcoln problem. lL ls a long runnlng argumenL beLween Lwo sLarkly conLrasLlng
Lheorles of economlcs, Lhe prevalllng school of LhoughL agalnsL Lhe less malnsLream
AusLrlan school.
l wlll begln by conslderlng Lhe opposlng aLLlLudes Lo deflaLlon before analyslng Lhe common
argumenLs agalnsL deflaLlonary currencles ln Lhe conLexL of 8lLcoln. l lnLend Lo conclude by
decldlng wheLher Lhe lnbullL deflaLlon of 8lLcoln would make lL LheoreLlcally unvlable from
an AusLrlan perspecLlve.

S.1 - D|ffer|ng att|tudes to def|at|on

!M.)-*($%1 1%=,*-(#$ +*$ 4% 9(;9,& 1%)-0.+-(6% -# * 2#1%0$ %+#$#2& *$1 )9#.,1 4%
)-0#$;,& 0%)()-%1>@ AD%0$*$3%7 EFFEH
ueflaLlon deflned by 8ernanke (2002) ls a general decllne ln prlces". MalnsLream
economlcs and world governmenLs have a keyneslan lnsplred preference Lowards poslLlve
albelL low lnflaLlon raLes and encourage Lhe manlpulaLlon of Lhe money supply by cenLral
banks Lhrough open markeL operaLlons Lo lnfluence Lhe lnflaLlon raLe and shorL Lerm
employmenL. erhaps born of Lhe fears of posL CreaL uepresslon, Lhe malnsLream
consensus has been absoluLe avoldance of deflaLlon aL all cosLs, for fear of a deflaLlon splral.
!O9%0% () *4)#,.-%,& $# 0%*)#$ -# 4% +#$+%0$%1 *4#.- -9% %+#$#2(+ %==%+-) #= 1%=,*-(#$\
.$,%)) #$% %T.*-%) -9% 8%,=*0% #= -9% $*-(#$ 8(-9 -9% 8%,=*0% #= (-) =*,)% %,(-%)>@
AR],)2*$$7 EFF^ <>WNH
Cn Lhe oLher slde of Lhe debaLe lle academlcs such as lrledman (1984) who proposed a
sysLem of anLlclpaLed lnbullL deflaLlon and saw no economlc reasons why such a sysLem
would noL be successful. CLher academlcs have pralsed Lhe beneflLs of deflaLlon and
chasLlsed Lhe modern consensus. Pulsmann (2008) argued LhaL deflaLlon has become Lhe
29
scapegoaL of Lhe economlcs professlon, Lhe case agalnsL lL so apparenLly clear lL has noL
been glven falr analysls and ls slmply derlded.
ArlsLoLle, Pume and SmlLh have all noLed ln some form LhaL changes ln Lhe money supply do
noL creaLe real aggregaLe wealLh changes ln Lhe economy. Pulsmann argues lnsLead LhaL
boLh deflaLlon and lnflaLlon are lmpllclLly zero sum games LhaL do noL produce real
aggregaLe changes ln an economy buL raLher radlcally modlfy Lhe ownershlp sLrucLure and
dlsLrlbuLlon of resources.
Pulsmann goes on Lo aLLrlbuLe Lhe opposlLlon Lo such sLrucLural change as Lhe reason why
Lhere exlsLs a vehemenL flghL agalnsL deflaLlon. 1haL enLrenched pollLlcal and economlc
ellLes who are rellanL on Lhe currenL debL based sysLem undersLand LhaL deflaLlon would
brlng abouL a personally unfavourable redlsLrlbuLlon and wlsh Lo avold such change aL all
cosLs. Pe nlcknames deflaLlon as Lhe harblnger of llberLy," pralslng LhaL lL would abollsh Lhe
advanLage LhaL lnflaLlon based debL en[oys over savlngs based equlLy flnance aL Lhe margln
and would ln Lurn encourage Lhe foundaLlon of an economlc sysLem bullL upon savlng as
opposed Lo debL.
!_*,,($; <0(+%) -90#.;9 ($+0%*)%1 <0#1.+-(#$ () * 8#$1%0=., ,#$;Q0.$ -%$1%$+& #=
.$-0*22%,,%1 +*<(-*,()2>@ A[#-94*017 EFFS <>EPGH
8oLhbard, a leadlng flgure ln Lhe modern llberLarlan movemenL, posed a sLarkly poslLlve
vlew of deflaLlon relaLlve Lo 8ernanke's vlew on lLs desLrucLlve naLure. Pls argumenL follows
LhaL deflaLlon arlslng from producLlvlLy lncreases, such as ln Lhe lndusLrlal revoluLlon, ls a
poslLlve economlc force.
1he magnlLude of Lhe LheoreLlcal dlvlde hlghllghLs Lhe dlfflculLy ln adequaLely analyslng
8lLcoln's deflaLlonary naLure, Lhe concluslon reached depends on Lhe ldeologlcal and
LheoreLlcal blas of Lhe analyser. lrom Lhe onseL of Lhls dlsserLaLlon l have cenLred on
AusLrlan economlcs and as such l wlll aLLempL Lo evaluaLe Lhe LheoreLlcal vlablllLy of a
hypoLheLlcal 8lLcoln currency sysLem and challenge Lhe deflaLlonary crlLlque ln Lhe conLexL
of Lhe AusLrlan school.

30
S.2 - Usab|||ty

1he flrsL argumenL proposed agalnsL deflaLlon ls LhaL Lhere exlsLs a problem of usablllLy.
Slnce mosL modern currencles have a mlnlmum unlL, as economles grow and mlnLed colns
are losL, ln Lhe exlsLence of a flxed money supply Lhls could lead Lo a slLuaLlon whereby
prlces of ob[ecLs wlLhln Lhe economy fall below Lhe mlnlmum physlcal unlL. WhllsL 8lLcolns
may fall ouL of exlsLence Lhrough loss of accounLs slmllar Lo how Lhe lraql Swlss ulnar
(secLlon 3.3) suffered from physlcal deLerloraLlon, Lhls would noL be a problem wlLh 8lLcoln,
8lLcoln ls dlvlslble by up Lo 8 declmal places, lendlng Lo a posslble 2.1 quadrllllon unlLs ln
clrculaLlon.
1heoreLlcally Lhe deflaLlonary naLure of 8lLcoln should noL be a problem for lLs wldespread
usablllLy.

S.3 - Def|at|on Sp|ra| 1heory

1he mosL common crlLlque of deflaLlon ls Lhe deflaLlon splral argumenL, lL sLaLes LhaL
expecLlng deflaLlon, consumers wlll delay spendlng on goods under Lhe knowledge LhaL
prlces wlll fall ln Lhe fuLure, hoardlng currency and creaLlng a negaLlve shock Lo aggregaLe
demand. roducers respond Lo Lhls negaLlve shock ln demand and are forced Lo drop prlces
furLher, parLlally as a resulL of purchaslng lnpuLs ln Lhe prevlous perlod under Lhe
expecLaLlon of hlgher demand, whlch creaLes a self-susLalnlng deflaLlon splral.
Surda (2013) refuLes Lhe hoardlng argumenL on Lhe basls LhaL lL lgnores consumer's Llme
preference or need for goods. SupporLlng evldence can be found looklng aL Lhe markeLs for
Lechnology or auLomoblles, lL ls wldely anLlclpaLed LhaL prlces ln Lhese markeLs are falllng
over Llme yeL lnvesLmenLs ln lnnovaLlon and sales flgures are dolng qulLe Lhe opposlLe. Slnce
!anuary 1998, C prlces have fallen 93 yeL consumer ouLlays have lncreased by over
2700 (ShosLak, 2010).
1here ls slgnlflcanL emplrlcal evldence LhaL challenges Lhe deflaLlon splral argumenL.
ALkeson & kehoe (2004) LesLed 180 years of daLa for 17 counLrles and concluded Lhere was
31
no evldence of a relaLlonshlp beLween deflaLlon and depresslons ouLslde of Lhe CreaL
uepresslon. 1hey also hlghllghLed LhaL a greaLer number of eplsodes of depresslon occurred
wlLh perlods of lnflaLlon Lhan wlLh deflaLlon. AnoLher lnsLance of non-harmful deflaLlon was
Lhe lndusLrlal revoluLlon, SLell and Plnds (2010) lnvesLlgaLed Lhe second phase of Lhe uS
lndusLrlal revoluLlon beLween 1870 and 1896, noLlng LhaL prlces fell 32 over Lhe perlod
whllsL real lncome soared 110 amld robusL economlc growLh and Lechnologlcal lnnovaLlon.
8oLhbard (2006) also clLed Lhe lndusLrlal revoluLlon as a poslLlve deflaLlonary perlod ln
whlch Lhere was observed sLeadlly rlslng real wages.
l belleve an lmporLanL aspecL of Lhe 8lLcoln proLocol LhaL deflaLlon splral proponenLs fall Lo
appreclaLe ls LhaL deflaLlon would be boLh anLlclpaLed by all agenLs and lL would be low and
sLable ln magnlLude. ln a 8lLcoln based economy wlLh susLalned deflaLlon, a hoarder would
lmpllclLly galn an lnLeresL raLe equal Lo Lhe deflaLlon raLe. uslng lrledman's analysls we can
undersLand Lhls deflaLlon raLe Lo be equal Lo Lhe raLe of ouLpuL growLh, llkely Lo be a small
yeL poslLlve number ln a healLhy economy (perhaps equal Lo Lhe raLe of Lechnologlcal
growLh aL Lhe Solow long run sLeady sLaLe).
lL follows LhaL Lhe cholce a consumer aL a glven Llme would have ls wheLher Lo spend on
currenL consumpLlon ln Lhe presenL or save by holdlng funds ln 8lLcoln Lo yleld a small yeL
poslLlve annual reLurn. l'd llke Lo draw Lhe slmllarlLy Lo a consumer ln our currenL
lnflaLlonary sysLem LhaL ls offered a slmllar cholce due Lo Lhe exlsLence of several poLenLlal
lnvesLmenL vehlcles, Lhe exlsLence of lnflaLlon beaLlng lnvesLmenL posslblllLles would noL
ellmlnaLe all presenL consumer spendlng. 8aLher Lhan belng lmplauslble we slmply expecL
an economlc sysLem sLrucLured drasLlcally dlfferenL Lo our currenL one.

S.4 - Debt markets and |end|ng

lL ls undenlable LhaL deflaLlon creaLes a dlslncenLlve Lo borrowlng. lunds pald back ln Lhe
fuLure are more valuable ln Lerms of purchaslng power Lhan Lhose borrowed ln Lhe pasL. lor
Lhose wlLh currenL flxed borrowlngs such as morLgages Lhe real burden of Lhelr debL would
lncrease ln accordance Lo Lhe flsher equaLlon on Lhe followlng page, where r ls Lhe real
lnLeresL raLe, l Lhe nomlnal lnLeresL raLe and ! Lhe lnflaLlon raLe.
32
! ! ! !!
A negaLlve lnflaLlon raLe lncreases Lhe real lnLeresL raLe wlLhln an economy. As a resulL ln a
deflaLlonary economy lenders musL offer negaLlve lnLeresL raLes Lo lncenLlvlse borrowlng, ln
whlch case Lhey would galn more from holdlng funds for Lhemselves and would choose noL
Lo lend.
l agree LhaL lnLroduclng deflaLlon ln our currenL economlc sysLem bullL upon Lhe clrculaLlon
of fracLlonal reserve credlL and debLs would be unamblguously deLrlmenLal as a resulL of
sLandlng flxed repaymenLs wlLhln Lhe economy. lL ls lmporLanL Lo undersLand LhaL a
deflaLlonary 8lLcoln based economy would have an enLlrely dlfferenL sLrucLure, Lhe
sLrucLure LhaL Pulsmann (2008) argues would be based enLlrely on savlng and lnvesLmenL as
opposed Lo debL.
A hypoLheLlcal 8lLcoln economy could sLlll have lendlng, [usL as lnsLlLuLlons charge a
premlum on lnLeresL Lo accounL for lnflaLlon, lenders could offer a dlscounL Lo accounL for
Lhe deflaLlon raLe. WhllsL Lhls would lower nomlnal lendlng raLes lL does noL necessarlly
requlre Lhem Lo be negaLlve so long as Lhe deflaLlon raLe ls of a low order of magnlLude as
expecLed. AlLernaLlvely lL ls plauslble Lo suggesL a shlfL Lo crowd based fundlng models such
as klcksLarLer, whlch grew 238 ln 2012 (opper, 2013). A slmllar lnnovaLlon already exlsLs
wlLhln Lhe 8lLcoln economy, 81C[am ls an exchange plaLform ln whlch prospecLlve
borrowers lay ouL Lerms and users selecLlvely choose favourable pro[ecLs ln whlch Lhey are
lnLeresLed ln lnvesLlng.
33


S.S - Case Study - Iraq| Sw|ss D|nar

!M&$-9%-(+ +#22#1(-& 2#$%& () $#- V.)- * 9&<#-9%-(+*, <#))(4(,(-&@ AM%,;($7 EFGN <>GNH
Selgln argues LhaL due Lo 8lLcoln's lack of non-moneLary use value and absoluLe scarclLy, lL
could be classlfled as synLheLlc commodlLy money. An unplanned lnsLance of Lhe
esLabllshmenL of such money, slmllar Lo 8lLcoln, was Lhe lraql Swlss ulnar. rlor Lo Lhe 1990s
paper dlnars were Lhe currency of lraq produced wlLh Swlss engraved plaLes. lollowlng
sancLlons on lmporL resLrlcLlons Lhe lraql governmenL chose Lo Lhe replace Lhe now flxed
supply of Swlss ulnar ln favour of new Saddam ulnars.
Saddam ulnars suffered from heavy depreclaLlon due Lo oversupply and ease of
counLerfelLlng. As a resulL Swlss ulnars conLlnued Lo clrculaLe ln Lhe kurdlsh reglons and
held a sLable purchaslng power and exchange raLe relaLlve Lo Lhe u.S. uollar, as seen ln
flgure 3.1 above (Selgln, 2013).
klng (2004) noLed LhaL Lhe clrculaLlon of Swlss ulnars was a markeL-based soluLlon Lo creaLe
a medlum of exchange ln Lhe absence of a governmenL wlLh Lhe ablllLy Lo lssue currency. lL
ls an example LhaL lnLrlnslcally useless currency can conLlnue Lo funcLlon as money even
Lhough lLs use ls noL recognlsed by legal Lender (Selgln, 2013).
llgure 3.1 - lraql Swlss ulnar/$ agalnsL Llme (klng, 2004)
34
Comparlng Lhe Swlss ulnar Lo 8lLcoln, Lhe dlnar suffered from Lhe problem of physlcal
deLerloraLlon, a problem whlch Lhe 8lLcoln currency also may have, walleLs holdlng accounL
balances may be losL over Llme and hence lL could be seen LhaL Lhe money supply may,
albelL very slowly, shrlnk. 1hls would also conLrlbuLe furLher Lo Lhe effecL of deflaLlon wlLhln
Lhe 8lLcoln economy. l argue LhaL faclllLles such as Lhe ablllLy Lo back up 8lLcoln walleLs wlll
become sLandard procedure and wlll largely ellmlnaLe Lhls problem.
An lmporLanL reason why Lhe Swlss ulnar held purchaslng power versus Lhe dollar was LhaL
norLhern kurdlsh reglons dld noL have a sophlsLlcaLed banklng sysLem. Slmllarly, ln secLlon
4.2 l argued LhaL lL was unllkely for 8lLcoln denomlnaLed money subsLlLuLes Lo emerge
wlLhln Lhe 8lLcoln sysLem and Lherefore Lhe case of Lhe lraql Swlss ulnar ls evldence LhaL a
flxed moneLary base sysLem can work noL [usL from a LheoreLlcal AusLrlan perspecLlve buL
also ln pracLlce under cerLaln condlLlons.

S.6 - Conc|us|on

l am ln no poslLlon Lo conclude Lhe debaLe as Lo wheLher or noL deflaLlon should be pralsed
or derlded wlLhln an economlc sysLem, Lhls ls far ouLslde of Lhe scope of Lhls dlsserLaLlon
and my own knowledge. WhaL l am able Lo say wlLh cerLalnLy ls LhaL 8lLcoln could be
consldered Lhe flrsL real aLLempL aL esLabllshlng a deflaLlonary sysLem LhaL conforms Lo Lhe
Lheorles of lrledman, Pulsmann and oLher proponenLs of Lhe AusLrlan 8uslness Cycle
1heory. 1he lraql case provldes some emplrlcal evldence Lo suggesL LhaL such a deflaLlonary
sysLem can operaLe ln parLlcular lnsLances.
l belleve lL ls posslble Lo envlsage a successful 8lLcoln based economlc sysLem wlLh
anLlclpaLed deflaLlon ln Lhe absence of fracLlonal reserve credlL expanslons. lmposlng such a
drasLlcally dlfferenL economlc sysLem upon our currenL debL based socleLy ls cerLalnly
emplrlcally unfeaslble, buL as a LheoreLlcal absLracLlon Lhrough Lhe AusLrlan lens Lhere ls no
reason why such a sysLem would noL work.


33
Chapter 6 - 1he future of 8|tco|n

6.1 - Specu|at|ve 8ubb|e or nyper monet|sat|on

1he rapld prlce lncrease of 8lLcoln represenLs lncreased demand for 8lLcoln holdlngs. CrlLlcs
of Lhe 8lLcoln sysLem such as Casey (2011) argue LhaL Lhe maln value of 8lLcoln ls as a
speculaLlve vehlcle and as such, due Lo lacklng lnLrlnslc value, lL ls a merely a speculaLlve
'bubble'. uuLch cenLral banker nouL Welllnk descrlbed 8lLcoln as worse Lhan Lhe classlc
uuLch 1ullp bubble of Lhe 17
Lh
cenLury ln LhaL aL leasL wlLh 1ullp Manla you goL a Lullp aL
Lhe end" (Pern, 2013a).
nobel laureaLe 8oberL Shlller (2012) descrlbes a speculaLlve bubble as a soclal epldemlc
whose conLaglon ls medlaLed by prlce movemenLs." Pe furLher deflnes a mechanlsm of
markeL exclLemenL and exuberance lurlng more and more people ln and fuelllng furLher
prlce behavlour, a Lype of successlve feedback loop as Lhe bubble grows. Surda (2012a)
found Lhrough regresslon analysls a sLrong poslLlve correlaLlon beLween Lhe prlce of 8lLcoln
and publlc lnLeresL ln 8lLcoln (measured ln Lerms of Coogle searches). Pe suggesLed a dual
dlrecLlon of causaLlon LhaL boLh publlc lnLeresL drove prlce acLlon furLher and Lhe news
surroundlng prlce acLlon moLlvaLed peoples lnLeresL ln 8lLcoln furLher. l would argue LhaL
llgure 6.1 - 8lLcoln uSu markeL prlce agalnsL Llme (blockchaln.lnfo, 2013) [Accessed 9/12/2013]
36
comblnlng Shlller's deflnlLlon and Surda's emplrlcal work 8lLcoln does appear Lo show
characLerlsLlcs of a speculaLlve bubble.
Craf (2013b) makes an lmporLanL dlsLlncLlon, Lhere ls a dlfference beLween dlsmlsslng
8lLcoln Lo be a bubble and deemlng lL Lo be a medlum of exchange LhaL ls suscepLlble Lo
bubble llke prlce behavlours. ln Lyplcal asseL bubbles, Lhe use value of Lhe underlylng asseL
does noL change no maLLer how greaL Lhe prlce becomes. ln 8lLcoln, as more people enLer
Lhe markeL and lLs prlce rlses lL galns poslLlve neLwork effecLs [usL llke language or soclal
neLworks. As a resulL Lhe pracLlcal value of Lhe sysLem lncreases for everybody uslng lL as
Lhe number of sLakeholders and markeL depLh lncreases.
SpeculaLlon ls noL Lhe only reason Lhe prlce of 8lLcoln can rlse, lncreased demand can also
arlse as a resulL of lncreased moneLlsaLlon, where more people demand 8lLcolns for
exchange LransacLlons. Lmplrlcal analysls from 8on and Shamlr (2012) concluded LhaL 76
of all 8lLcolns were belng hoarded. 1he same analysls repeaLed uslng 2013 daLa by
Melkle[ohn (2013) found a 12 reducLlon ln Lhe number of colns belng hoarded. 1he
lncrease ln exchange usage of 8lLcolns over Lhe pasL year wlll have conLrlbuLed some parL of
Lhe lncreases ln 8lLcolns prlce. 1hls lncreaslng Lrend wlLhln Lhe 8lLcoln ecosysLem ls furLher
evldenced by paymenL processor 8lLay, who saw a 6260 lncrease ln 2013 '8lack lrlday'
sales agalnsL flgures from Lhe prevlous year (Wong, 2013).
ln Lhe prevlous chapLer l concluded hoardlng would noL be problem for a LheoreLlcal 8lLcoln
economy where lL was Lhe sole medlum of exchange. ln pracLlce whaL we are seelng ls
hoardlng behavlour (albelL falllng) as a resulL of 8lLcoln belng used ln parallel wlLh oLher
domesLlc currencles. users foresee flxed repaymenLs ln flaL denomlnaLed Lerms and see
llLLle lncenLlve Lo purchase goods and servlces ln 8lLcoln, lnsLead holdlng as an lnvesLmenL
vehlcle ln Lhe hope LhaL lLs value wlll rlse.
1he prlce behavlour of 8lLcoln ls Lhe comblnaLlon of lncreaslng usage of 8lLcolns for lndlrecL
exchange purposes and more domlnanL usage as an lnvesLmenL vehlcle for users. As uowd
(2013) polnLs ouL, 8lLcoln ls noL currenLly a worklng currency markeL and Lhe volaLlllLy LhaL
arlses from speculaLlve behavlour ls exLremely deLrlmenLal Lo 8lLcoln's usage as a sLore of
value.
37
1he poslLlve for 8lLcoln ls LhaL Lhe Lrend of hoardlng ls falllng whllsL lLs usage ln exchange ls
lncreaslng and should be llkely Lo conLlnue lncreaslng so long as models such as 8lLay
proLecL reLallers agalnsL exchange raLe volaLlllLy and hence drlve merchanL adopLlon.

6.2 - Growth prospects of 8|tco|n

6.2.1 - Lxp|a|n|ng 8|tco|ns rap|d growth

8efore analyslng Lhe fuLure prospecLs for 8lLcoln as a leglLlmaLe form of money or an
lnnovaLlve paymenL sysLem lL ls lmporLanL Lo undersLand why Lhe markeL demanded and
adopLed an alLernaLlve Lo Lhe currenL forms of money.
8lLcoln was seL up llke many venLures before lL as an lnnovaLlon ln response Lo a markeL
problem. ln 8lLcolns case Lhe problem was Lhe rellance elecLronlc LransacLlons placed on
LrusLed Lhlrd parLy models, whlch creaLes slgnlflcanL LransacLlon cosLs. 8lLcoln was seL up Lo
economlse on Lhese cosLs.
ln lLs flve years of exlsLence lL has achleved a markeL peneLraLlon LhaL exceeds all oLher
forms of non-sLaLe dlglLal currency before lL. users holdlng Lhe currency represenL a number
of dlfferenL lnLeresLs lncludlng Lechnologlcal early adopLers, prlvacy and crypLography
enLhuslasLs, llberLarlan Lhlnkers, governmenL mlsLrusLlng 'gold bugs', crlmlnals and
speculaLors.
1he sysLem has a number of unlque properLles LhaL provlde 8lLcoln wlLh value Lo lLs users.
Such as:
uecenLrallsed moneLary mechanlsm, lndependenL of pollLlcal, economlc and
geographlc borders.
AnonymlLy ln LransacLlon.
Low relaLlve LransacLlon cosLs.
laclllLaLlon of mlcropaymenLs.
SlmllarlLy Lo gold ln producLlon.
38

Perpel (2011) analysed why people swlLch Lo dlglLal currencles as an alLernaLlve Lo Lhe
currenL sysLem and concluded LhaL demand for dlglLal rlses where Lhere ls an unavallablllLy
of banklng, local currency lnsLablllLles (such as ln developlng naLlons) and where Lhe average
lncomes are low. Pe clLes LhaL Lhe growLh of Lhe Webmoney sysLem LhaL emerged ln Lhe
laLe 1990s was ln parL due Lo Lhe 1998 collapse of Lhe 8usslan banklng secLor.
!O9%0% () $# 1#.4- -9*- D(-+#($ () * )<#$-*$%#.) *$)8%0 -# -9% 2#$%-*0& ($)-*4(,(-& -9*-
8% )%% ($ -9% 8#0,1 -#1*&>@ AX#01*7 EFGNH
A poll of 82 users on blLcolnLalk.org (2011) found LhaL 19.3 of respondlng users felL LhaL
Lhe dlsLrusL of cenLral banks was Lhe 'besL reason Lo descrlbe why Lhey use 8lLcoln'. WhllsL
Lhls ls noL an academlc source lL does hlghllghL LhaL some proporLlon of early 8lLcolns
adopLlon was drlven by anLl-esLabllshmenL senLlmenL or ldeologlcal blas.
Cn LrusL, Lhe Ldelman 1rusL 8aromeLer (Ldelman, 2013) found LhaL 61 of people LrusLed a
person 'llke Lhemselves', 43 LrusLed CLCs and 38 LrusLed governmenL offlclals. 1he
reason for recenL decllne ls perhaps due Lo Lhe emergence of lnformaLlon Lhrough
WlklLeaks cables and Ldward Snowdon's whlsLleblowlng on Lhe mass spylng capablllLles of
Lhe 8lSM survelllance program. lndlvlduals ln socleLy have galned awareness Lo Lhese
prlvacy lnfrlngemenLs and Lhls ln parL wlll have drlven lnLeresL Lo alLernaLlve sysLems such as
8lLcoln.

6.2.2 - 8|tco|n as a payment mechan|sm

1he llkellhood ls LhaL 8lLcoln wlll noL replace flaL currency ln Lhe world. 8lLcoln's unlque
properLles do lend lL Lo be a useful paymenL sysLem, wlLh low LransacLlon cosLs and
chargeback proLecLlon. 1hls allows 8lLcoln Lo acL as an alLernaLlve Lo convenLlonal paymenL
neLworks such as vlsa, aypal and WesLern unlon (Lee, 2013a).
MerchanLs do noL need Lo hold any 8lLcoln nor be exposed Lo volaLlllLy (Andreessen, 2014)
should Lhey adopL Lhe 8lLay or Colnbase model. 8lLay faclllLaLes over 14,000 merchanLs Lo
accepL 8lLcolns and ellmlnaLes poLenLlal exchange raLe rlsk by allowlng Lhem Lo recelve flaL
39
denomlnaLed funds. 1he sysLem processed over $100m of LransacLlons ln 2013 (!ahosky,
2013). Cn Lhe 8lLpay webslLe (8lLpay.com) Lhe company explalns LhaL lL allows vendors Lo
reduce chargeback rlsk (many merchanLs are ecommerce buslnesses who are more llkely Lo
geL LargeLed by crlmlnals uslng sLolen credlL cards) and also moneLlse new lnLernaLlonal
markeLs vla a unlfled dlglLal currency.
ln reference Lo vlrLual currencles, u.S. lederal 8eserve Chalrman 8en 8ernanke sald
!`-9%0% *0% *,)# *0%*) ($ 89(+9 -9%& 2*& 9#,1 ,#$;Q-%02 <0#2()%7 <*0-(+.,*0,& (= -9%
($$#6*-(#$) <0#2#-% * =*)-%07 2#0% )%+.0% *$1 2#0% %==(+(%$- <*&2%$- )&)-%2>@
AD%0$*$3%7 EFGN <>GFH
1he MonLreal Lconomlc lnsLlLuLe (2014) has also ldenLlfled lLs poLenLlal Lo revoluLlonlse
paymenL sysLems, parLlcularly ln developlng naLlons.
So far 2014 has been Lhe year of merchanL adopLlon. Coogle ls worklng Lo lncorporaLe
8lLcoln lnLo lLs paymenL soluLlons (Creenberg, 2014) whllsL medla sLreamlng servlce neLfllx
are rumoured Lo lmplemenL 8lLcoln, faclllLaLlng mlcro-LransacLlons by allowlng consumers
Lo purchase lndlvldual eplsodes or fllms aL a low prlce, a proposal prevlously unfeaslble wlLh
hlgher LransacLlon fees. Ma[or elecLronlc reLallers CversLock and 1lger ulrecL have begun Lo
accepL 8lLcoln, wlLh 1lger ulrecL processlng over $230,000 worLh of 8lLcoln LransacLlons
wlLhln Lhe flrsL 17 hours posL announcemenL (!oslc.com, 2014). lounder of AusLrallan
elecLronlcs flrm Mlllenlus, lerre 8ouLros, noLed LhaL 8lLcoln cusLomers are spendlng more
ln dollar Lerms Lhan any oLher paymenL meLhod and pralsed LhaL Lhe sysLem allowed Lhe
flrm Lo negoLlaLe fraud Lo 0 whllsL expandlng lLs global audlence (CrypLocolnsnews.com,
2014). 1hls Lrend of merchanL adopLlon can be expecLed Lo conLlnue as merchanLs are
reallslng Lhe flnanclal beneflLs for Lhelr buslnesses.
llnally 8lLcoln could see poLenLlal as a paymenL sysLem ln developlng markeLs. ln kenya 70
of adulLs do noL have access Lo a formal bank accounL whllsL aL Lhe same Llme 70 have
access Lo a moblle phone wlLh Lhe ma[orlLy uslng a moblle money servlce known as M-esa
Lo Lransfer money. (SmlLh, 2013). lL ls posslble Lo lmaglne 8lLcoln based lnnovaLlons creaLed
LhaL saLlsfy Lhls developlng markeL demand for accesslble moblle banklng and money
Lransfers.
40
ulglLal processlng now makes lL posslble Lo pay for a dollar denomlnaLed producL from an
alLernaLlvely denomlnaLed credlL card whllsL a forelgn exchange LransacLlon occurs ln Lhe
background (Surda, 2013). 1hls ls preclsely Lhe dlrecLlon l predlcL 8lLcoln usage headlng, all
advanLages of economlslng on LransacLlon cosLs and securlLy, whllsL ellmlnaLlng volaLlllLy
rlsk from lLs exuberanL prlce behavlour.

6.2.3 - 1he rem|ttance |ndustry

1he low LransacLlon cosLs of 8lLcoln also allow for growLh ln Lhe global remlLLance lndusLry.
1he World 8ank (2013) remlLLance prlces analysls found LhaL for Lhe $314 bllllon remlLLance
funds Lransferred annually Lhe average cosL of remlLLance ls 8.83 per year.
WhllsL lL ls exLremely early ln Lhe 8lLcoln ecosysLem's developmenL, lnnovaLlve sLarL-ups
have already sprung up ln order Lo galn a share of Lhls lucraLlve markeL. Cne such sLarL-up ls
8lLesa LLd, whlch LargeLs remlLLances Lo Lhe kenyan markeL whose remlLLance lndusLry ls
worLh $1.2 bllllon per year (Cmbok, 2013). 8lLesa ls compeLlng wlLh commerclal banks LhaL
handle half of remlLLance LransacLlons along wlLh servlces such as WesLern unlon LhaL hold
31 of Lhe buslness (World 8ank, 2010). WhllsL servlces such as 8lLesa have an lnlLlal
sLruggle Lo galn credlblllLy and wldespread adopLlon as an alLernaLlve Lo bank Lransfers, Lhe
3 raLe on oversees Lransfers plus same day arrlval of funds wlll be sure Lo aLLracL some
users away from sLandard means of Lransfer.
8lLcoln does noL have Lo become wldely accepLed as a medlum of exchange ln order Lo
achleve markeL peneLraLlon ln Lhe global remlLLance lndusLry, nor does lL have Lo reduce ln
exchange raLe volaLlllLy, lL ls posslble Lo lmaglne funds denomlnaLed ln 8lLcoln for very shorL
perlods of Llme and converLed lnLo Lhe domesLlc currency, slmllar Lo Lhe 8lLay model.



41
6.3 - L|m|tat|ons and r|sks for 8|tco|n

1here are slgnlflcanL poLenLlal rlsks and llmlLaLlons LhaL 8lLcoln faces, some of whlch were
ouLllned ln a 2013 8ank of Amerlca reporL (!effrles, 2013). 1he bank ldenLlfled lLs poLenLlal
as a ma[or means of paymenL for ecommerce buL hlghllghLed problems such as prlce
volaLlllLy, legal sLaLus and exchange rellablllLy. 1hls secLlon wlll brlefly cover Lhe rlsks and
llmlLaLlons l belleve Lo be lmporLanL ln Lhe fuLure of 8lLcoln growLh.

6.3.1 - kegu|atory r|sk

WlLh dlglLal currencles belng an enLlrely new class of producLs, governmenLs have sLruggled
ln decldlng how Lo classlfy, Lax and regulaLe Lhem.
unLll lLs closure, 8lLcoln faclllLaLed Lhe anonymous drugs markeLplace Lhe Sllk 8oad" whlch
generaLed monLhly sales revenue ln excess of $1.2m per monLh (ChrlsLln, 2012). 1he
argumenL LhaL 8lLcoln should be sLopped because of lLs lnvolvemenL ln lllegal acLlvlLles ls
hlghly quesLlonable, dollars are used dally for drugs LransacLlons wlLh Lhe absence of a
publlc ledger Lo record Lhe Lransfers (unllke 8lLcoln). AddlLlonally, Melkle[ohn eL al. (2013)
polnLed ouL LhaL uslng 8lLcoln Lo launder money ls noL parLlcularly aLLracLlve due Lo
exchanges acLlng as chokepolnLs of Lhe 8lLcoln economy, exchanges LhaL can be scruLlnlsed
and regulaLed by pollcymakers.
lLs classlflcaLlon varles across Lhe world, wlLh Lhe Swlss parllamenL recenLly slgnlng a
posLulaLe asklng for lL Lo be LreaLed as a forelgn currency whllsL Lhe governmenLs of norway
and Sweden are LreaLlng lL as an asseL sub[ecL Lo caplLal galns Lax (Moran, 2014). ln Lhe uk
PM 8evenue & CusLoms has sald lL would noL charge Lhe 20 vA1 Lax on 8lLcoln Lrades
(Wlld eL al., 2014) lmpllclLly Lhls LreaLs 8lLcoln as a currency and may lncenLlvlse fuLure
growLh of 8lLcoln sLarL-ups wlLhln Lhe uk. 1he 8lLcoln loundaLlon ls already looklng Lo make
Lhe move Lo London, aLLracLed by a favourable regulaLory envlronmenL.
CovernmenLs do have Lhe poLenLlal Lo llmlL Lhe 8lLcoln markeL, noL by prlvaLe usage buL
lnsLead by conLrolllng Lhe exchange mechanlsm. A sLaggerlng 30 prlce drop was observed
42
overnlghL when Chlnese exchange 81C Chlna sald lL could no longer accepL paymenLs ln
Chlnese currency due Lo a regulaLory change (Pern, 2013b) alLhough Lhls has subsequenLly
been reversed (Spaven, 2014). CommenLs from 8ernanke, Lhe LC8's (2012) neuLral sLance
and Cermany's classlflcaLlon of 8lLcoln as prlvaLe money hlnL LhaL Lhe rlsk of governmenLs
Laklng an acLlve role ln llmlLlng Lhe prollferaLlon of 8lLcoln ls slgnlflcanLly lower Lhan when
Lhe proLocol flrsL began.

6.3.2 - ract|ca| usab|||ty prob|ems

Cne recurrenL problem l have ldenLlfled over Lhe course of Lhls work ls a llmlLaLlon for
adopLlon ln Lhe form of knowledge and Lechnologlcal hardware. 1he acLlon of purchaslng
and Lradlng 8lLcoln ls ofLen noL slmple and does noL always feel secure. AddlLlonally l found
slgnlflcanL dlfflculLles ln explalnlng Lhe proLocol and beneflclal properLles of Lhe sysLem Lo
people wlLh llLLle knowledge of Lechnology. unLll blg buslnesses geL behlnd and push 8lLcoln
elLher as a currency or more llkely as an alLernaLlve lnLerneL paymenL mechanlsm lL wlll sLlll
be vlewed by Lhe ma[orlLy as somewhaL of a speculaLlve glmmlck, lacklng purpose.
lL ls unllkely 8lLcoln wlll emerge as money ln Lhe sense LhaL debLs, wages and prlces wlll be
denomlnaLed on a masslve scale ln 8lLcoln because lL ls lnherenLly rellanL on boLh
Lechnologlcal hardware and Lhe connecLlvlLy of Lhe lnLerneL. 1hese llmlLaLlons lend furLher
welghL Lo Lhe ldea of 8lLcoln developlng as paymenL mechanlsm.

6.3.3 - 1he protoco| |s abso|ute

uowd (2013) emphaslsed Lhls problem ln hls lecLure, Lhe properLles and worklngs of Lhe
proLocol are seL ln sLone. uue Lo flxed supply any mass adopLlon wlll be surely accompanled
by hyper-deflaLlon, lendlng 8lLcoln Lo aLLracL users of a purely speculaLlve naLure as
opposed Lo Lhose who value lLs oLher properLles.
1he absoluLe naLure of Lhe proLocol could also have severe lmpllcaLlons for 8lLcoln should
Lechnlcal lssues be dlscovered LhaL have noL yeL been ldenLlfled. A bug known as LransacLlon
43
malleablllLy has been an lssue ln Lhe proLocol slnce 2011. ln slmple Lerms lL ls posslble Lo
change Lhe unlque lu of a 8lLcoln LransacLlon before Lhe neLwork has conflrmed lL.
ulLlmaLely Lhls means LhaL lL ls posslble Lo preLend LhaL Lhe LransacLlon dld noL happen and
requesL Lhe Lransfer a second Llme. 1hls bug has severely affecLed Lhe world's largesL 8lLcoln
exchange MLCox, who flled for bankrupLcy proLecLlon ln lebruary 2014 (88C, 2014). lL ls
lmporLanL Lo noLe MLCox's crlppllng mlsplacemenL of an esLlmaLed 830,000 8lLcolns, aL a
value (as of 02/03/2014) of $476 mllllon dollars, was an avoldable error made by Lhe
exchange. lL ls posslble Lo argue LhaL Lhe faulL lles wlLh companles such as MLCox who
should have known Lo waLch for Lhe non-malleable paymenL deLalls of Lhe LransacLlon,
raLher Lhan Lhe malleable LransacLlon lu (8radbury, 2014).
lrrespecLlve of who ls aL faulL, MLCox's fallure Lo accounL for Lhls known bug unavoldably
reflecLs badly on Lhe 8lLcoln proLocol as a whole. 8lLcoln ls sLlll young and Lhe worry
surroundlng LransacLlon malleablllLy begs Lhe quesLlon as Lo whaL oLher slgnlflcanL problems
or bugs exlsL ln Lhe proLocol. lor example, 8ahack (2013) posLulaLed Lhe posslblllLy of
LheoreLlcal 8lLcoln aLLack wlLh less Lhan Lhe convenLlonal 30 compuLaLlonal power. As of
Loday (02/03/2014) Lhere ls no reason Lo belleve LhaL Lhe core proLocol has any crlppllng
flaws buL LhaL doesn'L provlde comforL Lo Lhe posslblllLy LhaL such flaws may be dlscovered
ln Lhe fuLure.

6.3.4 - What wou|d rep|ace 8|tco|n?

Should people sLop uslng 8lLcoln as a medlum of exchange lL musL be because Lhey swlLched
Lo anoLher due Lo some sorL of compeLlLlve advanLage (Surda, 2012a). WhllsL unllkely Lo be
beaLen on LransacLlon cosLs by flaL money or gold, Lhere are numerous alLernaLlve dlglLal
currencles whlch have been creaLed such as lrelcoln, eercoln, LlLecoln and AlLcoln Lo name
a few. Some of Lhese are 8lLcoln based whllsL oLhers operaLe on a dlfferenL proLocol, for
example lrelcoln lnLroduces a demurrage fee ln order Lo dlslncenLlvlse hoardlng.
AlLernaLlvely, lL ls posslble Lo envlsage a successful alLernaLlve currency supporLed by
governmenLs and organlsaLlons such as ayal, whlch could leverage lLs currenL popularlLy
Lo creaLe llquldlLy ln Lhe markeL (Surda, 2012b). lrrespecLlve of wheLher 8lLcoln ulLlmaLely
44
loses ln Lhe compeLlLlve baLLleground wlLh oLher alLernaLlve currencles lL has surely been
Lhe ploneer ln Lhe dlglLal currencles markeL and opened up a prevlously closed debaLe
surroundlng AusLrlan based moneLary sysLems.

6.4 - Conc|us|on

1he Lrend for Lhe fuLure of 8lLcoln ls largely poslLlve wlLh lLs lncreaslng usage as a medlum
of exchange and a paymenL mechanlsm. neverLheless a large proporLlon of 8lLcoln holders
are speculaLlve lnvesLors who seek Lo caplLallse on Lhe knowledge LhaL 8lLcoln ls sLlll ln lLs
early phases and who know LhaL lncreaslng accepLance wlll undoubLedly be accompanled by
hyper deflaLlon as a resulL of lLs flxed supply.
lrom a regulaLory sLandpolnL, alLhough some governmenLs are chooslng noL Lo class 8lLcoln
as a currency lL seems exLremely unllkely ln Lhe ma[orlLy of counLrles LhaL any lnLervenLlon
wlll occur ln order Lo block 8lLcoln LransacLlons and exchanges, Chlna belng perhaps Lhe
excepLlon.
1here are sLlll llmlLaLlons for adopLlon ln Lhe form of knowledge, Lechnology and prlce
volaLlllLy, ln addlLlon Lo Lhe ever-presenL rlsk LhaL 8lLcoln has some underlylng flaw ln Lhe
proLocol LhaL has noL yeL been dlscovered. As such, lL ls unllkely Lo be LrusLed as a sLore of
value wlLhouL slgnlflcanL Lechnologlcal research lnLo Lhe proLocol comblned wlLh a fall ln
volaLlllLy. unLll Lhen lL ls more llkely Lo develop as a paymenL mechanlsm Lhrough sysLems
such as 8lLay and wlLhln Lhe global remlLLance markeL.






43
Chapter 7 - Conc|us|on

1hls dlsserLaLlon has found LhaL conLrary Lo Lhe crlLlque of some modern AusLrlan and
llberLarlan Lhlnkers lL ls posslble Lo [usLlfy 8lLcolns exlsLence as conformlng Lo Mlses
regresslon Lheorem. lL ls my oplnlon LhaL Lhe fallure Lo observe Lhe lnLrlnslc value of 8lLcoln
ln early llLeraLure represenLs an overLly narrow approach Lo lLs valuaLlon. ln Lrylng Lo
crlLlque Lhrough Lhe regresslon Lheorem, crlLlcs losL slghL of Lhe core phllosophles LhaL
underpln Lhe Lheorem lLself. l would Lherefore argue LhaL Lhe prlor crlLlque has been Loo
rlgld ln lLs appllcaLlon, wlLh a dlsLlncL lack of emphasls on Lhe lmporLance of sub[ecLlve
valuaLlons LhaL are aL Lhe core of AusLrlan economlcs.
WhllsL Menger and Mlses could noL envlsage Lhe exlsLence of such a maLhemaLlcal backed
dlglLal currency l argue Lhey would appreclaLe Lhe sub[ecLlvlsm assoclaLed wlLh early prlce
valuaLlons and would have undersLood as such LhaL 8lLcoln can noL and does noL vlolaLe Lhe
praxeologlcal sLaLemenL LhaL ls Lhe regresslon Lheorem. 1he emergence of 8lLcoln as a
medlum of exchange ls plauslble boLh as a LheoreLlcal absLracLlon and an observable
phenomenon, such as Lhe emergence of gold. 1he blggesL dlfference ls Lhe rapld speed LhaL
8lLcoln emerged, aLLrlbuLed Lo Lhe speed of Lechnologlcal and lnformaLlonal prollferaLlon
across Lhe world Loday. 1he markeL can ldenLlfy, value and adopL a new medlum of
exchange aL a much fasLer raLe.
lrom a meLhodologlcal perspecLlve, Lhe underlylng assumpLlon LhroughouL Lhls dlsserLaLlon
has been LhaL Lhe AusLrlan perspecLlve ls correcL and under Lhls l have found no reason Lo
suggesL why a drasLlcally dlfferenL 8lLcoln based economlc sysLem would be unsusLalnable.
lL ls posslble Lhls assumpLlon ls wrong however ln my lnvesLlgaLlon l have no reason Lo
doubL lL and l have found Lhe llLeraLure boLh lnLellecLually compelllng and unlque.
A recurrlng problem l experlenced was Lhe avallablllLy of academlc research, parLlcularly
emplrlcal. l had orlglnally lnLended Lo LesL a llnk beLween 8lLcoln prlce and oLher sLores of
value, however on lnspecLlon Lhe volaLlle bubble-llke behavlour of 8lLcoln clouds Lhe valldlLy
of any emplrlcal resulLs and hence causaLlons LhaL can be drawn from Lhem. luLure
llLeraLure could analyse Lhe volaLlllLy changes of 8lLcoln over Llme Lo see Lhe effecL
lncreased merchanL adopLlon and markeL depLh has had on lL usage as a sLore of value.
46
Lxpanslon of Surda (2012a) could also be done ln aLLempL Lo model Lhe prlce acLlon of
8lLcoln whllsL lncludlng Lhe lnfluence of speculaLlve behavlour, a proxy of whlch may be
search englne popularlLy.
8lLcoln ls unllkely Lo emerge as a general medlum of exchange. lnsLead, as wlLh many
revoluLlonary Lechnologles, usage and lnnovaLlon can expand lnLo orlglnally unexpecLed
areas. 1he 8lLcoln proLocol represenLs a glganLlc Lechnlcal breakLhrough and could provlde
Lhe basls and lnfrasLrucLure for remlLLance and paymenL soluLlons markeLs ln Lhe same way
LhaL Lhe lnLerneL faclllLaLes lnnovaLlons ln cloud sLorage and emall proLocols. 8y compeLlng
wlLh lncumbenL monopolles ln Lhese areas, any lmprovemenLs lL brlngs ln elLher speed or
decreased LransacLlon cosLs wlll ulLlmaLely mean LhaL 8lLcoln wlll have had a poslLlve lmpacL
on global soclal welfare.













47
8|b||ography

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