Welcome to Tradimo! Here is our special offer for new users: Buy your first course now and get 10% off! 

Bitcoins obliterates 'the state theory of money'

The following article is an opinion piece by Jon Matonis – a leading authority on bitcoins board member on the Bitcoins Foundation.

Once you get past the childish title, the recent bitcoin piece from Karl Denninger raises some issues that warrant consideration from bitcoin economists. Denninger is an intelligent student of the capital markets and his essay deserves a serious reply.

Karl Denninger's argument against bitcoin is based on a Chartalist view of monetary theory. This claims that money must have no intrinsic value and should strictly be used as tokens issued by government.

The economic contribution of his essay is that it represents the thesis advanced by German economist Georg Friedrich Knapp in The State Theory of Money (1924), an expose advocating the Chartalist approach to monetary theory claiming that money must have no intrinsic value and strictly be used as tokens issued by the government, or fiat money. Today, modern-day Chartalists are from the school of thought known as Modern Monetary Theory (MMT).

Every trader needs a trading journal. As a Tradimo user, you qualify for the $30 discount on the  Edgewonk trading journal. Simply use the code " tradimo" during the checkout process to get  $30 offUse this link to get the discount.

Market-based illusion is just as valid as state-controlled illusion

Without getting into the intrinsic value debate, this is where I strongly depart from Denninger, because if we accept the thesis that all money is a universal mass illusion, then a market-based illusion can be just as valid or more valid than a state-controlled illusion.

What Denninger and Greenbackers and MMT supporters reject is the notion that monetary illusions themselves are a competitive marketplace, falsely believing that only the State is in a 'special' position to confer legitimacy in monetary matters.

Bitcoin seeks and gains legitimacy through the free and open marketplace. It is not a government instrument of legal tender that requires coercion by law in order to gain acceptance.

Regarding this issue of state-sanctioned legitimacy, bitcoin as a cryptographic unit seeks and gains legitimacy through the free and open marketplace. It is not a governmental instrument of legal tender that requires regulatory legitimacy and coercion by law in order to gain acceptance.

Therefore, the path to widespread adoption of bitcoin hinges on three primary market-based developments:

  • robust and liquid global exchanges similar to national currencies that can offer risk management via futures and options.
  • more user-friendly applications that mask the complexities of cryptography from users and merchants.
  • a paradigm shift towards 'closing the loop' such as receiving source payments and wages in bitcoin to eliminate the need for conversion from or to national fiat.

Denninger has four main criticisms of bitcoin

Even after graciously accepting Denninger's definition of what the ideal currency would be (which I don't) and searching for any economic nuggets of value, his arguments can be distilled into four main criticisms of bitcoin as a monetary instrument.

First, bitcoin does not provide cash-like anonymity. Second, bitcoin transactions take too long for confirmations to be useful in everyday transactions. Third, bitcoin exhibits irreversible entropy. Fourth, the decoupling of the stateless bitcoin from the obligation of monetary sovereigns is considered a fatal weakness.

Now that we identified the objections, let's take these in order.

The path to acceptance for bitcoin hinges on: robust and liquid exchanges; more user-friendly applications that mask complexity from users and merchants; and shift towards receiving source payments and wages in bitcoin.

Bitcoin offers user-defined anonymity

On the first point surrounding bitcoin anonymity, Denninger only embarrasses himself with this criticism. By default, bitcoin may not offer anonymity and untraceability like our paper cash today, but it is better described as user-defined anonymity because the decision to reveal identity and usage patterns resides solely with the bitcoin user.

This is far superior to a situation where users of a currency are relegated to seeking permission for their financial privacy which is typically denied by the monetary and financial overlords. Also, his capital gains tax issue is a non-starter because it's a byproduct of a monopoly over money.

Advances in green addressing techniques have solved confirmation delay issues

His second criticism of a lack of utility in the 'goods and service preference' due to timing of sufficient block chain confirmations has some merit.

However, advances have been made in the use of green addressing techniques that solve the confirmation delay problem by utilising special-purpose bitcoin addresses from parties trusted not to double spend.

Bitcoin offers the advantage of user-defined anonymity. This is superior to current paper cash, whose users are usually denied financial privacy by government.

Bitcoin offers ability to create backups and is hard to confiscate

Denniger's third criticism that bitcoin exhibits irreversible entropy is confusing. Typically, entropy refers to a measure of the unavailable energy in a closed thermodynamic system that is also usually considered to be a measure of the system's disorder. In the case of bitcoin, I suspect Denninger is taking it to mean the degradation of the matter in the universe because of his explicit comparison to gold.

While it is true that bitcoins lost or forgotten are ultimately irretrievable, I view that as a feature not a bug because it is the prevailing trait of a digital bearer instrument.

Two bitcoin digital attributes that make it superior to physical GOLD are its ability to create backups and its difficulty of confiscation. Furthermore, the number of spaces to the right of the decimal point (currently eight) is immaterial to bitcoin's suitability as a monetary unit.

Governments manage monetary system for own self interest

Now for the big and final one. Denninger asserts that monetary sovereign issuers possess not only the privilege, but the obligation, of seigniorage, which Denninger refers to as bi-directional since sovereigns have the responsibility of maintaining a stable price level during times of both economic expansion and economic contraction.

As a product of Hayekian free choice in currency, market-based bitcoin is decentralised by nature and poses a false comparison to the century-old practice of central bank monetary manipulation. Fear not deflation.

Governments have appropriated the monetary unit for their own benefit by declaring it the only preferred monetary unit for payment of taxes to the State. Believing that governments have sincere and good intentions in administering the monetary system is akin to believing in fairy tales.

Control of the monetary system serves one and only one interest — the unlimited expansion of the sovereign's spending activity to the detriment of the unfortunate users of that monetary unit. Decentralised Bitcoin obliterates this sad state of affairs.

Bitcoin is superior to physical GOLD because as a digital bearer instrument it is possible to create backups and it is difficult to confiscate.

Denninger's biased and establishment preference for a monetary sovereign serves only to harm his analysis because it undeniably closes him off from alternative, and usually superior, free-market monetary arrangements.

More damaging, however, is the fact that it places him outside of the mainstream in free banking circles and squanders his remaining quasi-libertarian credibility as a champion of markets.

It is a fallacy that governments have citizens' interests at heart when they administer the monetary system. The current system simply allows governments to expand their own spending activity to the detriment of other money users.


We strongly recommend to enroll in our cool  cryptocurrency course as well.


This article appeared originally in Forbes and is reprinted here with the kind permission of the author, Jon Matonis, who is a leading authority on bitcoins and currently serves on the Bitcoins Foundation board of directors.


Number of Clientsover 2,500,000
RegulationFCA, CySEC, IFSC


Get 12-month Premium Membership for free. Deposit and send us an email to premium@tradimo.com to claim your free Premium Membership.


Minimum Deposit$100
Average Spread2,2 pips
RegulationCySEC, FSB


Get 12-month Premium Membership for free. Deposit and send us an email to premium@tradimo.com to claim your free Premium Membership.

show less