Bitcoin was created to be a new kind of money rooted in a vision of a market not bound by geography, banks and governments. Despite the intentions of its creators, Bitcoin is not money. It was designed with a faulty understanding of money, and as a result has a bug, a kind of a short circuit that kick-started an asset bubble and that will eventually turn Bitcoin into a toxic asset. In order to to fix this bug we need to employ the labour theory of value.

Writing at New Economic Perspectives, Eric Tymoigne, a research associate at the Levy Economics Institute, argues that the fair price of Bitcoin is zero.

Tymoigne’s reasoning is based on the the fact that money is a financial instrument. The value of a financial instrument can come from being redeemable to its issuer, from providing an income stream or from having a collateralized value. For example US Dollars are redeemable against taxes. Bonds bear interest and stocks pay dividends. Gold coins contain gold, which can be sold as a commodity.

Since Bitcoin is not redeemable, provides no income and has no collateralized value, it is worthless as a financial instrument. Thus, its “fair price” is zero. Eric concludes that “Bitcoins are purely speculative assets.”

From the point of view of modern finance, Bitcoin is not money at all.

The inventor of Bitcoin, Satoshi Nakamoto, did set out to create a new kind of money. The very first words of the Bitcoin whitepaper state that a “purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

Bitcoin is intended to be money. A different kind of money. A form of money that is not a financial instrument issued by a bank or government, as Tymoigne understands it, but a form of money that is independent of financial institutions, governments and all other intermediaries.

Bitcoin is intended to be a kind of money that can be used to make payments across the internet in a way that makes government unnecessary and doesn’t reveal real names or physical locations. As such, it does not have properties that would tie it to an issuer who could redeem it, or provide a money income, or be collateralized with a physical commodity. Decentralized money can not have the properties on which Eric Tymoigne bases fair price.

The economic school most associated with the Bitcoin community is the Austrian school, especially its libertarian capitalist adherents. This school views money as being firmly rooted in what Tymoigne refers to as its collateralized value, i.e. the gold content in a gold coin, what Austrian-influenced economists call “sound money.”

While the modern finance view holds that even with gold coins, “the gold content of the coin is not a monetary instrument, and it is not what makes the coin a monetary instrument” as Tymoigne puts it, on the hand the Austrian view is that it is specifically the gold content of a gold coin that makes it money.

Frank Shostak, associated scholar of the Mises Institute, claims “An object cannot be used as money unless it already possesses an objective exchange value based on some other use.” Murray Rothbard, one of the key theorists of libertarian capitalism, states that money cannot originate “by everyone suddenly deciding to create money out of useless material, nor by government calling bits of paper ‘money.'”

Rothbard further explains that the only way money can come to exist is “by beginning with a useful commodity under barter, and then adding demand for a medium for exchange to the previous demand for direct use.”

Though inconvenient to Bitcoin proponents, it’s clear that Austrian theory would not consider Bitcoin money, since it’s a “useless material,” which never had any “value based on some other use” prior to being money. Despite this, Bitcoin’s design has been influenced by a faulty application of the Austrian theory of sound money, especially the “gold standard.”

The logic of the gold standard is that the supply of sound money, a useful commodity such as gold, determines the value of paper money issued by governments. Paper money is not a useful commodity and therefore has no intrinsic value. The government should be limited in the amount of paper money they create to the amount of gold they have. The gold standard is a proposal to have a fixed ratio between sound money, e.g. gold, and paper money.

It is not the amount that is fixed, but the ratio. Neither the amount of gold, nor the amount of paper money is fixed in the gold standard, the ratio between them is. If the government gets more gold, it should also create more paper money according to the theory, to keep the exchange value of money stable.

The Bitcoin software is programmed so that a fixed total supply will be eventually be mined, 21 million Bitcoin, and the rate at which Bitcoin is mined is also fixed. Starting at 50 BTC every 10 mins, the rate is reduced by half every four years. As of 2016 the rate of Bitcoin creation is 12.5 Bitcoins every 10 minutes, and will become 6.25 in 2020.

Bitcoin’s creators attempted to follow the reasoning of the gold standard by fixing the number of Bitcoins, understanding it to be like paper money, but as Bitcoin does not have a source of sound money to fix the supply of Bitcoin to, they just made up a wacky formula out of thin air. Essentially attempting to fix the money supply by decree, and encode that decree into Bitcoin’s software. In the Austrian view, this results in a broken digital currency that lacks a ratio to sound money.

Bitcoin can not be rational. Its face value can not be expressed as a consistent ratio with a supply of useful commodities. It is irrational by design, just like Bitcoin would have zero value from the point of view of modern finance, it would also have zero value from the point of view of Austrian theory. Both views consider the entire exchange rate of Bitcoin to be a speculative bubble, but neither can elaborate on how this bubble came to exist.

The Austrian schools of thought subscribes to the “subjective theory of value” developed by economists such as William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century.

Without an objective measure of value, money has to be itself a thing that can be used. For value to be subjective, money has to be an object, the utility of which measures the price of all of the things priced in it. For this reason, the Austrian school can not see the forest for the trees when it comes to Bitcoin, because it can not see the obvious source of value as being the computational power used to mine Bitcoin, as Bitcoin is not directly backed or collateralized by the mining rigs and the power they consume.

The subjective theory of value was developed in opposition to the labour theory of value, especially in opposition to socialist views and the ideas of Karl Marx. However Marx’s theory of money is not rooted in redeemability, nor collateralization, nor income, nor usefulness, but rather in labour.

Ironically, while libertarian capitalist theories of money can not account for Bitcoin, Marxist theories of money can. The face value of Bitcoin represents a certain worth in terms of the labour time embedded in the computation power used to mine it. The Marxist theory of money is a Proof of Work theory.

For Marx, the value of all commodities is not subjective, but objective; all commodities have a value that is created by the labour required to produce them. The reason that money can be used as a way to express the price of other commodities is because it represents a certain amount of labour, which is also what the worth of the other commodities is based on. As Marx states in Grundrisse “1/x ounce of gold is in fact nothing more than 1/x hours of labour time materialized, objectified.”

Marx illustrates that the face value of money is a rational number. It always represents a specific ratio. In the case of gold, Marx employs the ratio between the amount of gold and the amount of labour, the work:gold ratio. The value of the total volume of gold is derived from the amount of work required to produce it.

For something to be money, it needs to have a rational value, and it is that value in which the prices of all other commodities are expressed. Money, as such, has no price, and can not.

Take for example an economy that produces apples, oranges and coconuts, you could have a table of prices that lists apples and oranges in terms of coconuts, oranges and coconuts in terms of apples, and apples and coconuts in terms of oranges. You could not have a price of apples in terms of apples, nor oranges in terms of oranges, nor coconuts in terms of coconuts, or rather that price would always be 1.

If we chose to use coconuts as money, presumably because we’re coocoo for them, how many apples are worth a coconut? How many oranges are worth a coconut? The value of the coconut is its socially necessary labour time. Say that is 10 hours. Therefor a coconut is “worth” 10 hours. Say an orange is worth 2 hours and apple is worth 5 hours, the price of the orange is 0.20 coconuts (20 cococents), and the apple is 1/2 a coconut.

As coconuts are money, more are produced than are used, since once you use it to make a chutney, you can’t spend it as money, and you can’t save it. So its original use value as food is replaced by its new use value as money.

Yet, the value of a coconut is still rooted in socially necessary labour time, like the commodities that are priced in it, this is why it can be used to compare all the other commodities, because its value is rooted in the same thing: labour.

If there are not enough coconuts for the savings needs of the economy, demand for coconuts will go up. The exchange value of coconuts will temporarily rise, but will fall back to its value as more labour is drawn into coconut production, and away from the production of the other commodities. The market regulates the value of coconuts.

Money can express the value of commodities, because both money and the commodities priced in it can be reduced to a ratio of work to supply.

While the libertarian capitalist theory is not useful in determining the value of Bitcoin, Marxist theory is. Bitcoin does not need to be backed or collateralized in any reserve of useful commodities, but instead in the labour time required to produce it. Proof of work.

The Bitcoin software employs an algorithm that increases the difficulty of the work needed as more mining capacity is added to the pool to keep the rate at the current limit that is configured in the software. This means that while the face value of Bitcoin represents a certain worth in terms of labour, this worth is not consistent. There is no fixed ratio between work and coin. More work creates more value, but instead of creating more coins with the same value each, it creates the same number of coins. Each coin has more value.

As more computational power, representing ever greater amounts of labour, is employed in Bitcoin mining, the number of Bitcoins produced does not go up, instead, the value of each Bitcoin goes up, creating a positive feedback loop. The more Bitcoin goes up, the more people are attracted to mining it, the more it goes further up.

The Bitcoin creators model Bitcoin as a kind of paper money with an arbitrarily fixed supply and therefore an irrational value, attempting to follow Austrian theory, rather than model it as a money commodity according to Marxist theory, which is regulated by the market.

While at first Bitcoin’s exchange rate was only of interest to the economy of enthusiasts who are attracted to its intrinsic decentralized features, eventually investors and speculators took notice, and Bitcoin become the purely speculative asset Tymoigne accuses it of being. The positive feedback loop quickly became a short circuit, and kick-started an asset bubble.

As the bubble grows, the capital gains from Bitcoin become larger, and exceed returns from other forms of investment. Investment portfolios will over time start to carry a larger portion of Bitcoin, squeezing out other investment options.

During a bubble, It becomes perfectly rational for investors to pay a foolish price for an asset if they are certain that it can be sold for a higher price to a greater fool. The exchange rate of Bitcoin become detached from the labour time embedded in the computational capacity of the mining pool and become underwritten instead by the supply of the greater fool.

This turns the bubble investor into a judge in a kind of a beauty contest described by Keynes as not being one where we choose the prettiest option, but where “we devote our intelligence to anticipating what average opinion expects the average opinion to be.”

Like a game of betting on the answers of the contestants on Family Feud, so long as the investors believe that the average opinion expects the average opinion to be that Bitcoin will go up, Bitcoin will win the Keynesian Beauty Contest and the bubble will continue to inflate. However, the greater fool regularly has a crisis of confidence, which causes frequent crashes during the rise.

So long as exchange rate doesn’t stay below the cost of mining Bitcoin for very long, the bubble won’t pop and Bitcoin’s positive feedback loop will quickly begin to push the exchange value up again. So long as the capital gains are still better than returns on other investments, portfolio compositions will continue to shift to holding more Bitcoin.

At the same time, as long as the return on capital gains of Bitcoin are greater than real interest rates, portfolios will become more leveraged. Investors will borrow more and more, as the payment of the interest is less than the expected return from the Bitcoin exchange rate going up.

Hyman Minsky describes three kinds of investors, “hedge” investors, which have enough income to pay both the interest and principal on their loan, “speculative” investors, that can pay the interest but not the principle, and “Ponzi” investors, investors who can not pay either the principal or the interest, and depend on the assets that they own to increase in exchange value.

As returns on Bitcoin continue to be greater than other investments, Bitcoin will become a larger portion of investment portfolios, as Bitcoin does not pay interest or dividends, this means that the income of investors will go down as a result. While returns on Bitcoin are be greater than real interest rates, investors take on more and more loans. As a result, more and more investors will “go Ponzi.”

Every time there is a crisis of confidence of the greater fool, the Ponzi investors will go bust, as they can’t pay their loans, even after they sell off all their Bitcoin. As more investors go Ponzi, these will cause deeper and deeper crashes in Bitcoin, each crash will make Bitcoin a little less pretty, eventually Bitcoin will start losing the Keynesian beauty contest, perhaps to other alt-coins, perhaps to other investments completely, and the supply of the greater fool will dry up.

As the bubble bursts, Bitcoin will quickly become a toxic asset, with many holders wanting to sell, but finding few buyers. Miners will begin to abandon Bitcoin, and the positive feedback loop will begin to operate in reverse. Less miners will not mean less Bitcoin being produced, but instead the proof of work will become less difficult and the same number of Bitcoins will be produced. The value of each Bitcoin will fall. Eventually, falling to its “fair price” of zero, as Eric Tymoigne determined, or close enough to it. It will go back to simply being the in-game currency of libertarian capitalist fantasies.

The Austrian idea of money needing to be in fixed supply, drawing inspiration from “the gold standard,” is the undoing of Bitcoin. The coding of this bad idea into the Bitcoin software means, ironically, that the market can’t regulate Bitcoin. As more people invest in mining operations and the mining pool grows, the supply of Bitcoin doesn’t go up, so return on investment can’t regulate its exchange value.

Meanwhile, the bubble in the exchange rate of Bitcoin has made it useless as money. Price instability and high transaction costs have forced many vendors and payment processors who accepted it as payment to drop it as an option. This includes most of its most prominent mainstream supporters, like the digital distribution platform Steam or the payment processor Stripe.

As Bitcoin is still a relatively small part of overall investment portfolios, it’s impossible to know when exactly the bubble will burst. It’s likely that the libertarian capitalist bent of the community will actually work to delay this, as this community is a rich source of the greater fool, and probably is less likely to take on loans. We are very likely a long way away from a “Minsky Moment,” where a large number of Ponzi investors going bust causes a meltdown.

Not only has Bitcoin failed as money, but the asset bubble it has created has diverted investment from real production of goods to speculation, and the mining process consumes a phenomenal amount of energy, with catastrophic environmental effects. Meanwhile, it has done nothing in terms making the economy more fair or reducing the power of either governments, banks or any of the intermediaries it was meant to displace. There is no question that Bitcoin is a failure, a rather disastrous one, even if some speculators have been spectacularly enriched by it.

If there is value in the original vision of Bitcoin, to have a form of money that can be used to make payments across the internet in a way that makes government unnecessary and doesn’t reveal real names or physical location, it needs to be programmed differently. Such a currency would need to work in such a way that the supply of the currency increases when more mining capacity is added to the pool. This allows the market to regulate its exchange value by the natural increase and decrease of investment in mining relative to demand for the currency.

It is possible to create a cyptocurrency with a with a stable value by simply eliminating the feedback loop, creating a rational cryptocurrency with a consistent work:coin ratio. Bitcoin could be made rational by increasing and decreasing the number of Bitcoins produced per block along with the increase and decrease of the difficulty of the proof of work. This way, the number of Bitcoins produced would scale in proportion with the investment in mining.

However, there may not be much interest in doing this. As miners would need to choose to use their hashing power to make a standard rate of profit mining the rational cryptocurrency instead of chasing speculative returns by mining bubble-prone, intentionally irrational cryptocurrencies. Another obstacle would be get attention for it, as a rational cryptocurrency would not attract hype, because it would not have fantastically skyrocketing exchange rates.

Bitcoin was intended to be digital money for an ideal perfect market for libertarian capitalists, instead Bitcoin has turned out to primarily benefit bankers and speculators at the expense of the environment and the real economy.

For any that remain committed to the original vision of Bitcoin, a decentralized money that one could use with out revealing their real name and location, the path forward lies in creating a rational cryptocurrency, based on the Marxist and not the Austrian theory of money.

Yet, even with a rational cryptocurrency, it is unlikely to play a major role in the global monetary economy, given that governments are not constrained by reserves, crypto or otherwise. Even with a “gold standard” governments can still spend more by securitizing future tax obligations. Banks are likewise constrained only by qualified demand for their loans, not their own reserves. This means that the money in the global economy will remain government and bank money at the macro level.

Even if a rational cryptocurrency can not play the sort of revolutionary role that animates the dreams of libertarian capitalists, it can still provide a payment option that is international, convenient and privacy respecting, which remains worthwhile.

However, the institutions that would most likely create a rational cryptocurrency would be the banks or a fintech startup seeking to disrupt payment processing. While hardly heralding in a libertarian capitalist paradise, this would certainly be a better use of work than the misguided and harmful bubble Bitcoin is today.

Photo by zcopley

24 Comments The Face Value of Bitcoin: Proof of Work and the Labour Theory of Value

  1. AvatarStamatis Kavvadias (Σταμάτης Καββαδίας)

    Interesting but …ridiculous!

    Bitcoin is a bubble and a speculative asset and there is *no asset* that is not speculative or commodity that has any meaningful “objective” value, because there is no proper definition of objectivity!

    It appears economists thus far, including Eric Tymoigne and the author, cannot understand the things of most value, because they do not have an “exchange value”. Despite the claims of some of them, none of them can –or even attempts to– understand value without a price!
    [There are some thoughts on this, by political economists, as in “The worth of goods,” Oxford University Press.]

    They cannot understand the value of a banking system –that currently issues money– and assume the value of money lies in the assets in the banking system’s balance sheets. But if/when a bank run occurs, the balance sheets have no value at all! By the way, this was true even when there was a gold standard!

    They cannot understand the value of a system of law and order, possibly because they do not want to; but without one, money can be used only until a knife or rifle appears, let alone a riot. There is no meaning of property, without such a system!

    They cannot understand the value of a payment system and believe that the value of a banking system is in balance sheets and –some– that the value of Bitcoin is in “consumed” processing power to produce it. But a banking system can become obsolete, as soon as people can have a bank account in their country’s central bank and Bitcoin will persist as money, unless speculators start liquidating extremely large amounts of Bitcoin (which can be a problem even for the dollar); both exactly because of access to the payment system.

    The only way that economists will ever get a grasp of the historic reality of what is money, is when things of such great value, as banking systems, law and order systems and payment systems, become marketable “commodities”, with much help from Bitcoin’s concept and implementation (not Bitcoin itself or its technology, as many believe!).

    In all history (including when cigarettes are used in prisons as money), money is a *material or abstract thing* that has a relatively stable value and there is liquidity for it in a market, for relatively long enough time, where relativity is associated with the intended use of the money. There is no other meaningful definition of money, exactly because all things, material or abstract, *only* have speculative values!

  2. AvatarStamatis Kavvadias (Σταμάτης Καββαδίας)

    BTW, this makes no sense:
    “As more computational power, representing ever greater amounts of labour, is employed in Bitcoin mining, the number of Bitcoins produced does not go up, instead, the value of each Bitcoin goes up, creating a positive feedback loop. The more Bitcoin goes up, the more people are attracted to mining it, the more it goes further up.”

    Bitcoin does not go up when more mining power is introduced, because no more Bitcoin is mined. Bitcoin only goes up when more people exchange other currencies for Bitcoin. This is a description of an unreal feature of the labor theory of value.

    Similarly, this makes no sense at all:
    “As returns on Bitcoin continue to be greater than other investments, Bitcoin will become a larger portion of investment portfolios, as Bitcoin does not pay interest or dividends, this means that the income of investors will go down as a result. While returns on Bitcoin are be greater than real interest rates, investors take on more and more loans. As a result, more and more investors will “go Ponzi.” ”

    The fact that Bitcoin does not pay interest or dividends, does not mean that the “income of investors” will go down. The only problem is that there is no such thing as “income of investors,” unless they sell their investment!

    The same, this is nonsense:
    “Less miners will not mean less Bitcoin being produced, but instead the proof of work will become less difficult and the same number of Bitcoins will be produced. The value of each Bitcoin will fall. Eventually, falling to its “fair price” of zero, as Eric Tymoigne determined, or close enough to it. It will go back to simply being the in-game currency of libertarian capitalist fantasies.”

    Lots of Bitcoin will be impossible to sell, in a bubble burst. Independent of the price, there will be no buyers!

  3. AvatarFuture Money

    I dig the concept of [Labor]Bitcoin that, IIUC what the the author intends, is to ultimately make Bitcoin more ethically / socially fair by somehow automagically “pegging” both coin mining and it’s intrinsic value to human labor. As above comments point out, there is some technical, as well as philosophical, conceits and sloppiness in the article.

    However, what seems overall lacking in Kleiner’s concept is a proposed implementation- how would [Labor]Bitcoin *actually* function? Who would keep track of this “proof of labor” system? What would keep its ledger honest and synchronized across a globally distributed network of different industries and types of labor? How would such a system handle various collusion / free-rider attacks of faked / misplaced labor? Timebanks (see: ) have given lots of thought and experimentation in what seems to me a similar direction- odd that Kleiner does not cite this, as he almost certainly has heard of them.

    Presently, there’s an open source decentralized crypto-currency exchange called Bisq that uses something which, at a cursory glance, seems somewhere between a timebank and a proof of labor system called the “BSQ Bond”. The function of BSQ (AFAICT) is to bootstrap the open source development of the platform in an honest and equitably which respects the labor of those creating it (see: ).

    Overall, I appreciate Kleiner’s thought experiment, yet find his total condemnation of Bitcoin as a disastrous failure hyperbolic and not accurate.

  4. DmytriDmytri

    We don’t require “proof of labour” as such, as proof of work is already that, the price of the computers and the energy is already a measure of the labour. For a “rational” cryptocurrency, we just need to have a stable work:coin ratio. As Bitcoin is designed to have a fixed rate at which new blocks are added, the difficulty of the proof of work is increased when the mining pool grows. In order to make the currency rational, we simply need to increase the amount of Bitcoin that is rewarded to the miner in proportion to the increase in difficulty, that way the rate of new blocks will remain fixed as mining capacity grows, but the amount of Bitcoins created will also grow, keping the work:coin ration fixed. This means that the market can now regulate the exchange value of Bitcoin, as explained in the article.

  5. DmytriDmytri

    @stamatis, it is exactly because no more bitcoin is mined that the value of each bitcoin is higher as a result of more mining. In any case, my analysis certainly employs the labour thoery of value, and there is plenty of literature on that, I’m not going to defend that here.

    Income of investors goes down when the portfolio composition changes to include a greater proportion of bitcoin, and less income generating assets, such as stocks or bonds, and no, your assertion that they sell their investment to have income is false in these cases.

    The rest of your comments are gibberish, so I will only respond to the ones that directly cite my article.

  6. AvatarM421

    blah blah blah. ok so you didn’t buy bitcoin back in 2012 🙂

    I think things progressed so far that bitcoin is almost irelevant.
    Blockchain is relevant, and it’s here to stay.

    Let that sink in, for real.

  7. AvatarPaolo Brini

    Hi Dmytri,

    before concluding that Bitcoin is not money due to the the presumed non-fixed ratio work:coin, I think you should take into account some key factors currently ignored in the article.

    “The incentive can also be funded with transaction fees. If the output value of a transaction is
    less than its input value, the difference is a transaction fee that is added to the incentive value of
    the block containing the transaction. Once a predetermined number of coins have entered
    circulation, the incentive can transition entirely to transaction fees and be completely inflation
    free.” (Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”, section 6).

    In other words, once the last coin that can be technically mined has been mined, Bitcoin incentives to keep the network stable will be transaction fees rewards. What’s more, transaction fees are increasingly becoming important while Bitcoin asymptotically reaches the maximum amount of minable coins.

    2) The divisibility of Bitcoin is acting and will act more and more exactly to serve the purpose of a stable, rational work:coin ratio.

    3) Once the current divisibility of Bitcoin will no more be sufficient to support a rational work:coin ratio, the freedom to hard fork by consensus may very well lead to a shift to a new network (keeping the current blockchain, of course) where you can have a higher, arbitrary divisibility, instead of pushing miners to leave the network or contribute to keep network stability. Lightning Network, for example, is an already working proof (on testnet) that, amongst other things, allows further divisibility on the main chain. It’s a representation issue which has been solved, it’s not a protocol issue. Lightning Network should be ready for wide deployment in probably 12 months from now. Currently, I can see a growing consensus on Lightning Network in critical development areas around the Bitcoin… “ecosystem”.

    So, if the only problem to not consider Bitcoin money according to Marx theory of money is the problem work:coin ratio, Bitcoin in itself contains an elegant solution. You would not need banks or a fintech startup to find what you look for. I would dare to say more: it’s already happening.

    About the energy consumption, I think that the matter must be put into perspective. First of all, the energy consumption of Bitcoin is negligible when compared to the energy consumption required to print fiat money, even in small countries. You can find a lot of literature debunking the myth of Bitcoin energy consumption and environmental “catastrophic” impact. Furthermore, it’s reasonable to assume that energy consumption will go down when the weight of rewards will be mainly caused by transaction fees rewards. Some nice calculations: but you can find many other reliable sources for a cross-check.

    Thank you for the smart article, I found it really challenging and an excellent food for mind. Well thought criticism is much needed in Bitcoin, especially when the criticism of “economists” (even rewarded with a Nobel prize…) lack the basic understanding of what a blockchain is, what mining means… and are therefore totally useless to improve anything.

    All the best, hope to meet you once again in the near future, in Barcelona or somewhere in the world. 😀


  8. Avataremes

    What you’re proposing here is a fixed exchange between hashes done and coins received. The growing hash rate would increase the supply, driving the value of each coin down. That would be a technical change, counting not satoshis but kilo- or megacoins.

    What actually changes, is that there wouldn’t be a bonus for first miners. Anyone starting to mine now would get the same chance of receiving coins as the first miners had (or easier, given the faster hardware). The incentive for joining as early as possible would be gone.

    This leads to many questions, like: Would a currency without such motivator get any popularity? How would trade agreements look within the context of runaway inflationary prices denominated in such coin? Would it make possible to keep the network distributed and secure?

    Unfortunately, you seem to have failed to realize that the source of Bitcoin’s price (as well as any other commodity) is what the potential buyers are willing to pay. Given that Bitcoin has intrinsic value, which is the impossibility of double-spend, there won’t be a shortage of buyers in foreseeable future. The price might have been inflated but won’t be zero anytime soon.

  9. AvatarStamatis Kavvadias (Σταμάτης Καββαδίας)


    Your assertion that Bitcoin “has” (according to the labor theory of value) more value when more miners are engaged, has no backing of exchange value for Bitcoin in other currencies. The labor theory of value, roughly, asserts that value equals labor hours, on the assumption that a system of law and order and a political system backs that assertion. Unless you have any way of establishing a system of “mining” a system of law and order, as well as your envisioned version of a cryptocurrency, your assertion –that Bitcoin “has” more value when more miners appear– makes no sense! Itm definitely, is not the case with Bitcoin, is it?

    The “income” of investors form Bitcoin is like Schrödinger’s cat. You cannot know, as they do not, if it is more or less than that of stocks and bonds, unless and until they sell the coin. Your assertion (that Bitcoin replacing stocks and bonds in portfolios is loss of income) is speculative to the complementary probability that the investors will be able to repay their loans. Nothing more. You cannot know if the cat is dead or alive, until the investors attempt to sell their investments!

  10. DmytriDmytri

    @paolo, the marxist theory is the only one that does show that bitcoin could be money, the austrian and chartalist theories believe that bitcoin is purely a speculative asset. applying the marxist theory show us that bitcoin has a design flaw, the broken work:coin ratio. It’s not clear to me why you feel transaction fees are a solution to this, as they don’t answer the question of why is x Bitcoin worth x apples, for example. Only work ratio does.

  11. DmytriDmytri

    @emes, the prices would not be inflationary in such a currency, that is exactly the point. The exchange value of the currency would be regulated by the market.

  12. DmytriDmytri

    @stamis, you clearly don’t understand the labour thoery of value, and it’s outside of the scope of the article for me to explain that to you here any more that I already do in the article itself. The “system of law and order” that backs the assertion is called Capitalism. The market regulates the exchange value of all commodities toward their labour content. If you can take the LTV as given, I’m happy to explain my position, if you can’t and wish to debate the labour theory itself, you’re welcome to move along.

    In terms of “Schrödinger’s cat” You do not need to know anything, the investment will lead to more hashing power, and that is measurable, in fact it is already measured in the bitcoin software.

  13. AvatarPaolo Brini

    Hi Dmytri,

    good, I’m trying to clarify the points I probably was too synthetic and/or obscure about.


    If you don’t put into the work:coin ratio formula the transaction fees rewards for the miners, at the some point in time, when you reach the maximum divisibility representation of BTC, you get a fixed work:coin ratio, but it’s infinite. No matter how much work you pump into mining, you always get zero coins as a reward. You would have a network in which the miners, from some point in time on, are suddenly no more rewarded. The whole system would collapse quickly, I think, regardless BTC satisfies the property for something to be money or not.

    But it’s not Bitcoin, you would have described something else.

    Transaction fees rewards, which do exist and will become more and more important, are a brilliant way to resolve the absurdity, as Satoshi Nakamoto apparently was well aware of.


    If you consider the work:coin ratio as the amount of work spent on mining, divided by the amount of energy that such work can buy with the mined BTC + fees rewards, things become interesting.

    I consider here energy for convenience, since it’s the most basic need for life and an objectively measurable physical quantity. As long as mining remains sustainable, i.e. you can buy more energy with mining than that you would do by converting the mining work into energy in other ways,, the system remains sustainable, competitive against other energy conversion systems, potentially environment impact friendly, and represents an impulse to deflation.

    I’m not saying here that the “dreaded deflation” is desirable, I’m just considering that BTC properties push deflation and are a strong deterrent against hyper-consumerism.

    I’m also suggesting that the property of something to be money becomes secondary when compared to the efficiency of a system which is competitive in converting energy, has some abilities to auto-fix and is programmed to self-destroy if the energy conversion is no more competitive. Such results are interesting (if not amazing) even if the “price” to pay is that wild speculators are attracted.

    If it’s not money, it might be something even better: a system which pushes, technologically and financially, toward an efficient conversion of energy through fair competition.


    “Rational cryptocurrencies” based on an infinite supply of coins do exist. The work:coin ratio tends to remain constant, because the coin supply follows rules which take into account the work of a node. For example, after the first billion of EOS is put into circulation, new coins will be the reward for those nodes which validate transactions. The more the work you put into the system, the more coins you receive as a reward. This is a cryptocurrency which tends to assure a rational coin:work ratio at the expense of some potential issue to control inflation.

    However, I would like to note that, during the early stage we are living in, such coins have followed the very same pattern, raising the interest of speculators, exactly as it happened with Bitcoin. The value of such cryptocurrencies expressed in EUR or USD has followed an extraordinarily similar development, including paramount volatility, so (at least during this phase) the assumption that a rational currency would not generate hype and attract wild speculators seems very questionable.

    Keep up the good work!

  14. AvatarStamatis Kavvadias (Σταμάτης Καββαδίας)

    The only “value” accepted in capitalism is exchange value –what is anyone willing to offer. Labor value is not of fixed exchange value in capitalism (and there are countless mainstream reports on the slower rate of income increase, relative to average prices). Theories do not describe reality, unless people back them with demand, or lack of demand for alternative offers; and even then, it is hard to keep a legitimate market running, if it is opposed by vested interests, because of existing systems of law and order that customarily support these vested interests and the market and military power that backs these systems of law and order. Bitcoin was allowed to run in the capitalist markets, based on its exchange value, which was all the value Bitcoin was aiming for, from its beginning.

    Assuming that proof of work of mining graphics cards, has any meaningful relation to labor, undermines its “intrinsic value” to the degree that it attracts capital investment, reversing the relation of value and investment, i.e., it removes any meaning of “intrinsic” from labor value, it shifts all “intrinsic value” to the use of capital (that’s why it is called capitalism) and we are back to exchange value. That is why Bitcoin’s value is only its exchange value, in the first place and does not increase with more hashing power, as such power becomes cheaper and cheaper. The labor theory of value can do nothing about it, much less describe reality.

    A market of your proposed currency, with actual labor/work defining value, even if it had peoples’ demand behind it, wouldn’t be allowed to run, as it opposes the commoditization of labor that is capitalism’s central feature, overexploited by neoliberalism. But it would be a very interesting experiment, on our cultural expectations out of “value”.

    But, you are not going to debate it…. That’s all right 🙂

  15. Dmytri KleinerDmytri Kleiner

    @paulo, the price of transactions and the price of the things being purchased both need to be expressed in some money, and that money needs to be ratio to what is common between them, so work:transaction and work:things, to be money bitcoin would also need to be a ratio to work, work:coin, it could then be divisible by both transactions and things. As Bitcoin is not a fixed ratio to work, it can not be a stable price for either transactions or things, it does not function as money. Ending the creation of Bitcoin and simply relying on transaction costs doesn’t change this, though it will end the mining gold rush, and thus reduce inflationary pressure, it still has no way to be regulated by the market, and therefore will neither be stable nor popular as money.

  16. DmytriDmytri

    @stamatis, yes, the labour theory explains the source of the exchange value in capitalism: labour. PoW does not, in any way, “oppose the commoditization of labor.” That is just more gibberish.

  17. AvatarWill

    this all assumes the labor “theory” of value is correct which it isn’t. which is pseudo garbage based on a premise that value comes from authority and not perspective.

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