Bitcoin Debate: the Lack of Intrinsic ValueSubmitted by JixMainstream on Thu, 04/25/2013 - 17:03
Bitcoin is a controversial topic around here. That's a good thing, because it means we have an opportunity to engage in an intellectual debate. What's detrimental, however, is when a debate gets cluttered with irrelevant or off-topic discussion.
So I thought it might be helpful to have a focused debate on a single topic at a time. And why not start with perhaps the most controversial aspect of Bitcoin: its lack of intrinsic value.
Here's my take:
First, it's important to distinguish "money" and "currency". Money implies the ability to store wealth, while a currency is a medium of exchange. One requires Intrinsic Value (IV), the other does not.
We all know that gold has great industrial uses (IV), but are those industrial uses alone worth $1500/oz? Of course not. Some of gold's value comes from its properties of being a great medium of exchange. The price (P) of any commodity can be represented by this formula:
P = IV + EV (extrinsic, or "instrumental" value)
According to Wikipedia, "[Extrinsic] Value" is the value of objects (...) not as ends-in-themselves, but as means of achieving something else. For gold, this EV is in its properties of being a good medium of exchange. Said another way, people are willing to pay MORE than the IV of gold BECAUSE of its EV!
So why is Intrinsic Value important at all? Because it is a hedge.
Look at the formula again: P = IV + EV. In the event that people no longer decide to accept gold, paper money, or bitcoin as a medium of exchange, their EV would drop to zero. Only a commodity with IV (gold) will leave you with anything of potential value in your pocket.
But here's my next question: Is that important for a currency (medium of exchange)?
If you want to sell your laptop and buy something roughly equal in price (say, a TV), you find a guy on craigslist to give you some cash for your laptop, which you give to another guy in exchange for his TV. We all know the paper currency has no intrinsic value. It could be ten dollars, or it could be a million. The numbers on the bills are irrelevant so long as the parties agree that they represent an equal exchange of value! You’ve exchanged your laptop for a TV without having to find someone who has the TV you want, and also wants your laptop. This is how currencies are supposed to work!
So let's get a little hypothetical: Let's say there was a metal that was scarce like gold, divisible like gold, and durable like gold. In fact, let's give it some properties that might even be BETTER than gold! Let's say it's ultra-lightweight, and maybe that its color adapts to its surroundings so it could be easily hidden. This is starting to sound like the ultimate currency! Lastly, let's give this stuff an awesome name: "Jixium". Good. I like it.
Now here's the only problem with jixium: this metal is completely inert and functionally useless! It's not conductive, it can't be made into an alloy or anything of industrial value. No one even wants to wear jixium as jewelry!
So is jixium worthless? Does jixium's value as a medium of exchange disappear because it can't be made into a circuit board or a sparkly trinket to hang around your neck? Not at all!
We already know that people will pay more than the IV of gold because it has EV as a medium of exchange. There is absolutely no difference between paying for the exchange properties of gold and paying for the exchange properties of jixium.
The same holds true for bitcoins. People are willing to pay for bitcoins simply because they are an incredibly useful medium of exchange. People see a currency that can't be hacked or seized, can't get deflated, is transportable, and divisible. OF COURSE that has value!
So long as Bitcoin can maintain its usefulness as a medium of exchange, intrinsic value is irrelevant!
But what are your thoughts?