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Austrian economics helps us make sense of bitcoin

The idea of bitcoin is now just over 14 years old. We are so early, as they say. And yet, within this short period, bitcoin has swept the world by storm. It has already become one of the largest currencies in the world, established a global user base and a globally recognized brand, been declared legal tender in multiple nations, and is a frequent topic of discussion among the world's most powerful institutions.

The ingenious technological advancement of bitcoin unlocks incredible potential for its users. Proof-of-work timestamping with a difficulty adjustment creates a system of nodes anyone can run to verify the entire ledger to ensure their money is not diluted and that money is only spent by its rightful owner. The programmability of bitcoin script allows complex spending rules from multisignature to instantaneous payments on the Lightning Network and beyond. Derivatives of bitcoin use the blockchain construct to project many more fanciful and dubious applications of the technology, which at the very least is a testament to bitcoin’s enrapturing potential.

The technological possibilities of bitcoin and its implications lead many to believe that there is a need to rewrite everything we know about economics and human society. Many believe we are all but the blind men trying to figure out the elephant they just came across. Some even go so far as to say there is no way to define bitcoin, and that it just is. Altcoiners have often tried to introduce the term “cryptoeconomics” in order to analyze the game theoretical incentive building of their extensive monkey jpeg architecture.

Poetically, that “bitcoin simply is” is a beautiful sentiment. Given the global and programmable nature of bitcoin, it is hard to know all of the ways in which someone might value and use the protocol, now and certainly in the future. It is wise to remain humble towards a technology with so much potential.

That being said, I don’t believe we are completely in the dark.

Long before bitcoin, there existed intellectual traditions that sought not to just present hypotheticals about the world as it currently stands, but to establish timeless explanations of man’s nature regardless of his particular circumstances.

Bitcoin is not an organism separate from people. Bitcoin is people. Individuals hold keys, run nodes, and perform proof-of-work. The network is an emergent order of the people who find themselves drawn to the technology for whatever reason they might.

Because humans are dynamic, and the future is uncertain, we cannot perform controlled experiments to study the social sciences. Instead, we study human action in a deductive method starting at fundamental axioms. Every individual makes self-interested choices to use the means they have available to try to improve their conditions. Each one of these choices is constrained by the very logic of choice. In the Austrian economic tradition, the study of this logic is called praxeology.

By studying praxeology, we can deduce timeless truths about human action. On the one hand, we can create a theoretical framework by which to understand the economy as it is and the real choices real humans have made, by thinking of humans as purposeful individual actors rather than mere data points. We can also learn to disregard historical narratives that require contradicting what we know to be true about the laws of human action. Finally, we can make qualitative statements about how humans act given certain conditions, which can better inform our attempts to make qualitative judgements about the future of the market.

Such a framework is necessary to make sense of the fact that bitcoin has succeeded to the magnitude that it has. Simply looking at charts merely tells us data about what happened, but not any meaningful explanation of why such events took place. As Ludwig von Mises points out in Human Action:

History cannot teach us any general rule, principle, or law. There is no means to abstract from a historical experience a posteriori any theories or theorems concerning human conduct and policies. The data of history would be nothing but a clumsy accumulation of disconnected occurrences, a heap of confusion, if they could not be clarified, arranged, and interpreted by systematic praxeological knowledge.

Many have been blindsided by bitcoin’s meteoric growth, but those who thought through the timeless lens of purposeful human action were often able to see the potential of the technology based on what they knew about how humans deal with future uncertainty with the aid of a medium of exchange, and what qualities make a good best suited for this purpose.

While “cryptoeconomics” type arguments might have value in engineering, the invention of bitcoin did not also invent a new way that humans make choices. Instead, it just gave them an additional means to be used towards their ends. Economic law is exactly as it was before the genesis block. Further, known economic law also helps us understand what foundational problems are being solved with a technology like bitcoin, just as with any medium of exchange, and this in turn actually provides important information on how to consider what people are likely to truly value. Those who have used “cryptoeconomics” as a framework have come up with many fanciful governance ideas that look nice on paper, but those who understood the importance of a reliable and verifiable medium of exchange knew to focus on security, backwards compatibility, decentralization, etc. This approach has been continually proven in the marketplace insofar as bitcoin remains king.

In this newsletter, I hope to foster an appreciation of the Austrian tradition, along with other fields of study, to help shine a light on why bitcoin is important, why bitcoin is successful, and why I believe this will continue into the future at an accelerated pace. While we may never fully grasp bitcoin, we can go a long way by examining the fundamental logic, motivations, and implications of human action.

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