Recently, there has been a bit of a kerfuffle in the Austrian economics world concerning bitcoin. Gary North, a well known Austrian, wrote a series of articles calling bitcoin a Ponzi scheme. Refutations have been written by various authors arguing through the Austrian school itself. I would like to take some time to shed some light on the issue and perhaps bring some new opinions to the discussion.

Mather goes through North’s claim, refuting bitcoin as a Ponzi scheme and ends with

There is a single trait that Bitcoin can be said to have in common with highly successful Ponzi schemes: a dramatic appreciation in price.

And correlation is not causation. North seems to have compared bitcoins with ponzi schemes and concluded that since they share similar characteristics they must be one and the same. But as we know what smells like teen spirit may not necessarily be teen spirit.

North says that “defenders of Bitcoins say a genius created a new money” in an attempt to claim it is centrally authorized like fiat money is. But Satoshi did not single handedly create crypto currency. He solved the double spending problem. Digital currencies have been around for a long time. Satoshi added to years of work, experience, failed experiments and research to solve a critical flaw in the implementation of digital currency. His solution was released in the form of the bitcoin protocol. It didn’t materialize out of the blue and neither did Satoshi on his own give value to bitcoins. Which takes us to the next objection.

North uses the intrinsic value argument against bitcoin saying that it is “made out of nothing”. He uses Mises’ regression theorem of money implying that bitcoins have never been used “for their own sake” therefore they cannot be money.
[ The regression theorem tries to impute how a currency could have come about and how it would have become accepted as a medium of exchange. To summarize the theorem: a good is first valued for its use, then it starts becoming used in exchanges.]
North argues that since bitcoin can’t be used “for it’s own sake”, it fails the first step and can’t become money. But the fact is that bitcoin can be used for it’s own sake. It is the fastest method of transferring capital from one person to the other over vast geographical distances. This service of bitcoin is considered valuable by people which is why bitcoin is exchanged for fiat and commands a high price to do so. Even if bitcoin never makes it as the default currency of the world this use value is important to people, as has already been expressed by its market price. This November bitcoin transaction volume exceeded that of Western Union and Paypal.
[Stats by coinometrics]

Erik Voorhees made the same argument in favor of bitcoin as a reply to Peter Schiff’s attack on the digital currency

When you suggest that bitcoins have “zero intrinsic value”, you are only considering the currency unit itself and ignoring the payment network… But — and this is absolutely critical — the payment network has vast utility.

I find it startling that North is using a version of the intrinsic value objection, when he is aware of the subjective theory of value. In fact I have quoted him on subjective value numerous times. The fact is that bitcoin is valuable because people consider it valuable. It has nothing to do with it being a ponzi scheme. Nothing has value “for it’s own sake” and North knows this.

There is no central authority issuing bitcoins and selling them to new entrants. There is a market exchange process with voluntary traders buying and selling. The only new bitcoins being produced are rewarded to miners who are helping maintain the blockchain. You can argue that ‘early adopters’ are winning, but this is the case with any speculative investment. Early adopters do always seem to win. Of course they are the ones who took the most risk. But what you cannot claim is that the winnings are at the expense of the new entrants, becuase these are voluntary exchanges.

I do not blame North for not understanding bitcoin better. There is a lot of misinformation flying around the electron tubes. But if he wishes to express a strong opinion on the matter he owes it to bitcoin to at least study it more fully. Bitcoin could very well be the most revolutionary invention of the 21st Century.