Understanding Bitcoin: Cryptography, Engineering and Economics

CHAPTER 3Economics

Different types of money have been used through the history of humanity (Szabo, 2005). In principle Bitcoin could serve as money as it satisfies the technical properties of money: it is durable, divisible, fungible, easy to transport, and impossible to counterfeit. Modern mainstream economists (Mankiw, 2003) usually assign money three functions:

• Medium of exchange. Money can be exchanged for goods and services.
• Store of value. Money can be used to transfer purchasing power from the present to the future.
• Unit of account. Goods and services are quoted in terms of the money unit.

A lot of the economic debate has centered on whether Bitcoin is or is not a currency. Bitcoin critics argue that Bitcoin does not serve the three functions of money and thus does not conform to the definition of money. Bitcoin supporters reply that an asset does not have to fulfill the three functions of money to be valuable, and call this argument the “money or nothing” fallacy (Graf, 2013). Moreover, there is some economic evidence (Koning, 2013) that the traditional three functions of money can be unbundled.

Bitcoin as a currency is more readily accepted by economists of the Austrian School (Graf, 2013; Šurda, 2012). The Austrian School is a school of economic thought originated in Vienna in the late 19th century whose method is rooted on the analysis of the actions of individuals. Some of the most controversial contributions of the Austrian School are:

• Austrian School economists ...