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Bitcoin Debate: the Lack of Intrinsic Value

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?

-Jix



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Great Post... Healthy debate on Bitcoin is, well... HEALTHY! :)

Thanks JixMainstream

You are doing an amazing job here, I smile when I think about how these posts reach people here on DP, one at a time...

Just like I was "reached"

Keep the debates going, they are a great educational tool I believe.

Just plain 'Happy'about the direction the world is taking! Especially if we live to reach LEV [Longevity Escape Velocity]

Why do we value gold?

I would say for 90 - 95 % of the value gold has comes from it's monetary properties.

Take those properties out of the equation and Gold becomes valued much like any other commodity.

So, What if there was something that mimicked the monetary properties of Gold but went beyond that by making transacting in it much more efficient, faster, secure and secure. Well Walla! There is your currency. Bitcoins/Litecoins are it.

We can not have the technologically advanced society we have today without currency. Digital Currency to be exact. Imagine shipping 150 ounces of Silver from florida to California for a computer. Or sending Gold to a relative in Europe every month. Yes, Gold and Silver transactions would literally take us back in progress. Unless we had digital transactions representing Gold and Silver in a vault. Like Egold and Gold money. Only thing is it's illegal and those vaults are big targets for tyranical governments much to much risky.

Right now Digital Crypto currencies are a real way to opt out of the Fed reserve system. Everyday you don't use an alternative form of transacting and use dollars you are empowering those who wish to do harm to Liberty.

So please help end the Fed and use Bitcoins/Litecoins

My problems with bit coins are..

Their "value" can go to zero and lose their medium of exchange value by hitting zero.

Bitcoins are extremely risky because they have a short track record and very high fluctuations of "value". Even knowing that bitcoins can facilitate "under the radar" transactions leaving parasitical governments in the dark about them, we must admit that there is a very high risk that from the moment you buy the bitcoin till the moment you sell it, their is a time period were you are basically gambling with your wealth by knowing that you may lose most of it.

(I will admit that I don't know much about bitcoins I chose not to waste my time on the subject due to some of these fundamental flaws.)

www.youtube.com/truefictions

I try to change people every day. Do You?

So you admit your ignorant

But still want to claim there are flaws.

Well I see a Flaw in your analysis and that is that you Value things in FIAT paper dollars.

That's the real FLAW.

Hi there Mr. Know It All..

"Well I see a Flaw in your analysis and that is that you Value things in FIAT paper dollars."

Would you mind explaining how you reached that brilliant conclusion from my words?

I will give the bit coin supporters this.. they are marketing this idea with great passion and that does give the bit coin some value in the sense that many people will be fooled by the marketing and money will be made. I see it as a missed opportunity to get in on a pyramid scheme, but I don't mind missing those.

www.youtube.com/truefictions

I try to change people every day. Do You?

Bitcoin may be the biggest ANTI-pyramid scheme EVER!

Dear truefictions,

you may say: "I see it as a missed opportunity to get in on a pyramid scheme"

but everytime you use a true pyramidal currency like dollars/euros etc... you are 100% supporting a pyramid scheme that is not only corrupt, but absolutely EVIL in it's design to steal value to benefit those at the top.

Bitcoin is not a pyramid scheme simply because it does not have the constant feeding of the TOP (first-comers) as a pyramid scheme needs. The people who first adopt it get the benefit of their investment only until they decide to "sell" once they have exited that's it, there is no longer any stake left, no more value to be gained from ever being members of the community.

from: https://en.bitcoin.it/wiki/Myths#Bitcoin_is_a_pyramid_scheme

"Bitcoin is nearly opposite of a pyramid scheme in a mathematical sense. Because Bitcoins are algorithmically made scarce, no exponential benefit is derived from introducing new users to use of it. There is a quantitative benefit in having additional interest or demand, but this is in no way exponential."

Just plain 'Happy'about the direction the world is taking! Especially if we live to reach LEV [Longevity Escape Velocity]

I sure hope intrinsic value

I sure hope intrinsic value isn't important for anything!!! Considering that all value is subjective, and can ONLY exist in the mind of an individual, said value can't possibly be contatained in an objects physical form.

If the biggest question concerning bitcoins is whether or not they have something that doesn't exist, then I don't see the point in debating.

OTOH, if you want to talk about the SALE-ALE-NESS of bitcoins, then there is a meaningful discussion to be had.

Sale-ABLE -NESS, or how you think the next guy will subjectively value a bitcoin, has real implications for it's use as money, considering that the definition of "money" is always "the most sale-able good". Let's not confuse our GUESSING how the next guy will value an object with the idea that the value is somehow inside the object, itself. Sale-able-ness is NOT the same thing as "intrinsic value". I can explain sale-able-ness WITHOUT assuming inanimate objects exhibit fictitious, and mythological characteristics. "Intrinsic" value died with the "Labor" theory of value. When the theory proved to be inadequate, the ideas based off of said theory became inadequate as well.

Money is always a good. Currency can be a claim on a good, but money is the good, itself, not a claim. This is the difference between the two.
BTW, the original post suggested that the difference between money and currency was that money could "store wealth". That's a no-go right there. Wealth, being a product of value, can't be stored. There is no unit of measure for wealth, or value, therefore, there is no objective way to tell if "wealth" is being reserved, enhanced, or depleted. It's all subjective. If one denies the subjective quality of value, then that person CANNOT explain why gold has a higher price than iron, which is a lot more useful. This very question is what killed the "Labor" theory of value, and the idea of "intrinsic" value with it.

"I do not add 'within the limits of the law,' because law is often but the tyrant's will, and always so when it violates the right of an individual."

RE: "Money is a store of value"

Premise: Value does not exist in nature.
Premise: Man acts.

Conclusion: Value is derived from human action.

It is impossible for gold to inherently store human energy or action so the whole debate is bunk. Gold is a store of value because man deems it so. If men deem bitcoin to be a store of value, it is so.

Yes, but...

...by intrinsic value the OP means value as a consumer good, and by extrinsic value he means value as a producer or exchange good - i.e. he's not claiming that value is objective.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

If ...

value derives from human action and human action is not objective then value can not be objective.

"Inherent value" is a contradiction in terms since value does not exist in nature. What is important are the reasons men deem something to be a store of value. Bitcoin has demonstrated that tyranny provides a new reason in the market ... privacy.

Again...

...I agree with you that value is subjective. But you're attacking a strawman, the OP is not really claiming that value is objective, he's just using language which makes it sound that way.

What is important are the reasons men deem something to be a store of value. Bitcoin has demonstrated that tyranny provides a new reason in the market ... privacy.

I don't think that squares with the regression theorem: i.e. BTC is of no use for private transactions unless it is already accepted as a medium of exchange.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

Is it ...

the regression theory or regression fact?

The attributes of Bit Coin are common sense:

http://bitcoin.org/en/

The regression theory stating moneys only can come about after there has been a demand for the money commodity in a barter economy does not account for knowledge.

It is common sense something can only come about by what is known. The regression theory presumes commodities are the only thing that will ever be known. I think the presumption is in error.

I will attempt to sum it up in a formula:

Money = Human Action + Subjective Valuation Based On Usefulness Which Is Individually Discerned By Knowledge + Widely Used Because Many Individuals Arrive At The Same Conclusion Or Adopt The Same Belief.

Why bitcoin will fail

For something to become a medium of exchange, it must already be valued as a commodity (regression theorem). More to the point, for something to be widely used as a medium of exchange, it must already be widely valued as a commodity. Bitcoin arguably meets the condition of the regression theorem (a handful of techies valued it as a commodity originally: "digital jewelry" as they say), but it is definitely not widely valued as a commodity, nor is it likely to be (IMO), and so it has very limited potential as money.

If you want to demonstrate that bitcoin has the potential to become money in a meaningful sense (a widely excepted medium of exchange), then you need to make a case for how bitcoin becomes a widely accepted commodity.

Note: by "commodity" I mean simply a good, whether a producer or consumer good. Hwwever, since bitcoin cannot possibly be a producer good (one cannot make anything with bitcoin), bitcoin can only be a commodity in the sense of a consumer good (e.g. as "digital jewelry"). So, again, if you think bitcoin can become a widely accpted medium of exchange, you need to explain how it first becomes a widely accepted consumer good.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

Bitcoin Doesn't Have To Be Better Than Gold

Bitcoin only has to be better than fiat currencies, which it is because it has intrinsic scarcity. When fiat currencies are printed into worthlessness, Bitcoins will remain. Think of Bitcoins as another brick on the path back to the gold standard.

Yes but ...

the argument is a historical one. You are asserting because in the past things tended to become money that were commodities because men deemed that to be an important reason.

The Federal Reserve Note and fiat money pretty much directly challenge your assertion. Clearly something that is not a commodity can be deemed money and widely used.

"the argument is a historical one"

No, it's a logical argument: namely, the regression theorem.

Why would a person accept a widget as payment? There are only three possibilities. Either (a) he values the widget as a consumer good, (b) he values the widget as a producer good, or (c) he expects that he can sell the widget on the market for something he does value as either a consumer or producer good.

If option (a) or (b), then widgets are money because they are consumer or producer goods. While option (c) just begs the question and we start all over again.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

I would

assert there is only one reason.

One can use what is received.

What can not be presumed are the possible or potential uses because they can change or evolve with knowledge.

You applying for a job at the Fed?

"So long as [the USD] can maintain its usefulness as a medium of exchange, intrinsic value is irrelevant!" --Ben Bernanke, Somewhere in time, I'm sure.

The importance of intrinsic value is...

to reduce the long term risk of holding the currency as an investment. Like you said, it's a hedge. Precious metals are durable, able to be used as coinage, rare enough to preserve their value, and cannot be created out of thin air by man.

On the other hand, bitcoins are not limited in the practical sense. A virtually infinite number of bitcoins can exist which makes them a risk to hold for any length of time. Time is what is important here, and it must be considered. How easy is it to liquidate bitcoins to other forms of currencies or to buy into potentially more time stable investments? Further, I assure you that time will show that bitcoins are as "unhackable" as the Titanic was "unsinkable."

Bitcoins are just as fiat as FRNs and less transferable.

People that don't spend their money as soon as they get it wouldn't be any better off with bitcoins than they are with FRNs.

Perfect Currency

You know what would make the perfect currency? Weed. Cannabis. Herb. Gandja. Why?

"And I will raise up for them a plant of renown, and they shall be no more consumed with hunger in the land, neither bear the shame of the heathen any more."

Cannabis fights cancer, it nourishes the body, it makes valuable and long lasting products of virtually any kind, planting it purifies the soil, you can live on the seed alone for all of your body's nourishment, people enjoy its use, it retains a high market value (for thousands of years and despite prohibition), it grows almost anywhere, and no one person, organization or institution can solely control the flow of it; they have tried.

If we are to look for a real solution to our currency problem why should we not use a medium that empowers us rather than enslaving us?

I think what most people are

I think what most people are not even contemplating about Bitcoin is that they are not guaranteed to be accepted, such as FRNs. The Government(local, State, and Federal) have to accept FRNs, and what's worse for Bitcoiners is, in most States, FRNs are all that are allowed to be accepted to pay taxes, and fines. This dose of reality leaves Bitcoiners with a potential future problem, which is, how does one turn Bitcoins into FRNs? This problem would normally be solved with an exchange; however, when Magic The Gathering Online eXchange aka Mt Gox signed a deal with Silicon Valley Bank, Mt Gox now has to follow all banking laws -which is why they now require a photocopy of the individual's ID to open an account. The US government has also stated that all exchanges must follow certain finance laws. This means that while it may be theoretically impossible for the US government or any Government in particular to control Bitcoin within their borders, those government can ensure that Bitcoin is not the sole currency in use, by making it nearly impossible to exchange Bitcoin for government fiat needed to pay taxes(property taxes, auto insurance, etc).

Also, while government will never be able to stop person to person transaction -barter is still around in certain places- the government can make it nearly certain that all major companies and corporations would not accept Bitcoins. They can do this via tax loopholes or some-other fashion which helps reduce a company or corporation's tax liability to zero. With all kinds of tricks up a government's sleeve, Bitcoin will never become more than a novelty, because the vast majority of people will never utilize it, because the companies which most people frequent will never accept Bitcoin; lest they want to run afoul with the mob (government) which provides for their protection.

As far as using a traditional computers or even several computers to mine bitcoin is concerned, it is unrealistic in this day-and-age. Traditional CPUs are not made to do the type of calculations required to mine bitcoin. This is why the miners in the beginning quickly moved to computers with multiple high-end graphics cards -costing up-to $1200 for each graphics card. Today, these Frankenstein computers are not utilized as much -except for those who never recouped their initial investment and total cost of operation. People moved to FPGA systems and now ASICS systems. However, now that the ASICS systems are out it is becoming harder and harder for people with little money to be able to mine any bitcoin. The system was designed so that the more miners which were mining the harder it becomes to mine a single bitcoin -this way the system controlled how long it would take for the total number of bitcoins to be mined.

Also, most governments have been trying to find a way to get their citizens to embrace a total digital currency for quite some time. The Black and Grey Markets, as well as libertarians and Sovereigns and other types of liberty individuals have been the biggest holdout from this homogenized digital currency. Bitcoin is hell-bent on taking the Black and Grey Market digital along with Anarchists, Agorist, Libertarians, Sovereigns, etc. If Bitcoin were to succeed it wouldn't end FRNs, it would end physical money altogether; and the governments would force everybody to use their government digital currency. People would therefore have no other choice but to use Gold and Silver, until -that is- they are confiscated like gold was back in 1933.

Also, what one must realize it that whatever physical item one buys with bitcoin must be shipped to a physical address. Between this and the fact that every transfer is held within the coin itself means that Bitcoin is not as anonymous as its proponents like to tell everybody.

Bitcoin would be great for buying digital items, but most -if not all- digital items for sale for bitcoins have been copied 'illegally.' If the legality doesn't bother an individual, then one should think that they could also get the item -which is for sale for bitcoin- for free from the same websites the seller got it from; therefore, making the purchase of the digital item pointless.

The only really useful use for bitcoin is the purchase illegal items which are physical in nature, like drugs or guns or even sex or a person; but physical purchases can be tracked and therefore Bitcoin's greatest usefulness is a liability.

One need not use an exchange.

One need not use an exchange. Person to person exchanges are quite common.

While what you say is true,

While what you say is true, it is equal to money laundering -only so many people would be doing it and therefore the cost of it would be enormous. It is quite expensive, and will only become more-so as time moves forward. I think it was on bitmit, I saw a $20 bill for $25 -value of bitcoin- plus postage. If there ever was total control of the exchanges then one could easily see a $20 bill being $50 -value of bitcoin- or more.

This leaves people with the option of having two jobs, one which pays in bitcoin and one which pays in government fiat; that doesn't sound like much fun. Since government will never accept bicoin, this means that there will be a main currency -one which is mandated- which would be government fiat, and then there would be a secondary currency -one used between individuals- bitcoin. Since government fiat is going to be necessary anyway, most people will never bother with using the secondary bitcoin -unless, government fiat were not accepted by any places other than government. However, this is highly unlikely due to the highly dependent nature of modern business on government; therefore, only secondary businesses would even consider accepting bitcoin -the large companies wouldn't.

Since that is the case, then one can clearly see that bitcoin is nothing more than a method for getting the digital holdouts -black and grey marketers, anarchists, preppers, etc- to switch to digital money. Since hard 'money' is already tracked from the dealers -with the exception of small transactions between individuals, coin stores, and pawn shops, hard 'money' would be very easy to confiscate after the holdouts moved to digital currency. Thereby, creating the unthinkable situation where everybody is forced to use government digital fiat; that sounds like such a joyous occasion.

There have also been legislation offered in Illinois to mandate that the transfer of a commodity aka gold, silver, or whatever require a bill of sale and ID. Thereby making even the transfer of the smallest unit of trade, of a commodity, tracked.

Neither you nor I have any

Neither you nor I have any way of knowing how far Bitcoin will ultimately reach as a highly liquid fiat currency, so just relax and use it or don't. You're not being forced into anything with regard to Bitcoin.

What we do know, is that

What we do know, is that government -and thereby the bankers who own the government- are going to control the money. We can calculate what they -the banker controlled governments- will do -with great amount of certainty, since the bankers will never allow money to exist outside of their control. If you think that the banker controlled government are going to let a currency exist which they can't control, be the leading currency of the world, then I'm sorry but you are delusional.

So, in regard to bitcoin; it will never be a leading currency, because the large companies and corporations will never accept it, and therefore the mass of people will never use it.

I repeat... Neither you nor I

I repeat... Neither you nor I know the future. If you really believe otherwise we have nothing to discuss.

So, you think that the

So, you think that the central bankers -who control the central banks of the world- are just going to let some currency replace their money making machine? You cannot be seriously thinking that scenario is an actual possibility. Also, the governments are never going to accept bitcoin for payment of taxes or fines, and therefore it automatically puts bitcoin at a disadvantage. As I've stated before, the big corporations are not going to accept bitcoin if the government doesn't want bitcoin to succeed; and without the major corporations accepting bicoin, then the vast majority of people will not be using bitcoin, for there would be no purpose for them to do so.

Just trying to say that I'm wrong with my analysis is not evidence of a logical problem with the analysis.

Why don't you try to use logic to explain how the inverse, of my analysis, is even a possibility?

Hmmm,

good food for thought in your post Jix. Recently I quit baulking and took the plunge and bought my first bitcoin, more out of curiosity than anything else. I`ve been watching the charts daily just to see where it leads. Watching it soar to $250+ THEN SINK TO $50 I held out and never sold, as I said i was observing and learning. It has become obvious to me looking around the net that there are very wealthy investors whose buying and selling habits contribute largely to the volatility of price. I see this as a good thing for small astute investors, it`s not rocket science, buy low sell high.
Then there is the matter of the Mt gox crash 4/4/13, while many wondered if this was a bubble or not, mt gox claimed it was an inability for their hardware to cope with the demand. Also it has been claimed this problem has been addressed and rectified, to what extent i don`t know? Watching now it will be interesting to see when the buyer confidence will overtake the previous record price. In many places I would love to be a fly on the wall as it approaches the $250 mark, that record is a benchmark and i expect further extreme volatility at that point, another plus for the small investor.
Having just started at this I would like fellow bitcoiners to suggest good sites to trade with and some good forums to subscribe to. Atm i use Bit-innovate here in Australia and i would like to learn about mining as you are doing. My computers are on 24/7 and just bought a 5kwh solar system to cope with my 4 teenagers power consumption so 24h mining is interesting to me.
Finaly i would like to hear some well thought out opinions on the future of bitcoin. Many here have called it a ponzi scheme or pyramid selling or just a rort. I am not convinced it is any of those things. When the last bitcoin is mined...then what? I think it`s important to watch the trends as that day approaches, will the BIG investors dump and run back to frn`s , will there be panic in the market? I think if bitcoin is established well into the market as a true medium of exchange it will survive and thrive and we can spend those satoshi`s gleefully. But if its major role is an investment vehicle and people just are not spending them as they would cash, i can`t imagine the buyer confidence would continue, at this juncture it does seem a little to be a pyramid scheme and i foresee a lot of satoshis trading then.
To avoid that scenario a lot of goods and services must be available through bitcoin, it has to be useful and advantagious to use it and stable in its price. Though it`s difficult to put stability and bitcoins in the same sentence i think that day will come, perhaps when the last one is mined we will still have a good use for them.. i think so...

If every great fortune has a great crime behind it, then the greatest fortunes have the greatest criminals behind them. End the fed!

Theoretically, the last

Theoretically, the last Bitcoin could not be mined for a long while, since the difficulty of the problems to solve increases if the rate of mining accelerates too fast. It's all math.

I'm always in the Reddit for

I'm always in the Reddit for new news and to talk.

http://www.reddit.com/r/Bitcoin/