Some Austrian-school economists rely on Ludwig von Mises´ regression theorem as the best test of a good´s “moneyness”.
In a nutshell, Mises developed the regression theorem to solve the circularity of reasoning in the marginal utility of money. Money obtains its purchasing power today because of its expected purchasing power in the future. The “regression” was that people base the expected future purchasing power on the past, and in this case the value of money keeps regressing back into history. Mises invokes Carl Menger´s origin of money story to solve the infinite regress. At the original point in time when money went from being a good valued to directly satisfy human wants to one valued only to exchange for other goods the regress is broken. At this moment the purchasing power of money is defined by its use value in directly satisfying a want.
This regression theorem is then used, at least by some economists, as the test for whether a good qualifies as money. Any good functioning as money must have derived from a good with use value, and the corollary holds true: any “money” not derived from a useful good cannot be money.
This belief confuses Mises. His focus was not on a criterion by which we can judge whether a good should be defined as money, but rather was to explain where its purchasing power came from.
Many monies of today have emerged in a similar fashion to bitcoin. The euro, for example, came into existence not directly from any useful good but as a conversion of the existing national fiat currencies at an established exchange rate. Similarly bitcoin emerged with a purchasing power relative to an existing currency, the U.S. dollar. The only question is by what standard this initial exchange rate was established.
For bitcoin evidence suggests the original exchange rate was defined by the cost of production to mine one. In this sense, the initial bitcoin-dollar exchange rate has a more defensible basis than, say, the initial German Deutschemark-Euro exchange rate, which was really constructed by fiat (not unlike the two relevant currencies themselves).
The historical emergence of bitcoin and its subsequent evolution provides no reason why we should be hesitant to accept that it is a good functioning in a monetary role. What of some other tests?
Money is a very unique financial asset. It is the only asset that trades at par value and on demand. By this I mean that a $1 coin always redeems for $1 worth of goods. Since cash and demand deposits (chequeing accounts) are redeemable instantly (on demand) they require no waiting time to access their purchasing power. This is different from a financial asset such as equity, which is also available on demand but only at the going market price. Likewise, bonds share the quality with money that they trade at par value (in the sense that you know in advance the amount you are receiving) but you must wait to access this purchasing power. Futures are financial products that give you a market price after a waiting period. Money thus serves a very unique role in the financial world as being the one asset which is priced and available with a great amount of certainty.
While it is commonly said that “money is as money does”, a good functioning as money must satisfy these two special requirements: it must be instantly available on demand, and trade at par value. Does bitcoin satisfy these requirements?
Bitcoin is available on demand, provided that you want to use it exclusively for electronic payments. (Notwithstanding some physical bitcoins starting to become available.) Although the need for complementary technology gives bitcoin a much more limited use than cash, for many transactions the criterion of being available on demand is fulfilled well by the cryptocurrency. In this way using a bitcoin is no different than using a debit card because of the need for complementary technology (such as a terminal, electricity, internet connection, etc.) Bitcoin, like demand deposit accounts, circulate less widely than cash for this reason, although some can argue that the electronic functionality of the former two means of payment increases their usability. Whatever one’s opinion on the matter – or whether one prefers to use cash, their debit card of bitcoin – there is no insurmountable problem with bitcoins being available “on demand” that money in the form of a deposit account does not also encounter. If deposit accounts are considered money, and by almost all common definitions they are, then bitcoin also circulates as money, at least according to the criterion of being available on demand.
The quality of being defined at par value is a little more difficult to obtain. Money serves several roles in the economy. One such role is that it is a medium of exchange, that good which we transfer to others to settle debt obligations. The other role is the unit of account, that good which defines prices that the medium of exchange will settle.
For a good acting as money to satisfy the characteristic that it trades at par value it must serve in both capacities. Thus, Canadian dollars serve as money in Canada because prices are defined in dollars and the currency also is used to make these purchases. In this way we can easily see that Canadian dollars are redeemable at par value.
For bitcoin to function in a similar way, prices need to be established in bitcoin. This is indeed the case in many websites now offering goods. It is not true of goods in general, however, though this situation is changing as more stores start accepting the bitcoins. If a price is defined in dollars and a user pays in bitcoin, the situation is analogous to buying a good with a share of equity. You will pay according to the prevailing exchange rate or market price, thus introducing some uncertainty to the transaction. (More to the point, it would be like paying with a share of a technology stock with no earnings – the purchasing power of which is determined solely by the expected future services to be provided.)
Getting back to the original question: Are bitcoins money? To the extent that prices are defined in bitcoins and it is used to settle these prices, the crytocurrency functions as money. This is currently a narrow offering, and thus the “moneyness” of bitcoin is limited. This does not mean that it will never be able to have more broad appeal, and indeed it may be still in an early adopting phase that will see ever more users of the digital currency.
Despite what may seem intuitive, however, the determining factor of whether bitcoin develops into a more broadly used, generally accepted medium of exchange, depends not on the amount of users. It is dependent on the number of merchants who will define prices in terms of bitcoins, and thus give the innovation wider monetary appeal by allowing it to trade at par value.