The "Intrinsic Value Of Bitcoin

in #bitcoin8 years ago (edited)

A provocative title to kick things off… Many so-called “Financial Experts”, Bankers, “Economists” and myriad “Analysts” have decried Bitcoin as a fiction, a delusion, a Ponzi Scheme, Linden Dollars, “intrinsically” worthless imaginary monopoly money… Even elements within Mainstream Austrian Thought, which one would expect to know rather better, have jumped on the Bitcoin Ponzi bandwagon… Really quite depressing…

As the title suggests, I’m in fundamental disagreement with these “experts” and hope to demonstrate that Bitcoin does indeed have “Intrinsic” value like a good such as, say, Gold has “Intrinsic” value… I hope to demonstrate this as a necessary truth, based on logical deduction and sound Austrian Economics…

The first question to be thought out is; what is value? From where does value derive? What gives anything “Intrinsic” value?

Busting The Myth of “Intrinsic” Value

This Myth is old… It comes down from the Classical Economists, Adam Smith (1723-1790) and David Ricardo (1772-1823) and through Karl Marx (1818-1883), who to different degrees relied on The Labour Theory of Value… This is the theory that the value of goods are derived from the labour and/or production of the good in question… This is the origin of the myth of “Intrinsic” Value in that labour is somehow inherently and intrinsically embodied in said produced good… For example, if you worked ten hours on a particular good then you would have to sell your good for more than ten hours of labour at, say, £10 an hour… To turn a profit you would have to sell your good for not less than £100… In your own mind, your good has a value of at least £100…

The obvious flaw in this thinking is that you’re not selling to your own mind, you are selling to somebody else’s mind… What if that mind only thinks it’s worth £50? If someone is only willing to pay you for half the time it took you to make at your expected hourly rate, then your good is not worth £100… It is worth £50, or whatever you can get for it when haggling…

Which brings us to the myth of the “Intrinsic” value of goods… Gold has “intrinsic value”; Fiat money is “intrinsically” worthless as it is not “backed” by anything; Bitcoin is “intrinsically” worthless because it is not “backed” by anything…

Refuting The Gold Has “Intrinsic” Value Meme

Anyone who believes Gold to have “intrinsic” value should look at the following clip… It is a video published on May 29th May 2012, where Mark Dice tries to sell a 1 ounce Gold Maple Leaf to customers (12:35)… What this video should demonstrate is that these people will not part with their “intrinsically” worthless “un-backed” Fiat dollars for “intrinsically” valuable gold “backing”… They value their infinitely printable inked counterfeited paper notes, above finitely unprintable precious metal; quite an indictment of the “Success” of Compulsory Public Education and Elitist Mainstream Media control on the American Public… To 90%+ of the Western World, gold is a pointless barbarous relic

The obvious question is, why? Why do these people value infinitely printable paper dollars above finitely unprintable Gold? Three words, Legal Tender Laws… They get paid in dollars, all the stores they buy their stuff at asks for payment in dollars, and all these people accept these paper notes because they are redeemable in the paying of Income Taxes… These people have no use for Gold; they don’t understand it, it has no utility in their minds, so why would they value it? Gold has no “intrinsic” value to these people because they value subjectively like everyone else, and dollars have far more utility as money given that they are “backed” by the implicit coercion of Tax Authorities and prisons…

This is The Subjective Theory of Value and the central insight of Carl Menger (1840-1921), founder of the Austrian School of Economics, that economics is the pursuit of individual needs and wants with limited resources… In other words not the cultish religion and statistical models of Economist Academia, but Real World Economics, using logic not mathematics…

Marginal Utility – Where Value Derives

Now that we have refuted the myth that Gold or any other good for that matter has “intrinsic” value, we can move on to the particulars of The Subjective Theory of Value, and where value ultimately derives…

When one is in pursuit of needs or wants, their decisions are based on how useful those goods are subjectively… For example, our most urgent needs or wants will be water and food to survive, and then come clothes, shelter, etc etc… For a good to be desired or wanted, it first has to have utility… Water has utility for drinking; meat, vegetables and fruits have utility for eating… Therefore utility is an important determinant in the derivation of value…

However, utility on its own is not enough to determine valueAdam Smith (1723-1790) had applied theories of utility and value to goods but ultimately relied on labour as derivation of value because he could not solve the Diamond-Water Paradox… The paradox is a simple one; if utility is the sole derivation of value, then how is water of less value than a diamond? You see his point… Water would keep you alive while the diamond is a luxury vanity item, so water has de facto more utility than a diamond… And yet copious quantities of water could be bought for the value of a small diamond… It doesn’t make sense does it? It didn’t to Smith, and his faulty theory of value was accepted down to Karl Marx (1818-1883), as the centre-piece of his Theory of Surplus Value leading to his Theory of Class Conflict, and the rest as they say is history; of blood, misery, cruelty, and murder

The Marginalist Revolution

Quite unbelievably, in the same decade (Circa 1864-1874) and quite independently of each other living in different countries, Carl Menger (1840-1921), William Stanley Jevons (1835-1882) and Léon Walras (1834-1910), solved the Diamond-Water Paradox… They solved it through applying the Real World Economics of scarcity to utility… Marginal Utility… It is on the margins of society that the plane of the reality of individual wants and needs operates… Yes the water has more utility than the diamond obviously, but it’s the scarcity of these resources out on the ground that is the real derivation of value… While water is easily available and cheap on the open (or regulated) market, diamonds are intrinsically scarce on the open (or manipulated) market… And this should be the central insight to take from this post; it is the INTRINSIC SCARCITY of real world marginal units of goods and resources that gives them their utility and therefore their value

The Odd One Out

The title of this post was a bare faced lie… Bitcoin does not have “intrinsic” value… But neither does Fiat money, and neither does Gold or Silver… All these mediums of exchange have subjective value based on Marginal Utility, that of scarce utilityNow let’s compare these three mediums, Precious Metals, Bitcoin and Fiat, and ask the question; which is the odd one out?

My answer is Fiat… Why? Because unlike Precious Metals AND Bitcoin, it lacks intrinsic scarcity… The issuance is controlled privately by a cartel of very powerful and influential banks and bankers, with what is literally a licence to print money… The money supply can be expanded and contracted at will, creating the Credit and Business Cycles, the Boom Bust Cycles that have devastated generations from the Great Depression (1929-1946) to The Stagflation Seventies, The Dot Com Bubble, The Housing Bubble, and this most epic in human history, Central Banking Bubble… By “virtue” of monopoly control over the supply of money, they can position themselves ahead of time to profit from either boom or bust, while depriving the productive members of society that are devastated by these “unforeseen” crashes, of REAL assets and property

For now Fiat still has utility as it is accepted, nee enforced, as “Legal Tender” in the payment of taxes and therefore forced on near enough every merchant, producer and consumer in every Country on the face of this earth… This enforced “utility” is what gives Fiat money its value, but again it should be clear that this only applies as long as people still believe there is a scarcity of Fiat money… This is a CONfidence game as all Ponzi Schemes are… As long as the common man still believes there is a scarcity of infinitely printable pieces of paper or electronic digits, he will find utility in using them… But when the tipping point is reached when the Ultimate Myth of Central Banking is exposed for the Ponzi Scheme that it quite obviously is, when the ability of a Central Planning Committee to control the essential lifeblood of a functioning economy is exposed as a grotesque delusion, when CONfidence is lost; the only logical conclusion is hyperinflation of the currency… It becomes subjectively worthless, and loses its utility completely as a medium of exchange, unit of account and store of value…

Gold Has Intrinsic Scarcity

Unlike Fiat, Gold has intrinsic scarcity… The current value of Gold in Fiat is being blatantly suppressed as not to expose the rapid loss in purchasing power of the dying Fiat system and should be trading at multiples of this current farcical price were it not for the “paper gold” straitjacket… Price discovery is long dead… When you strip away the paper to expose the underlying physical metal, Gold has intrinsic scarcity… It is rare… Its scarcity is its main utility… It is expensive to mine, costly to produce and is finitely unprintable… It has served as the main money (a medium of exchange, unit of account and store of value) for thousands of years… It will always have intrinsic scarcity (outside of extra-terrestrial discoveries and production), and therefore will always have utility subjectively to Humans on Earth…

Bitcoin Has Intrinsic Utility

Here we get to the nub of this post… I would define Bitcoin specifically as an Asset Transfer Protocol (like e-mail is an information exchange protocol or Http:// is an internet protocol), which has the Blockchain as its network infrastructure, on which storage and exchange transactions are recorded and confirmed by a decentralized consensus of network computing power (the miners); and has an in-built currency called bitcoin, of which there will only ever be a maximum of 21 million issued and dictated by a self-adjusting algorithm… These 21 million units are stored within the Blockchain and can only be exchanged within the Blockchain by the ownership of Public and Private Keys…

Another way to define it would be as a Decentralized Asset Ledger that allows ownership of virtual assets and within that ledger, has no counter-party risk… It is not owned by Banks and it is not owned by Governments… It cannot be issued or controlled by Banks, and it cannot be issued or controlled by Governments… You can transfer your virtual assets anywhere within the network, instantaneously (barring confirmation), for any denominational amount, for a fractionally small fee… There are no capital controls within the Bitcoin network, and as long as you can secure your Private Key you are the owner of that asset in perpetuity… To connect to this global distributed virtual asset network is as simple as an application download to a smart phone or laptop, and you are connected to the rest of the Bitcoin network and economy… I hope we can agree that there is absolutely no doubt that this technology has utility

And Currency is only the first application, to which you can and will soon be able to add, Legal Contracts, Stock Ownership, Property Deeds, Medical Records etc etc… Your physical assets, your Gold, your Silver, your home, your car, your property, can be stored in digital form and can be exchanged and traded within this self-contained network of potentially everyone else on earth… It can eliminate Banking, The “Legal” Profession, The Accounting Industry, Forex Trading, Remittances, any and all powerful (and therefore corruptible) middlemen who control our voluntary exchange and our lives, and their wealth extracting and private property violating Government “Licences” and “Regulations”… Your wealth in its digital form is incorruptible and free of any capital controls… If you cannot see the mind-bending utility of this technology, then you haven’t understood it

Bitcoin Has Intrinsic Scarcity

The denominational in-built currency of the Bitcoin network is bitcoins, of which there can only ever be a maximum of 21 millionBitcoin therefore has intrinsic scarcity… Like Gold it is expensive to mine and takes (computational) resources to produce, and like Gold it is finitely unprintable… You can’t print Gold and you can’t print bitcoins either… Whatever trade and commerce and industries store and trade their wealth on the Bitcoin network, that wealth is added to the Blockchain… A million people with a thousand pounds (Fiat Sterling value) of value trading on the blockchain, would make the Bitcoin network worth a Billion pounds; divide that by 21 million, gives you a value of £ 476.19… Ten million people with ten thousand pounds of wealth on the blockchain would be One Hundred Billion pounds; divide by 21 million, gives you a value of £ 4761.90… This is a quick and basic illustration of how it works… The more people use this fledgling technology, the more assets that are stored and traded through the blockchain because of its inherent and intrinsic utility for asset transfer; the more value is added, but at the end of it, only 21 million bitcoins into which it can be divided… That is intrinsic scarcity…

Conclusion

The title of this post was fallacious… Bitcoin has no “intrinsic” value, but it has all the attributes of having subjective value; it has astounding utility and is intrinsically scarce, which tells you that Bitcoin has valueIncredible value… A Storage and Asset Transfer Protocol that has no counter-party risk (and one look around Modern Society should scream that corrupt and politically privileged counter-parties are what’s destroying all our futures) I would argue is Priceless… Private Property is Human Freedom, and the Blockchain allows you to store and exchange YOUR private property free of Fiat Decree and without having to exchange through centralized cartelized counter-parties, giving you financial freedom, and therefore de facto economic freedom… Simply put, Blockchain Technology is the biggest game changer in Human History

To try to quantify and condense what a shadowy programmer with the strange pseudonym Satoshi Nakamoto has invented and created; a public ledger that anyone can connect to voluntarily for storage and free exchange of physical assets virtually, eliminating counter-party risk, in other words Governments and Banking… Once you understand what this means, you can let your imagination do the rest… Is my call for Satoshi Nakomoto as the Man of The Twenty First Century premature?

Recommended Background Information For This Post

Introduction to Austrian Economics, Lecture 2: Value, Utility and Price – Jörg Guido Hülsmann (55:20)

The Marginalist Revolution – Joseph T Salerno (59:17)