A couple weeks ago, Tho Bishop reminded us of Bob Murphy’s explanation of the relationship between Bitcoin and the Regression Theorem. In the original post by Dr. Murphy, he addresses a common objection to Bitcoin made by Austrian economists:
If Austrian economists want to say, “But those people had no basis for saying whether that pizza should have been 100 BTC or 1 million BTC!!” OK fair enough. But they did decide, somehow; those initial transactions provided a frame of reference that guided subsequent transactions involving bitcoins.
Dr. Murphy’s explanation is correct, of course, but for those curious, there is an explanation for the “somehow” that shows that the original pricing was not arbitrary.
In October of 2009, the early advocates of Bitcoin needed a way to obtain the coins other than “mining” them, so they set out to find a way to exchange them in dollars and other fiat monies. The problem pointed to by the Austrian objectors did come up, but it was easily solved. Some members of the early Bitcoin community set up a website called New Liberty Standard, and the first quote they listed for a coin in dollar-terms (1,309.03BTC for $1) was calculated according to the cost of electricity consumed in mining.
Whether this was the best means for deciding the original exchange rate or not is inconsequential, and it serves to support Murphy’s explanation that Bitcoin does not violate the Regression Theorem. It’s also interesting to keep this history in mind in light of Dr. Murphy’s more recent post concerning Bitcoin and the cost of electricity.
