Jeremiah Jolliff – Bitcoin & The Austrian View

Time preference and the Bitcoin monetary evolution

“time preference describes the tendency for humans to value present consumption more highly than equivalent future consumption”

Among the influential economic concepts elucidated by the Austrian school of thought, the theory of time preference holds particular salience to Bitcoin’s role as an emergent monetary evolution. This notion of prioritizing present goods over future goods based on varying individual circumstances aligns with Bitcoin’s disinflationary supply schedule and game theory dynamics incentivizing its adoption.

At its core, time preference describes the tendency for humans to value present consumption more highly than equivalent future consumption. All else being equal, economic actors will rationally choose to receive a good or service sooner rather than later.

Visual illustration of time preference theory comparing present vs future value

This theory was pioneered by Austrian economist Eugen von Böhm-Bawerk, who posited that since humans have diverse time preferences based on factors like income levels, consumption needs, and uncertainty about the future, interest rates must emerge to incentivize delaying present satisfaction. Higher interest compensates by increasing future value.

Böhm-Bawerk’s time preference insights were further expanded by Frank Fetter and Ludwig von Mises, who integrated the concept as a foundational axiom underlying human action and market pricing mechanisms.

Bitcoin’s Scheduled Hardening of Money Supply

So how does this principle of time preference manifest itself through Bitcoin’s novel monetary design? The key connection relates to Bitcoin’s capped supply and disinflationary issuance rate over time.

As discussed previously, only 21 million bitcoins can ever be mined into existence, and the rate at which new coins enter circulation slows by 50% roughly every 4 years in an event called “the halving.”

Chart depicting the diminishing issuance of new bitcoins over time

This predictable, constricting schedule hardens Bitcoin’s future scarcity and purchasing power compared to the present. In the language of time preference, forsaking present consumption of bitcoins gets compensated by greater future value of that saving as the money supply progressively dries up.

The Bitcoin halving mechanism effectively automates and formalizes Böhm-Bawerk’s theory by coding distilled time preferences directly into the protocol’s monetary policy in a publicly auditable manner.

Opportunity Cost Driving Adoption

From the vantage point of rational economic actors evaluating Bitcoin, its scheduled supply hardening means delaying consumption (spending/selling bitcoins) today gets compensated by a higher future purchasing power of those held coins. This creates an incentive to acquire and retain the asset now rather than later.

Moreover, this incentive compounds over successive halvings as Bitcoin’s scarcity relationally increases against other monetary goods and assets with perpetual inflation baked into their supplies. The opportunity cost of not adopting Bitcoin as a store of value becomes higher the longer one waits.

Conceptual image symbolizing rising opportunity costs over time

This opportunity cost dynamic is what Austrian economists like Hans-Hermann Hoppe and Saifedean Ammous theorize will drive more rapid Bitcoin adoption over traditional moneys as its relative hardening becomes too compelling for rational actors to ignore.

Time preference therefore acts as an accelerant for Bitcoin’s game theory adoption cycle – forgoing spend of appreciating bitcoins today rationally leads to greater reserves of future purchasing power, which incentivizes even more adoption as the pattern self-reinforces.

Visual diagram depicting the theorized "Bitcoin Adoption Cycle" based on time preference incentives

Potential for a Revaluation of Time Preference

Perhaps the most profound implication of Bitcoin’s unique time preference model extends beyond just driving adoption, but potentially inspiring a broader societal revaluation of time preferences themselves.

In traditional fiat monetary systems with constant devaluation of currency through inflation, economic incentives skew heavily toward present consumption over future investment. Why delay gratification or save when money’s future value is perpetually dwindling?

Conversely, Bitcoin’s monetary hardening essentially penalizes excessive present consumption while rewarding delayed gratification through an appreciating currency supply. A Bitcoin standard could thereby incentivize societies to reduce time preference toward longer-term planning, sustainability, and investment in production over wasteful present consumption.

Conceptual image contrasting present consumption vs future investment

This could have immense positive impacts in areas like environmental protection, deferred infrastructural development, scientific research, and any activity where current costs need to be weighed against future gains for humanity.

As the hardest form of digital money, Bitcoin’s revolutionary integration of time preference into its core monetary policy stands to profoundly influence human behavior, economic activity, and potentially even cultural philosophies around saving, investing, and achieving future prosperity over temporary present indulgence.

Whether this impacts just Bitcoin’s specific sphere of adoption, or gradually reconfigures the world’s relationship to time preference on a civilizational scale remains speculative but tantalizing food for economic thought. One thing is certain – Böhm-Bawerk’s seminal theory takes on new significance through Bitcoin’s innovative synthesis of time preference into a monetary singularity.

Bitcoin as a manifestation of Misesian praxeology

“Unlike the mainstream neoclassical economic theory focused on mathematical equilibrium models, praxeology centers on the fundamental logic underpinning human choice itself”

Among the multitude of parallels between Bitcoin and Austrian economic theory, one of the most fascinating is how Bitcoin effectively exemplifies the Misesian philosophical foundation of praxeology in practice. The creation and adoption of this pioneering cryptocurrency is an astounding real-world case study validating many of the core tenets put forth by the luminary economist Ludwig von Mises.

At its essence, Mises’ praxeology is the deductive study of purposeful human action, based on the notion that humans engage in conscious behavior to achieve desired ends utilizing the most appropriate means available according to their perception and circumstances.

Unlike the mainstream neoclassical economic theory focused on mathematical equilibrium models, praxeology centers on the fundamental logic underpinning human choice itself. Mises argued that properly defined, economics is the analysis of every conscious action an individual undertakes to substitute a more satisfactory situation for a less satisfactory one.

The Birth of Bitcoin Through Voluntary Choice
Bitcoin was created in 2009 by the anonymous cryptographer Satoshi Nakamoto, but its revolutionary rise as an alternative monetary system perfectly encapsulates the voluntary, human-centric nature that Mises expounded.

At the core of Nakamoto’s white paper proposing Bitcoin was a model for achieving monetary integrity and independence from ruling authorities through a decentralized, peer-to-peer electronic cash system. It established a way for transactional value to be transferred globally, instantly, with no third-party intermediaries, fees, or artificial constraints.

While that may seem an ambitious enough goal, the more philosophically profound implications are how Bitcoin achieved this feat solely through the exercise of individual human action and voluntary coordination.

No centralized institution, government mandate, or backing asset was required for Bitcoin’s existence. It was formed, adopted, and grown organically through the purposeful actions of distributed humans evaluating the proposed system, recognizing its potential superiority as a means to achieve desired ends over fiat currency norms, and freely choosing to participate in production and exchange on the network.

This embodiment of voluntary, self-interested yet productive behavior aligns squarely with Mises’ conception of humans as “rational actors” perpetually seeking to improve their respective conditions by whatever means their offered circumstances and knowledge allow.

Visualization of the concept of "rational self-interest" as defined in Austrian economics

Praxeologic Properties of the Bitcoin Network
Beyond its grassroots formation reflecting Misesian thought, numerous other attributes of Bitcoin closely adhere to praxeological principles as well:

Decentralized structure with no centralized authority enforcing rules or value
Open source protocol rules allowing for inspection and voluntary participation
Free market dynamics determining Bitcoin’s value through economic calculation of supply/demand
Constant economic activity through mining and trading as the means to achieving desired monetary ends
Incentive mechanisms encouraging productive, self-interested participation to secure the network

Diagram illustrating the decentralized structure and cryptography behind Bitcoin's network

Austrian philosopher Hans-Hermann Hoppe even described Bitcoin as “an exemplary case of Misesian human action… demonstrating the importance of entrepreneurship, property rights, and economic calculation for the emergence of free markets and rational sustainable order.”

Hans-Hermann Hoppe, an Austrian school economist and libertarian/anarcho-capitalist philosopher

The Emergence of a Spontaneous Bitcoin Order
Perhaps most crucially, Bitcoin exemplifies what Mises described as spontaneous order theory – the ability for complex systems and institutions to form and maintain themselves purely through the voluntary and self-directed motivations of participating individuals, rather than top-down design or authority.

Visualization of complex systems emerging from spontaneous, unplanned order

Bitcoin arose with no centralized planner, organized institution, or regulatory scheme dictating its existence or adoption. It grew spontaneously as a Bottom-up order through the free association of humans independently evaluating its benefits as a preferable money system to their current situations and choosing to create and exchange value on it accordingly.

This process of rational human actions coalescing into larger spontaneous orders that satisfy widespread demand is a pivotal aspect of Misesian thought. Bitcoin arguably represents the emergence of an entirely new robust monetary order formed not by ruling corporations or governments, but from the purposeful pursuit of individually perceived ends by volunteers worldwide adhering to an open, distributed protocol.

In this sense, Bitcoin is not just a technology but a stirring testament to Mises’ conception of praxeology itself – how the liberty for individuals to act purposefully through available means toward their desired aims can manifest complex systems and solutions superior to those derived through centralized, imposed methods.

As Bitcoin evolves and impacts the global monetary order, it will remain a compelling phenomenon through the lens of Misesian economic philosophy and the principles that so remarkably parallel its creation and continuing operation.

The Deflationary Nature of Bitcoin’s Hard Cap Supply

“Bitcoin’s revolutionary architecture introduces a fundamentally new economic model for money itself.”

Bitcoin’s revolutionary architecture introduces a fundamentally new economic model for money itself. At its core, Bitcoin is a capped supply currency with a strictly limited and dwindling issuance over time. This deflationary system represents a paradigm shift from traditional fiat currencies and even hard money assets like gold.

Unlike dollars or other government-issued money that can be printed ad infinitum by central banks, Bitcoin has an absolute ceiling of 21 million coins that can ever be created. This is enforced by the very protocol rules that generate new bitcoins and govern the network.

Bitcoin fixed supply limit of 21 million coins

The Disinflationary Bitcoin Issuance

While Bitcoin’s hard capped maximum supply is the headline feature, equally crucial is the controlled, diminishing schedule at which new bitcoins are released into circulation. This issuance rate adheres to a disinflationary curve of geometrically slowing growth over time.

When Satoshi Nakamoto mined the genesis block in 2009, the initial block reward for validating transactions was 50 bitcoins. However, this reward is cut in half every 210,000 blocks mined – roughly once every 4 years in an event called “the halving” or “halvening”.

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Illustration of the Bitcoin halving schedule with diminishing block rewards

With each successive halving, the rate at which new bitcoins enter the market slows exponentially until the hard cap supply is reached by approximately 2140. At that point, the Bitcoin money supply becomes permanently fixed with zero allowance for any further inflation.

An Inelastic Supply Adhering to Austrian Economics

This strictly limited, steadily constricting supply is the diametric opposite of fiat currencies which have an elastic, constantly increasing money supply fueled by fractional reserve banking policies. Instead, Bitcoin’s model far more closely resembles the ideal commodity currency as envisioned by the Austrian school of economic thought.

Portrait photo of Austrian economist Ludwig von Mises

Ludwig von Mises and his philosophical descendants like Murray Rothbard and Friedrich Hayek were vociferous critics of inflationary policies enacted by central banks. In their view, artificial expansions of money supply were the root cause of unsustainable economic booms followed by recession.

The Austrian prescription was for money to be issued exclusively through economic activity and production rather than manipulated fiat banking. A monetary system based on inelastic rules, free of intervention, and adhering to a non-inflatable supply would foster genuine price stability and sustainability according to Austrian theorists.

In many ways, Bitcoin is the digital embodiment of these Austrian ideals. Its supply strictly capped, its issuance unalterable, and its monetary policy executing on an automated deflationary road toward a permanently fixed purchasing power.

Illustration of the Austrian economic theory of a deflationary, fixed money supply

Implications for the Future

So what does this mean for Bitcoin’s economic impact as adoption scales over the coming decades? Most financial analysts agree the implications of such a revolutionarily different monetary system from what the world has known are profound and multi-faceted.

In the short to medium term, Bitcoin’s disinflationary curve provides a constant downward pressure on inflation – the inverse of today’s expansive fiat model. This could catalyze a persistent, mild deflationary environment rewarding investment and saving over consumption and debt accumulation, according to Austrian thinking.

In the long run, once Bitcoin’s supply reaches its mathematically-enforced cap, the world may witness an economy adhering to a truly non-inflatable form of “hard” digital money for the first time in history.

Visual depiction of a theoretical future Bitcoin-based, deflationary economy

Whether Bitcoin supplants global reserve currencies and existing financial infrastructure, or exists as an “exit” option alongside them, remains to be seen. But its revolutionary, Austrian-esque economic architecture guarantees Bitcoin will continue sparking rigorous thought, analysis, and debate from all corners of economic philosophy.

The Deflationary Nature of Bitcoin’s Hard Cap Supply Through an Austrian Lens

“crack-up boom”

Bitcoin is often called “digital gold” – a reference not just to its scarcity and use as a store of value, but also its deflationary monetary properties. Like gold, Bitcoin has a strictly limited supply that is fundamentally distinct from fiat currencies which can be printed endlessly by central banks.

This deflationary hard cap on the Bitcoin supply is one of its most defining characteristics and a key reason it aligns with the teachings of the Austrian school of economic thought. Let’s explore the implications of Bitcoin’s fixed money supply through the lens of Austrian economics.

The Austrian View on Money Supply

Portrait of Ludwig von Mises, Austrian economist

A core tenet of Austrian economics is the rejection of artificially inflexible money supplies controlled by central authorities. Influential Austrian thinkers like Ludwig von Mises and Murray Rothbard argued that constantly expanding the money supply through bank lending and money printing inevitably leads to distorted price signals, wealth redistribution, and economic booms followed by painful busts.

llustration of the Austrian economics 'crack-up boom' hyperinflation concept

In Mises’ scenario of the “crack-up boom“, once the public recognizes that a currency is losing value due to over-issuance by the monetary authority, they begin to dump it rapidly in favor of undervalued real goods – causing hyperinflation to spiral out of control. The only way to avoid this dire outcome, Austrians argue, is by ensuring a truly limited monetary supply governed by the market rather than artificial constraints.

This makes Bitcoin’s fixed supply of 21 million coins particularly attractive from an Austrian perspective. Its monetary policy cannot be manipulated, inflated or debased at will since the total supply and issuance schedule is predetermined by the protocol’s code itself. No central planner can simply “print” more bitcoins into existence.

The Rules of Bitcoin’s Hard Cap

Bitcoin supply schedule showing coin issuance and halving over time

Bitcoin’s capped maximum supply is enforced through several key rules hardcoded into the protocol:

1. Only 21 million bitcoins can ever be created. This is the absolute ceiling.

2. New bitcoins are released slowly through a predetermined issuance schedule, not all at once. They enter circulation through the block reward given to miners for validating transactions.

3. The block reward started at 50 BTC in 2009 and is cut in half every 210,000 blocks mined (about every 4 years) in an event called the “halving” or “halvening”. This geometric issuance rate continually slows over time.

4. The last bitcoin will be mined around the year 2140 after which no new BTC will ever be created. Regular block rewards to miners will then come solely from transaction fees.

This hard cap combined with diminishing new supply over time creates a disinflationary or deflationary monetary supply curve. Unlike fiat currencies which tend toward constant inflation by design, bitcoins are guaranteed to become more and more scarce relative to any growing economic output.

The result is essentially the digital money version of a perfectly inelastic supply, which is the ideal case argued by Austrian economists. With an unchangeable cap, Bitcoin supply cannot be influenced by monetary policy decisions or fractional reserve lending expansion which Austrians view as destructive to a stable, hard money system.

Time Preference and Bitcoin

Another Austrian principle that aligns with Bitcoin’s nature is the economic theory of time preference. Established by economist Eugen von Böhm-Bawerk, time preference refers to the human tendency to value present goods higher than future goods, all else being equal. We prefer to obtain something now rather than later.

This drives interest rates, as people must be incentivized through higher future value to willingly delay present consumption. It’s why $100 today is considered more valuable than $100 a year from now, and why interest must be paid on loans.

With Bitcoin’s scheduled halvings roughly every 4 years, time preference comes into play. Potential Bitcoin investors must decide if it’s worthwhile to obtain and hold the present supply of bitcoins knowing their future purchasing power will likely rise as supply issuance slows towards the 21 million.