Smiling Dave,
for the time being, I’ll ignore that I already did formulate the regression theorem to you, and your only reaction was that you disagree, without any explanation.
Nevertheless, in the meantime I have come up with a better formulation of the regression theorem:
- Once a medium of exchange is sufficiently liquid, it can sustain itself through the network effect (liquidity creates demand)
- Before a medium of exchange is a medium of exchange, it must be liquid
- Before it is liquid, it must have a price
- Both of these are fundamentally market phenomena, i.e. both price and liquidity must be established as a catallactic process
Bitcoin has a price, and is relatively liquid. Not as liquid as money, not as liquid as some blue chip stock or precious metal ETFs, but I would put it right after that. You can trade Bitcoin 24/7, from anywhere. There’s a minimal bid-ask spread and a relatively high availability of ready buyers and sellers. You don’t have this with any physical commodity (apart from money), only with financial instruments. I already told you that changes in liquidity, not changes in price, are relevant for predictability of Bitcoin as a medium of exchange in the future. Between February and May 2012, for example, the price fluctuated less than the price of silver (I did not actually calculate this myself, but people claim it), but the liquidity (measured on Mt. Gox BTCUSD market) tripled (at 0.001 threshold) or doubled (at 0.01 threshold). I did calculate the liquidity myself and will publish it eventually.
So, bitcoin adheres to the regression theorem. It has a price and it is liquid. It’s not money (yet), but it is a secondary medium of exchange (Mises) or quasi-money (Rothbard).
Commodity money adheres to the theorem, because the initial price is based on the non-monetary uses. Fiat money adheres to the theorem, because the initial price is created by a peg (and through Gresham’s law, it then pushes the preceding money out of the market).
Why Bitcoin had an initial price and why it became liquid I leave open for a debate. Jon Matonis speculated about that, Robert Murphy speculated about that. For the purpose of the regression theorem, it’s irrelevant. Similarly as your denial is irrelevant.
For the future, the most important thing to realise is that unless there is a major exogenous change, the users of Bitcoin do not have anything to switch to. Neither fiat nor precious metals can beat the technological innovation in transaction costs Bitcoin provides, and other cryptocurrencies have comparably lower liquidity. Fiat/precious metals offer a higher liquidity, but that’s often not enough. There are plenty of businesses which are either highly sensitive to transaction costs, or which would be heavily burdened by transaction costs if they switched. This creates plenty of demand for Bitcoin. As its liquidity increases, this further lowers the transaction costs (in the broader sense), creating a reinforcing spiral.