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Bitcoin Value Part 3: Konrad S Graf’s Bitcoin Value Theory

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This article is the third installment of a 4-part series on the theory and origin of Bitcoin value. In the first two articles, we looked at two different value theories presented by two prominent thinkers in the Bitcoin community, Konrad S. Graf and Detlev Schlichter.

In the last installment of this series, part 2, we looked at the Bitcoin value theory advanced by Detlev Schlichter. His theory holds that Bitcoin, or any other modern currency, does not need to posses a direct-use value in order to become a currency. The fact that other currencies already exist absolves Bitcoin from having to undergo the full transitory process of going from being a regular commodity, becoming a medium of exchange, and then becoming a widely accepted currency. Bitcon can merely “piggyback,” or bootstrap, onto the pre-existing currencies through their established price systems and can gradually replace them, eventually becoming a unit of account in itself. At the end of part 2, we concluded that Schlichter’s theory for the origin of Bitcoin value is a very accurate description of the value bootstrapping process, but it does not provide a satisfactory solution to the real problem at hand. Schlichter’s theory does not explain how Bitcoin became a medium of exchange that was capable of bootstrapping to fiat currency in the first place. In order to provide a sound economic theory for the origin of Bitcoin value, we must determine how Bitcoin became a valuable medium of exchange, rather than treating its value as a given and merely describing its linkage to fiat.

In this article, we will examine the theory advanced in part 1, Konrad S. Graf’s Bitcoin value theory.

A Summary of Graf’s Bitcoin Value Theory

Graf’s argument, as covered in part 1, states that Bitcoin does indeed have a direct-use value and is currently going through the transitory process entailed in Ludwig von Mises'(picture below) regression theorem. According to Graf, there is no question as to whether or not Bitcoin violates or adheres to the regression theorem; this issue is not a question of economic theory, but rather a question of history. The real question here is: At what point did Bitcoin go from being a consumer’s good to a medium of exchange, when was the last day of barter?

Once we recognize this question as the real problem involved in determining the existence of a direct use-value in Bitcoin, all we have to do is look to Bitcoin’s history in order to obtain a satisfactory solution to the problem at hand, according to Graf. If the solution to this conflict is as simple as identifying Bitcoin’s last day of barter, then we can say with complete confidence that Bitcoin had a direct-use value the day before the first fiat-for-bitcoins exchange ever took place. With a brief look at the “History” page of, Bitcoin attained an official exchange rate on October 5th, 2009. If we adhere to Graf’s Bitcoin value theory, which maintains that Bitcoin did indeed have a direct-use use value, then October 4th, 2009 was the last day of barter for Bitcoin. At that point in time, Bitcoin was solely a consumer’s and was not a currency in any way.

However, answering this historical question does not reveal any information on the valuations imputed upon Bitcoin before it attained an exchange ratio with fiat currency. Graf says that this lack of data does not matter, though, because the regression theorem is an apoditic truth, it can never be violated by any good in the process of becoming a medium of exchange. So, even if we do not know explicitly what Bitcoin’s direct-use value was, we still know that one necessarily existed. Otherwise, it would never have become a medium of exchange and it would not have established a definite exchange rate with the various fiat currencies. Graf argues that as long as we can determine that there was a period of time in history when Bitcoin had no monetary value, then there was definitely a direct-use value present regardless of whether or not we can identify what that use-value was. Therefore, the regression theorem is satisfied.

Although Mr. Graf argues that identifying Bitcoin’s use-value is not a requirement in determining whether or not that value actually existed, he still attempts to identify this elusive use-value. He cites the historical work of Peter Surda in providing his hypothesis on the subjective valuations of the “pre-exchange-value” era in Bitcoin’s history. The early Bitcoin miners and users, he claims, did not value Bitcoin as a currency; rather, they likely had some other valuation that had something to do with an interest in the technology involved in Bitcoin or the protocol itself. The value came from the satisfaction experienced when solving a problem, exposing a bug or flaw in the system, or just tinkering with a new technology. Regardless, these valuations were entirely subjective and their contents do not matter for the purposes of praxeology. All that matters is that the valuations took place and that they had logical consequences, which of course resulted in Bitcoin embarking upon a journey of becoming a legitimate currency.

Confusing Motives and Ends

Konrad S. Graf
Konrad S. Graf

But, there is one major flaw in Graf’s theory and his speculations on the subjective valuations that made up the origin of Bitcoin value. In his theory, Graf has confused motives and ends. He speculated that the use-value of Bitcoin was the satisfaction, or fun, gained from solving a code, advancing computer science research, etc. However, those satisfactions were not ends, they were merely factors that motivated the early Bitcoin miners and developers to test its viability as a currency. Satoshi stated explicitly in the White Paper that his intent was to create a trustless, digital cash system. Because of this explicit statement of intent, the ends aimed at when working on Bitcoin are clear; anyone who decides to work on developing the protocol or testing its strength does so to determine Bitcoin’s validity as a currency. There is no question on that matter, the ends involved in working on Bitcoin have been unequivocally stated in the White Paper. Therefore, any kind of satisfaction gained from testing the viability of Bitcoin can only serve as a motivation for taking on the task, not an end in itself. The end is making Bitcoin a better currency, the motivation for doing so is advancing the scope of computer science. No matter what the circumstances are, “advancing the scope of computer science” can never be an end that is aimed at, it can only act as a form of social recognition which serves to motivate individuals to pursue ends. An individual cannot create a new coding language by advancing computer science, that is totally illogical. The individual advances computer science by creating a new coding language. The same logical rules apply to Bitcoin. One cannot strengthen Bitcoin by advancing cryptography, he or she must advance cryptography by strengthening Bitcoin.

By Nic McPhee [CC BY-SA 2.0], via Flickr
By Nic McPhee [CC BY-SA 2.0], via Flickr

Of course, Graf would very likely fall back on his argument that, no matter what, the regression theorem cannot be violated, so whether or not he has confused motives and ends is of no importance to the matter at hand. He would likely argue that Bitcoin is a currency, therefore it satisfies the regression theorem. The regression theorem can not be violated, nor can it be wrong because Ludwig von Mises said that it is a universal law. But is that argument not a resort to aggressive dogmatism? To say that Bitcoin fits into the regression theorem because the theorem says that it must do so engages an a bout of circular reasoning. Mises was indeed a brilliant man and is seen by many as an authority in Austrian theory, even in posterity, but that does not relegate Mises to a position of divinity or omniscience, so it does not absolve his theories from criticism. In order to keep economics scientific, all theorems must be examined with a critical eye no matter how fond we are of their authors. Arguing that the fact of Bitcoin being a medium of exchange confirms that it had direct use-value because the regression theorem is universal law does nothing for the problem at hand; such statements do nothing but lend more ammunition to the critics of Austrian economics who claim that its practitioners are unscientific. We should dismiss Graf’s Bitcoin value theory simply because he resorts to such dogmatic tactics

In conclusion, Konrad S. Graf’s theory on the origin of Bitcoin value does not satisfactorily answer the question at hand. Bitcoin was deliberately created to serve as a monetary system, with the bitcoins being intended to serve as currency. How can there be any direct use-value for a currency that was designed to function as a currency and nothing more? How can Bitcoin have a direct use-value if it was not made of any physical materials that could have been used as consumption or production goods? Is Mises’ regression theorem correct, or is it a fallacious theory? We will attempt to tackle these important theoretical problems in the fourth, and final, installment of this series on the origin of Bitcoin value.

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10 comments on “Bitcoin Value Part 3: Konrad S Graf’s Bitcoin Value Theory”

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  1. “Bitcoin was deliberately created to serve as a monetary system, with the bitcoins being intended to serve as currency. How can there be any direct use-value for a currency that was designed to function as a currency and nothing more?”

    The key for action theory is to look at action. And particular actions are performed by specific people at definite times and places, one and then another, and then another. The ends/means structures of these many discrete actions are heterogeneous and by no means necessarily consistent from one person to another or even for the same person from day to day. Praxeology discusses value in universal terms in relation to action as such, but to interpret particular “historical” actions, it is necessary to use different sets of tools to then try to consider what the actual ends/means structures of the various people involved were. This is a matter for research and interpretation. Patterns my emerge or appear to, but whatever one person may or may not have had in mind does not necessarily tell us about the structures of action of all sorts of other, different people at different times, each taking different actions all their own. The key for a methodological individualism approach in this case is that there is no monolithic “motivation” that can be ascribed to all of these different people at different times one way or another.

    If you haven’t seen them, check out my later papers on this as listed above and my views may become much clearer. Peter Surda has also been great at collecting specific historical information from people who were involved in the early days and I quote some of that here and there too. There is much more detail on my interpretation of the regression theorem (it is a very specific theoretical point and has often been interpreted too broadly and vaguely) and of the history of money and of Bitcoin.

  2. I suspect from initially scanning the above that you are referring to my very first article on Bitcoin from February 2013. I continued working on the issues after that and went into much more careful detail in two later papers. They are listed at the top of this page: “On the origins of Bitcoin: Stages of monetary evolution” (3 November 2013) and “Revisiting conceptions of commodity and scarcity in light of Bitcoin” (17 March 2014; a revision of something earlier).

    1. Hi, Mr. Graf! Thank you so much for taking the time to comment on my article. This piece is actually in reference to “On the origins of Bitcoin: Stages of monetary evolution.” I think all of the points I brought up in this paper apply reasonably to the arguments you advanced in that paper. I’m working on a Bitcoin value theory project of my own and I’d love it if you’d be willing to take some time out to discuss some things with me.

      1. All right. Good to know. Will try to look more carefully another day. Maybe you can send me the gist of your approach?

    1. Intermediate ends are merely temporary goals that serve to further the progression towards the attainment of the ultimate end. Isolate the intermediate ends from the ultimate ends and they suddenly become worthless. Laying a foundation to a house means nothing to a person who is paying for a full house. So it doesn’t really matter what the intermediate ends are, what really matters is the ultimate end. The ultimate end of Bitcoin development is to produce a viable currency. All intermediate ends involved in that development process are necessarily aimed at advancing towards the attainment of the ultimate end of making a good currency. So it doesn’t matter what the short term goals of the people working on the protocol are, what matters is that they are working towards the realization of a final end. Plus, Graf isn’t even talking about intermediate ends in his paper, he is definitely talking about motivations. He didn’t detail the various goals that the early developers set out to meet. He tried to explain why they valued Bitcoin. He explicitly stated things like advancing computer science and having fun, which are motivations, not even intermediate ends. Like I said in the article, you cannot improve cryptography by advancing computer science, you advance computer science by improving cryptography.

  3. Well, since Bitcoin did trade prior to being used as a medium of exchange, it must have had non-monetary value, irrespective of what the regression theorem says. That’s an empirical, not a theoretical, issue. From monetary point of view, there is no other type of value than monetary and non-monetary. We do not need to understand the motivations of the people involved to make this conclusion. The only way to disprove this is to find an example of Bitcoin being used as a medium of exchange prior to NewLibertyStandard’s self-reported sales, not by analysing the motives of the people involved in the trades. From empirical point of view, such data could appear. So the argument is falsifiable.

    Of course, since, as early Austrians, in particular Menger and Mises, discovered that a medium of exchange must be liquid, such data cannot exist. This follows from the nature of medium of exchange as such. An illiquid medium of exchange is a contradiction and thus cannot exist. But that’s a deductive, praxeological, approach, distinct from the empirical one. You need to make it clear which approach you are taking.

    See my recent paper:

    1. Hi Peter, I’m honored that you took the time to read and respond to my article! I’m currently working on a research project about the origin of Bitcoin’s value and I’ve looked through both the paper you linked in your comment and your master’s thesis.

      The problem I have with ascribing either monetary value or non monetary value to an object is that those two classifications do not account for objects that were created solely to act as a currency but do not yet have any significant demand. They can’t be considered a non-monetary consumer’s good because they have no other use than to facilitate exchange. They also can’t be considered commodity money because they are, of course, not yet money.

      The point you made about motivations not being a concern of praxeology is exactly my point; because Graf mixed up motives with ends, his speculations on the origin of Bitcoin value are invalid. Furthermore, the end of any crypto-currency is indeed to create a currency. So any work done on the infrastructure of that crypto-coin serves that definite end, regardless of the motivations involved in taking up the task. But that brings us back to the dilemma: what is the non-monetary use value of something that was designed solely to be a money? How can something gain exchange value if it never had any direct use value? You said that Bitcoin must have had a non-monetary value since it was traded before it was used as a medium of exchange, but that isn’t really true. Again, Bitcoin was designed to be a medium of exchange, that was Satoshi’s intent from the start. So any exchange done with Bitcoin before it was used as a legitimate currency was done either for the sake of testing its strength as a medium of exchange or for use as a medium of exchange! There is no other way that Bitcoin can be consumed; it cannot be deconstructed and used to create something else. You can see the circular reasoning begin to take place.

      I have a theory about the nature of money that I will be arguing for in my paper on the origin of Bitcoin value. I’d love to talk to you about it if you have the time. Do you have an email address I could reach you at?

  4. Mirco Romanato

    There is a simple answer and it is compatible with Mises Regression Theorem.
    The initial exchange value of bitcoin was ZERO because it had no direct use value.


    Any speculation about future value giving a non zero evaluation would give some current positive value.
    Anyone willing to obtain bitcoins to play with them without the hassle of mining them would result in some positive value for bitcoins.
    Acquiring them to make a political/social statement would give them a positive value and would had value only if the acquirer would spend a significative sum (significant is, obviously, subjective).

    Acquiring bitcoins in any way will clash with their limited nature and the costs of mining and will start the positive feedback loop.

    All of these are, in my opinion, what I would call “noise”. They are random happenings and they will fade away without a significant positive feedback loop to amplify them.
    But Bitcoin is designed to have the ideal money characteristics and it have the capacity to start a positive feedback loop of value as a indirect mean of exchange.

    it is not a chance bitcoins acquired monetary value an year after the paper was released and many months after the Genesys Block was mined. The time spent was proof of the lasting nature of Bitcoin and another feature needed to increase the positive feedback loop of the currency.

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