Wednesday, March 3, 2021

Tag: Is Bitcoin a Commodity? – Keith Weiner

Is Bitcoin a Commodity? – Keith Weiner


by Keith Weiner, Sprott Money:

Carl Menger, father of the Austrian School of Economics, showed the world that money is not the product of the state. He did not mean that government is intrinsically incapable of decreeing something to be money while other groups, organized for different purposes, could do it. He described how money emerges as the commodity which is most marketable (“absatzfähigkeit” in German).

He discusses factors that limit marketability including to whom you can sell a particular good, where you can sell it, when you can sell it, etc. The most marketable is the one anyone can buy or sell anywhere at any time, with no limitations on quantity.

Picture the problems with fresh oysters, crude oil, winter woolens, and iron ingots. Oysters spoil very quickly, crude oil has to be stored in a specialized tank, no one wants wool mittens in the summer, and iron is heavy. Only a dealer in seafood could buy oysters. Oil can only be bought up to the buyer’s storage capacity. No clothing retailer wants to buy merchandise that will sit in a warehouse for a year until next winter. Moving iron any great distance is expensive.

At one time, cattle was money. A big cause of this is that cattle move under their own power. For nomadic societies, everyone thought of livestock as wealth and pastureland was not a limitation. However, as people settled into cities and agriculture, animals didn’t work so well any more. What would a blacksmith or weaver do with a few cows in the workshop? And what will it cost to feed them? They needed something more convenient.

Gold emerged as the most marketable commodity. It does not have any of the above problems. Anyone can accept gold anywhere at any time, and bring it anywhere else to anyone else.

It is important to ask why a commodity. Why not love? “I will trade you two acres of farmlands for love (or a kiss)” Why not chiseled carvings on a stone at the city temple, kept in absolute trust by the priests? Why not pieces of paper? The first is a frivolous question to make a point. Love or a kiss cannot be exchanged with a third party.

But the other two are nontrivial, and deserve a serious answer. The answer is not: because price inflation. Or, at least, that is only one potential risk among others that lead to a more general problem and the full answer. Nor is it about collapse and the end of the world, what will people barter with (e.g. bullets, cigarettes, or dried food). It is about a universal concern in the human condition.


Obviously if you think someone is a cheat, then you will not extend him credit. Or if you don’t like the balance of risk and reward, you will want to withdraw credit. But the issue is much broader than these two simple cases. In the market, it is not usually black and white. There are degrees. In other words, you may want to keep a certain fraction of your wealth in the system, where it earns a return and is easy to use in exchange.

At the same time, you may also want to keep some portion at home in the sock draw or under the floor boards. Everyone must decide for himself what portion to hoard. Yes, we use the word hoarding, though we know that most economists were dismissive of it if not derisive. In his book Human Action , economist Ludwig von Mises called it, “…a deus ex machina, the much talked about hoards…” (though in other places, he treated hoarding more dispassionately).

In fact, there is an arbitrage between hoarding and—to coin a verb word here— crediting. Hoarding is less convenient. Handling and trading physical pieces of metal such as coins has a cost in time spent and often a wider bid-ask spread. However, crediting incurs the risks of default, fraud, and even honest error.

Spread is always a motivator. In this case, there are two spreads. One is convenience, ease of use, time saved. The other is interest. The higher the yield on gold that one can earn, the greater the incentive to dishoard and put one’s money to work. The lower the return, or the higher the risk, the greater the incentive to hoard.

Hoarding is the only alternative to crediting. Whether you put the gold in your pocket, store it in a safe, or contract with a professional vaulting service, you are withdrawing your gold, refusing to grant credit, not allowing your gold to be used by anyone for any reason, and not being in a position to depend on a third party to return your gold (which is somewhat ambiguous in the case of a depository).

This illustrates why money is a physical commodity. Everything else is a form of credit. With any other monetary asset, you are granting credit to someone. Your asset is represented by a number on a ledger of a debtor, or at least an issuer. For purposes of extricating yourself from risk, for purposes of having something in hand, only taking home a physical commodity will do.

Note that not just any commodity suffices. If you buy a warehouse full of lumber, palettes full of copper bars, or a tank full of crude, these have storage costs. And you are speculating. You cannot rest easy so long as you have these goods, because the prices are always moving either up or down. If up, then you are getting richer. If down, then you are getting sweatier.

All the discussion of price in the gold community aside, this is not true for gold. People put gold into intergenerational trusts, with good reason. When you hold the monetary commodity, you are safe. The purpose is not to sell it for a higher price, but to hold it for its own sake, for the reasons we cited for hoarding earlier.

Leaving aside the question of whether price is determined subjectively, we now raise the following question. Is the definition of commodity subjective? Is a thing a commodity, or not a commodity, based on personal preference? Can one person just say that a number on a ledger is a commodity, while it is equally true for another to say no, that only a thing you can hold in your hand is a commodity?

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