Value cannot be stored and many Austrian economists have explained this concept over the years, despite Keynesians and other modern economists believing otherwise. In my last editorial, “Putting an End to the Bitcoin Store of Value Fallacy,” a lot of commenters disagreed with the observations and the theory discussed. Basically, the editorial relied on Menger’s definition of “value”and posited the idea that money including gold and bitcoin cannot actually store value.
However, it doesn’t mean money’s worth doesn’t exist or that humans don’t actually give value to things like precious metals, commodities, virtual assets, or collectibles. Value is relative in a personal way, but it is not arbitrary as it is always based on what Ludwig von Mises referred to as “human action.” In the Austrian economist’s magnum opus, “Human Action: A Treatise on Economics,” Mises presents a rational investigation of free market capitalism based on praxeology.
“Praxeology is the study of those aspects of human action that can be grasped a priori,” Roderik Long explains on Praxeology.net. “In other words, it is concerned with the conceptual analysis and logical implications of preference, choice, means-end schemes, and so forth.”
So individual human action is how people make everyday decisions by using the resources or means they have obtained in life to secure various ends or goals. We can assume that value itself stems from each and every individual’s preferences or rational decision-making. “The use of resources is not done haphazardly but in accordance with an individual’s priorities — The individual ranks various ends or goals that he wants to attain,” the economist Frank Shostak asserts in his June 2018 Mises Wire editorial. This would essentially mean an individual with a medium of exchange like fiat, who wants to trade it for a cryptocurrency, sees the digital currency as a means to secure certain ends or goals. Individuals give things like precious metals and digital currencies “market value,” which is based on the number of resources market participants are willing to trade for the specific item. Right now people attempt to measure the value of a digital currency in terms of fiat or the number of dollars equal to one coin.
In the book “Human Action” published in 1949, Mises described how individuals value things in accordance with the last unit’s perceived value. “Value attached to one unit of a homogeneous supply on the basis of the value of the least important use of the units of the whole supply” is essentially what humans call “marginal value” according to Mises.
A precious metal like gold is considered a Store of Value (SoV) because it gives humans utility as well as being rare. Market participants, since they were children, have always placed a higher value on things that are rare or scarce. But that doesn’t mean a shiny rock like gold stores stable and unmoving value because that perceived value must be in accordance with an individual’s priorities. The sum of each individual’s preferences make up a market price and things can be quite different if there are lots of market participants compared to only a few.
For example, if a person was on a deserted island, then food and water would likely be more important than a few ounces of gold or even a hardware device with a few bitcoins. So it is safe for anyone to say that the storage of value function is not guaranteed in all conditions and at all times of any given economy. “In a society of free men the preservation of life and health are ends, not means,” Mises underscored in Human Action. But that doesn’t mean humans do not place value in other types of items or do so on mere whims as the founder of Austrian Economics, Carl Menger, explained in Principles of Economics:
Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.
Substitute Goods, Sound Money, and an Individual Market Participant’s Preferences Combined With the Notion of Value
So yes humans can call items like digital currencies such as bitcoin SoVs because individual market participants ‘consider‘ them an SoV. This is because we know individuals place value in scarcity and believe that some digital assets, similar to gold, can be used as a hedge against inflation. But the value each individual places on a cryptocurrency is only guaranteed if the person’s economic conditions are stable in any given economy, which we all know is impossible to predict. This brings to the equation the notion that if something is given value – like money or a good – and it does not meet the individual’s expectations (help them fulfill their ends) they will eventually substitute it for something else. For instance, the Venezuelan bolivar is pretty much worthless now and people don’t want it. You can see this as people literally weigh bundles of the bolivar for a dozen eggs and in the pictures of Venezuelan bills strewn across the streets.
If a cryptocurrency fails to provide the basic utility that’s offered by a medium of exchange (MoE) then individual market participants will seek an alternative that does it better. When BTC fees were infeasible and people had to wait hours and even days to get a transaction confirmed, users substituted it for an alternative market choice. In fact, the substitute of goods theory began immediately after transaction fees began to spike and the BTC mempool became congested. Ultimately the definition of substitute goods theory in economics says: if there are two types of goods that can be utilized for similar purposes and the price of using one good increases, demand for the substitute will increase as well. Objective data of this happening to BTC can be seen by looking at when the cryptocurrency captured 80-90% of the market up until March 2017. At that point blocks were congested, network fees began to rise, and BTC saw a steady dominance decline down to a low of 34% on Jan. 15, 2018.
With the market dominance data and the fact that an individual’s ends are not set arbitrarily, we can argue that if an MoE like BTC obstructs spending at any time with significant fees and poor user experience, people will most definitely choose an alternative. The theory of substitute goods is not an irrational decision as some would assume, as Mises declared that all “human action is purposeful behavior” and “thinking is always thinking of a potential action.” Right now, with cryptocurrencies being such a nascent technology, the majority of the 2,100+ coins in existence are speculative investments. This type of financial move is considered risky because the individual investor is unsure of the market value because there’s no guarantee a great portion of these coins will have any utility or fulfill any of the developer’s promises. From these vows, it’s still likely that at least one of the many cryptocurrencies will provide the best traits money can offer an individual.
If market participants continue to speculate on the idea that a cryptocurrency can be solely a store of value instead of a medium of exchange, however, it will not live up to expectations. An attempt to bootstrap an SoV function to a cryptocurrency in an economy that cannot be guaranteed throughout all conditions and all times in any given economy will not fit the needs of market actors unless it’s useful. In comparison, bitcoin cash aims to offer the best traits that money can furnish by providing qualities that humans prefer in regard to what people call “sound money.” This includes being mutually interchangeable by offering fungibility with concepts like Cashshuffle and Schnorr signatures. Mixing platforms have a much harder time working when a network’s transaction fees are too high. BCH offers great ease of transport by always offering low transaction fees on a consistent basis which aids portability. A cryptocurrency stagnated by expensive network fees makes an individual frustrated and often these individuals will immediately follow the theory of substitute goods based on their experience.
Bitcoin cash is also durable and easily divided which gives the decentralized currency more attributes of what humans call sound money. Divisibility is hard when fees are expensive because high fees can essentially neuter the ability to transact with the lowest amount of satoshis possible. Bitcoin cash is a permissionless currency that is scarce like precious metals, but storage costs and sending costs are considerably lower than gold or silver.
Over time BCH proponents aim to provide economic freedom to everyone in the world and many supporters are pushing for wider mainstream acceptance on a daily basis. Once global adoption is pierced, people will be more inclined to perceive BCH less speculatively because it will have universally recognizable value. The end game is when individuals who are essentially market actors consider BCH valuable because it offers the benefits of what people believe to be sound money. After fulfilling the last two steps on the chart above — General Acceptance and a Unit of Account — BCH will have improved all of what humans consider sound money. Should that occur, market participants will use it because it works as intended.
What do you think about human action and how individuals’ perception of value is based on the means they have obtained in life in order to secure various ends or goals? Let us know what you think about this subject in the comments below.
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