On Austrian Economics and Bitcoin

How Bitcoin fits into the Austrian Business Cycle and Monetary Framework

Austrian economics and Bitcoin have been tied together since the very early days of the Bitcoin community, largely because they both draw in a libertarian-leaning audience. In fact, I first became interested in Bitcoin because of my passion for Austrian economics. Since then, Bitcoin and crypto have seen a huge change in their communities, and the prevalence and understanding of Austrian economics has since decreased significantly in crypto circles. As we are now in a time of rapid change and economic panic, much like when Bitcoin came into inception, it is fitting to bring Austrian economics back into the spotlight.

Austrian Business Cycle Theory (ABCT) explains why many Austrians view commodity-backed (typically gold-backed) currency as superior to fiat currency. Put in layman’s terms, ABCT claims that excessive inflation of money supply, typically driven by a central bank or the government, results in an artificial boom that ultimately results in its own bust.

Another criticism from mainstream economics reflects the complete opposite view of Austrian economics: having an inflexible supply means the inability to conduct monetary policy and adjust money supply for economic changes. Keynesians argue that money supply should be increased during bad economic circumstances to stimulate aggregate demand. Especially when economies face significant illiquidity, Keynesians take the approach that the central bank should actively lower interest rates and increase money supply to increase investment and consumption. This, of course, in the Austrian perspective contributes to the boom and bust cycle and prevents the liquidations of malinvestments, thus leading to potential larger problems in a future economic cycle. Generally speaking, global central banks have largely followed such a policy; however, they have failed to live up to the flip side of Keynes’s views, which look to the government to adjust fiscal and monetary policies when the economy recovers.

In the beginning of the article, we discussed the evolution of the perception of Bitcoin from digital p2p cash to digital gold. This is important, because should this perception of Bitcoin as an alternative to gold hold a wider sway over both institutional and retail investors, it may cause capital flight into Bitcoin during a financial panic. As we noted before, interest in Bitcoin has increased since the coronavirus panic and the subsequent policies from the Federal Reserve. Yet, if you do a simple Google search of Bitcoin and coronavirus, you will find two diametrically opposed camps on the effect of coronavirus on Bitcoin’s price, with markedly different sentiments on every other article headline. Although many in the Bitcoin community and the broader finance community remain bullish, it is impossible to predict the trajectory of Bitcoin from here the true net effect of the coronavirus crisis on Bitcoin remains to be seen.

As shown above, Austrian economics and Bitcoin have been connected since the very beginning of Bitcoin’s existence. I myself started my crypto journey in college, when my passion for Austrian economics led me to Bitcoin. Since I entered the space, cryptocurrency markets have changed vastly and the prevalence and understanding of Austrian economics has since decreased. Hopefully this article illuminates the connection between the two and demonstrates the potential value of Bitcoin within the Austrian business cycle framework. As we enter a period plagued by coronavirus and uncertain economic conditions, an understanding of the economy, financial markets and Bitcoin’s role in them may be more important than ever.

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