Monetary theory

Advanced monetary theory applied to Bitcoin

“Money is the most marketable economic good; Bitcoin is its flawless digital version.” — Rafael Meruane

1. Introduction

To understand the economic meaning of Bitcoin we must analyze it not as isolated software, but as a monetary asset with unique properties:

unalterable scarcity
fully predictable monetary policy
mathematical verifiability
non-dependence on institutions
extreme divisibility
instant portability
global political neutrality

This chapter links Bitcoin with:

classical and Austrian monetary theory
macroeconomic models
function of money
business cycles
digital scarcity
quantitative models

and contextualizes how Bitcoin alters the history of money.

2. What is money? Academic synthesis

Economists agree that money fulfills three main functions:

Function

Definition

Does Bitcoin fulfill it?

Medium of exchange

Facilitates trade

Partially, grows with Lightning

Unit of account

Measures prices

Still emerging

Store of value

Maintains purchasing power

Strong, due to scarcity

The Austrian School adds moreover:

Good of greater liquidity,
Mechanism for economic calculation,
Vehicle for temporal transmission of value.

Bitcoin fits especially in 3, 4, 5 and 6.

3. Austrian theory of money applied to Bitcoin

The key contributions:

Menger (1892): spontaneous origin of money
Mises (1912): regressive theorem of money
Hayek (1976): denationalization of money
Rothbard (1962): critique of fiat

3.1. The regressive theorem applied to Bitcoin

The theorem says that an object can only be money if it previously had non-monetary value.

Critics say that Bitcoin would violate this. But the refutation is clear:

Bitcoin had initial value as a scarce digital good useful for censorship resistance and sending value without intermediaries.
That use value preceded the exchange value.

Therefore, Bitcoin respects the theorem under a modern interpretation of “non-monetary value” as digital utility.

4. Quantity theory of money applied to Bitcoin

The classical equation:

$MV = PQ$

Where:

$M$ : money supply (fixed and predictable in Bitcoin)
$V$ : velocity of money
$P$ : price level
$Q$ : real output

4.1. Implications for Bitcoin

Given that:

$M = \text{constante y decreciente en crecimiento}$

and in fiat:

$M_{fiat} \rightarrow \infty$

The Bitcoin system behaves like hard money (hard money), while fiat is soft money (soft money).

5. Inflation rate and halving: mathematical model

The supply of Bitcoin is:

$S(t) = \sum_{i=0}^{n} 50 \cdot 2^{-i}$

The halving occurs every 210,000 blocks (~4 years).

Approximate annual inflation:

$\text{inflación}(t) \approx \frac{\text{nuevos BTC}}{\text{BTC en circulación}}$

Converging towards:

$\lim_{t \to \infty} \text{inflación}(t) = 0$

The only monetary asset with inflation strictly converging to zero.

6. Monetary hardness and stock-to-flow

The Stock-to-Flow (S2F) model compares scarcity among monetary assets:

$S2F = \frac{\text{Stock existente}}{\text{Flujo anual}}$

Bitcoin (post-halving) surpasses:

gold
silver
platinum
collectibles

Conceptual table:

Asset

S2F

Silver

Gold

Bitcoin (2024+)

115+

This places it in the category of “digital super-gold”.

7. Bitcoin as an emerging asset: 3-stage transition

Digital collectible (2009–2012)
- experimental value
- cypherpunk adoption
Speculative asset (2013–2020)
- growth of exchanges
- macro speculation
- correlation with risk
Monetary asset (2021–present)
- corporate treasuries
- institutional ETFs
- “store of value” narrative

8. Volatility: characteristic of monetization

Volatility is common in assets that are monetizing, not in established monetary assets.

Historically:

gold → extremely volatile at the beginning
fiat → unstable in implementation
oil → initial volatility due to global adoption

Volatility = function of adoption ± liquidity ± expectations.

Bitcoin reduces its volatility as:

monetary mass stabilizes
adoption grows
long-term participants increase
professional derivatives mature

9. Systemic risk: Bitcoin vs fiat

9.1. Fiat (state money)

endogenous inflation
dependence on the central bank
financial bailouts
political risk
banking risk
risk of confiscation

9.2. Bitcoin (sovereign digital money)

immutable scarcity
self-custody
no direct political risk
no banking risk
decentralization of issuance
rules verifiable by the user

10. Bitcoin and business cycle theory

The Austrian School (Mises–Hayek) argues that cycles are created by:

artificial expansion of credit
manipulated interest rates
fractional reserves
bad allocations of capital (malinvestment)

Bitcoin mitigates this:

there is no central bank
there is no rate manipulation
there is no money printing
automatic monetary policy

11. Intrinsic value: academic debate

Many economists say that Bitcoin “has no intrinsic value”. This is incorrect under a modern view.

Bitcoin has intrinsic value because it offers:

verifiable scarcity
censorship resistance
immutability
global permissionless transfer
sovereign ownership
energy security
political neutrality

These are attributes with economic value, though not physical.

12. Bitcoin as neutral international money

In the past:

gold was neutral
the dollar is NOT neutral (it is geopolitical)
Bitcoin recovers neutrality with additional attributes

Bitcoin does not belong to any country, which makes it:

the first geopolitically impartial currency in history.

13. Quantitative valuation models

13.1. Metcalfe model

$\text{Valor} \propto N^2$

Bitcoin behaves like a network, not like a traditional commodity.

13.2. Cash flow models for miners

$\text{Ganancia} = (\text{Recompensa} + \text{Fees}) - (\text{Coste energético})$

Mining creates a minimum fundamental value, since:

if price falls below energy cost
miners shut down
hashrate falls
difficulty decreases
security restores equilibrium

It is a homeostatic.

13.3. Store-of-value-based models

Similar to gold:

$Valor_{BTC} \approx \frac{\text{Valor total de activos refugio}}{\text{Oferta BTC}}$

14. Bitcoin against inflation

Bitcoin protects against inflation in two ways:

(1) Strict supply

$\Delta M_{BTC} = 0$

for the long term.

(2) Incentive to save

Hard money → low time preference.

Macroeconomic effect:

savings ↑
solid capital investment ↑
unproductive speculation ↓
rational resource allocation ↑

15. Bitcoin and velocity of money

Velocity in Bitcoin is low because:

users prefer to hold it (store of value)
liquidity does not depend on the government
supply does not increase to compensate low velocity

This does not prevent its monetary function; on the contrary:

Strong money → low velocity → high accumulation of value.

16. Macroeconomic risks

regulatory shocks (less impact in the long term)
speculative cycles
correlation with risky assets while monetizing
repricing in response to geopolitical events

But all these risks diminish over time.

17. Chapter conclusion

Bitcoin combines:

classical monetary theory,
Austrian principles,
modern economic incentives,
digital scarcity,
global neutrality,
mathematical verifiability.

All this makes it:

the most advanced form of money ever created and a potential post-fiat global monetary standard.

Bitcoin does not compete with cryptocurrencies. It competes with gold, sovereign bonds and the global monetary system itself.

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Last updated 9 months ago

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