Ethereum, Mises, & Why Cryptos Are Not A Bubble
Bitcoin satisfies Mises’ Regression Theorem as money and that’s why it’s so confusing to some many people.
So many people simply misunderstand what cryptocurrencies are and what they can be. Even to the informed skeptic they represent a sea-change in thinking which betrays their fundamental misunderstandings about the nature of money and how it comes to be.
And because of this, and our familiarity with money since we use it everyday, that skepticism is deeply ingrained in their brains; logic be damned.
Ludwig Von Mises spent a lot of time trying to figure out what money actually is. In the end he developed his Regression Theorem. In short, a thing can only rise to be money if it had value as a commodity before it became money.
Mises and Latent Demand
The process of utilizing the thing as money eventually overwhelms the previous uses for the thing and its value is then determined almost purely based on its demand as a money.
This article at Mises.org does a great job of explaining why cryptocurrencies fulfill Mises’ requirement for ‘antecedent value’ far better than I’m willing to at this point.
What I figured out immediately when I saw Bitcoin back in 2010 is that, at its core, it is simply and encrypted packet of information. And, so, by extension, if encrypted packets of information traversing the internet can have value, then Bitcoins — being an encrypted ledger of transactions themselves — have value.
I like to use the analogy that if IBM’s supply chain information is moved around the internet to communicate with subsidiaries via encrypted packets then they are a great analogue to Bitcoins.
IBM’s data has value, so therefore the packets themselves have value. In effect, the internet itself creates the ‘antecedent value’ for Bitcoins by proxy.
Moreover, as Peter St. Onge states in his article linked above:
It’s the antecedent demand, even latent, not the previous buying and selling, which counts in importing value via the Regression Theorem.
To give an example that satisfies both liberalizations, a benefit such as anonymous wire transfers is both a money-related benefit and is also a service that didn’t previously exist. In a liberalized Regression Theorem, this benefit would count as the antecedent demand giving the spark of life to a scarce cryptocurrency.
This is what I’ve been telling people since 2010.
Which brings me to Ethereum.
Ethereum’s Big Trade
In truth, this blog post came from a comment thread on my latest article at Seeking Alpha where I responded to the tired criticism that ‘It’s all fake.”
If technology has value then the companies that produce the technology have value. Trading Ethereum tokens is not really that much different than trading stock… the difference is that the stock isn’t more liquid than the token.
Ethereum, or any of these IaaS tokens can function as both [tech and currency] at the same time because they’ve rolled up the transmission system, the exchange itself, into its structure.
So, they can rise in liquidity to the point of satisfying Mises’ Regression Theorem as a commodity capable of becoming a money.
They have no alternate use except as a medium of exchange, a unit of account and (potentially) a stable store of wealth. [a crucial point]
They already satisfy the first two criteria. The last one is the trickiest.
And that’s what the focus of the development is one at this point…. increasing transaction density and network performance to create real competition for existing government-issued currencies.
That’s all they need to rise to the level of money… that and the confidence of the people using it, which will ultimately be determined by the market.
And that’s what makes all of this so confusing to most people. Our lives are proscribed by money, we use it everyday. It is one half of nearly every meaningful decision we make, and yet, we understand how it works about as well as the non-mechanic understands a car.
Money is a tool. Ethereum is a money that is a tool first and a money second. But, it is its value as a tool, its network, that gives it its value which we can directly decide upon without having to go through a centrally-controlled medium of exchange, i.e. the dollar.
The Network is the Money
In other words, the collapsing of the network, the costs of maintaining that network and the technology of the network into the value of the token, be it Ethereum, ERC20s, EOS, NEO, OMG, WAVES or STEEM removes the need for paying the middle man.
Those middle men are first, the central bank issuing the credit money, and second, those that control the infrastructure itself.
Those are the guys who have been making trillions off controlling ‘The Wire” (bandwidth) when controlling the wire should be like every other first order commodity and have its cost to consumers driven down to just above its cost of production.
That’s not the case right now. And those that profit most from that system are the cryptocurrencies ‘ biggest enemies. The costs of maintaining control over money will rise and profits will fall. Like Mises’ Regression Theorem implies, market forces will always demand the superior money.
And drive the controllers out of business.