Bitcoin and Austrian Economies
I probably know what you are thinking—probably the same thing I thought in 2014 when I first heard of Bitcoin. My business serves as an alternative asset custodian, which means that we assist people with investing in all sorts of unique, and sometimes even weird, assets (mostly through tax-free or tax-deferred retirement accounts). One of the best things about the help we provide is that we do not advise or recommend investments. Therefore, it does not matter to us what our customers invest in, so long as we can securely hold and accurately report on the investment.
Believe me: Some people can come up with some strange things to invest in! To me, none were stranger than the one we were asked to custody back in 2015. It was this thing—or was it even a thing? I wasn’t really sure. After quickly researching this “Bitcoin,” I affectionately labeled it as “nothing that is apparently worth something.” To be honest, this was kind of a running joke around the office.
However, I started to notice this sizable following for this mysterious “cryptocurrency,” and no one else in our industry was providing regulated custody to this group. Being an opportunist businessman, I lead my staff to develop a system and technology to custody these assets and protect them from money laundering, bad actors, hackers, and everything else I had read were the greatest risks to a cryptocurrency investment.
Did I believe in Bitcoin? Absolutely not. Did I understand Bitcoin? Absolutely not. Did I have a desire to understand it or invest in it? Absolutely not! But the same could be said for most of the 20,000 assets that we hold for our clients. I simply had a desire to fulfill my passion and the calling of our business which is to empower Americans with the freedom to invest in whatever they wish to invest in without being limited by the government or their investment broker.
This is where I must stop and not confess but profess my Libertarian-leaning views. I might as well, because they are splattered all over my business as well as the remainder of this paper. I am at my very core first a child of God and a passionate Jesus follower. Second, I am a patriotic American. I believe in personal freedom and choice, and I am not a fan (in most cases) of government intervention or manipulation. And, of course, I believe in capitalism.
Years ago, through these beliefs and overall concern about the U.S. economy, I became a follower of Austrian economics. I will cover Austrian economic theory a little later, but first, back to Bitcoin.
As we released our regulated custody product for Bitcoin, I began to meet many people from the industry. Some were real quacks! There were plenty, however, that were smart and had honest contributions to bring to the investment space. So, my company helped organize the discussion, and in late 2016, we helped put on the first Bitcoin conference for institutional investors. I asked the smartest in attendance what excited them so much about Bitcoin—to the point that many were willing to now devote their professional lives to it. The first four I asked provided similar responses, and within the first few sentences, each mentioned Austrian economics and how Bitcoin was a possible way of reintroducing its most important theories to the world.
I must admit, I had studied these theories previously, but I did not get it. How does “nothing that’s worth something” correlate in any way to Austrian economic theory? So, with an open mind, I began to research. Allow me to explain so we can explore the theory and the connection to Bitcoin together!
What is Austrian Economics?
The Austrian School of Economics is a heterodox school of economics based on
methodological individualism, the concept that social phenomena result exclusively from the actions and choices of individuals. This school of thought is typically associated with libertarianism. Austrian Business Cycle Theory (ABCT) explains why many Austrians view commodity-backed (typically gold-backed) currency as superior to fiat currency. In layman’s terms, ABCT claims that excessive inflation of money supply, typically driven by a central bank or government, creates an artificial boom that ultimately results in its own bust.
This boom is driven by malinvestment, which is investing in the wrong lines of production because of a distortion in price signals. This is caused by excessive expansion of credit, often in the form of artificially low interest rates created by the central bank. However, a “bubble” occurs as malinvestment results in an inflation of goods, and eventually a bust will occur when banks become risk-averse to the accelerated pace of the boom and consumers re-establish their preferences of consumption and saving at prevailing interest rates.
The crisis can be delayed by continuing to pump new credit into the economy. But by delaying the inevitable bust, over-leveraging becomes even more severe and, thus, leads to an even bigger bust. At this point, which is full-blown crisis mode, the economy must adjust. As we know, this adjustment period is difficult for the public, as wages fall and unemployment rises, and public sentiment quickly turns from optimistic to depressed and despair during this bust period. Austrian economics is based on true supply and demand that is free from manipulation or “currency printing” by a centralized bank or government.
What is Bitcoin?
I will avoid a deep dive into the technical side of Bitcoin in this paper. Bitcoin was the first use of blockchain technology, which requires its own very technical explanation but is nonetheless very fascinating, has many uses, and in many ways could change our world. That said, for this paper, let’s identify a few key features you should know about Bitcoin:
Bitcoin is decentralized. The Bitcoin network is not a company, is not owned or controlled by anyone, and cannot be changed or manipulated by anyone or any government.
Bitcoin is truly scarce since only 21mm Bitcoins will be released into distribution. The timing of release of these Bitcoins is pre-programmed and known by all. It is immutable. It is arguably the only form of payment or medium of exchange in the history of mankind that has true unmanipulable scarcity and supply and demand. Because of this, it is deflationary (opposite of inflationary), which is praised by Austrians (and criticized by Keynesians, who believe in using government spending and inflation as a remedy for economic crisis).
Bitcoin has all the characteristics of money (durability, portability, scarcity, divisibility, and recognizability) based on the properties of mathematics rather than relying on physical properties (like gold and silver) or trust in centralized authorities (like fiat currencies).
Bitcoin is transparent. Everything from the programming of the network to each transaction performed on the network is public and viewable by anyone. While we have all heard about criminals using Bitcoin, misuse of money and money laundering is no more prevalent in Bitcoin than with fiat currencies. Further, as technology expands, Bitcoin and blockchain will play a greater role in helping stop illegal use of funds around the world. A top DOJ official once told me they “wish every criminal would use Bitcoin” because it would make their job much easier.
Bitcoin is global. At current growth rates, some estimate that soon, more people in the world will own Bitcoin than own a United States dollar. Bitcoin has no boundaries and is available to anyone with access to the Internet or satellite network. Regardless of government restrictions, it can be accessed by banked or unbanked individuals around the globe.
Bitcoin and Austrian Economics
Bitcoin is a technology and asset birthed by the global financial crisis of 2007-2008. At that time, many Austrian economists dismissed it as fiat “magic money,” much like I did. But just over a decade later, many Austrians are very open to Bitcoin and believe it, at least potentially, qualifies as sound money and is firmly within the ideology of 20 -century pioneers Mises and Hayek.
Many Austrians initially criticized Bitcoin because they felt it came out of nothing and had no use as a commodity in and of itself, thereby breaking Mises’ Regression Theorem and rendering its value baseless. However, Jeffery Tucker helped champion the belief that the value of Bitcoin derives from itself, in the sense that it is simultaneously a technology and a currency—an idea that was understandably complexing to many economists at first, especially those that didn’t understand the technology.
Yet, Bitcoin was indeed the first to be both a payment solution and unit of currency at the same time. The utility of the blockchain provided Bitcoin value before it even became a medium of exchange (which was months after launch) and, thus, actually confirmed Regression Theorem.
Many Austrians now realize that their belief in the gold standard requires governments to institute it and not manipulate it, which will likely never happen. Hayek came to believe in the denationalizing of money, or free banking system, back in the 70s. Bitcoin is likely the first currency of the modern era to put this Hayekian ideal into action.
While some Austrian Economists are still skeptical about Bitcoin, I have found that most true “bitcoiners” (those who believe and invest in it not because it is high or low but because they believe it is the future of money, or “digital gold”) are, whether they realize it or not, proponents of Austrian Economic Theory.
Bitcoin’s value may go up, it may go down, and, who knows, it may even go away. Whether you like it or despise it, I hope this paper helps convey the economic theories driving global Bitcoin adoption. To some, Bitcoin is a joke or a scam, and to others, it is a speculative investment. For others, though, it is a deeply held passion or belief, and for many, it is a lifeboat protecting them from losing their life savings to a failing government-backed currency. I have met many people in each category. Before you speak too loudly (like I did), I challenge you to perform your own research, and then decide in which category you belong. Because, whether you like it or believe in it or not, you really should consider paying attention to it. God Bless!,
Article originally hosted and shared with permission by The Christian Economic Forum, a global network of leaders who join together to collaborate and introduce strategic ideas for the spread of God’s economic principles and the goodness of Jesus Christ. This article was from a collection of White Papers compiled for attendees of the CEF’s Global Event.