How the Fiat Money System Can Explain Bitcoin Value


If you’ve read my post about Modern Monetary Theory, you’re aware that according to MMT, the prime driver of monetary value is taxation. Taxes drive fiat money because a sufficient number of economic entities need it in order to settle tax liabilities, penalties, fees, etc. with the sovereign government of the region.

The amount of money that the government spends into existence, and doesn’t remove from private sector hands, represents the private sector’s net saving for the observed period. The private sector (households and corporations) has an inherent demand for increasing its net saving. Decline in net savings can at some point cause the private sector to purchase less in order to save more. In fact, many recessions and depressions are preceded by a drop in private sector net savings; the ensuing correction period being where the private sector usually rectifies this shortage.

I’m not sure if anyone has made this case yet, but I would argue that you can easily explain the entire Bitcoin economy through Modern Monetary Theory’s observations about the fiat money system and taxes driving the value of money.

In the world of Bitcoin there is no government. However, there are the so-called Bitcoin miners. We could group all Bitcoin miners together into one sector… let’s call it the “Bitcoin mining sector”. Then there is the other sector, consisting of people signing Bitcoin transactions without being miners, let’s call this the “Bitcoin user sector”.

When someone in the mining sector makes a purchase from someone in the user sector, he spends his earned Bitcoins to receive something in exchange from the user sector. The user sector now essentially has accumulated net saving against the mining sector, to use MMT terminology.

What is it that virtually everyone in the user sector must do to be able to send Bitcoins to someone else? They have to pay a transaction fee to the mining sector – and what currency is used to pay this fee? Of course, Bitcoin!

I would argue that when the mining sector spends its Bitcoins, it is similar to when the government spends fiat money into existence. Meanwhile, when a user must pay a transaction fee to the miners, this can be equated to the taxes that drive the value of money in a fiat money economy. The number of Bitcoins that the mining sector leaves to the user sector can be roughly equated to the government budget deficit in the fiat money world.

Of course, I understand that taxation is compulsory, so I don’t mean to equate the two concepts morally. Rather, I equate them to understand the ultimate reason why people desire to hold the tokens in question.

In other words: people ultimately hold Bitcoins, because everyone needs Bitcoins to submit a new entry into the blockchain, usually for the purpose of making a Bitcoin transaction; however, in many cases, this is also just in order to submit a hash into the Blockchain that proves the existence of a document (or other data) at a certain point in time. This is just one example of Bitcoin usage that is not facilitating the exchange of goods and services.

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Nima is an entrepreneur and Bitcoin advocate who writes about economics and freedom. He was born and raised in Berlin and received his Master's degree in the US in 2004. He co-founded an auction software company in San Francisco and successfully sold it in 2015. (Twitter: @economicsjunkie)