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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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thx good info :)

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

Where does money get it's value?

The value of money is not intrinsic, it is not inside each individual piece of currency.

The value of money is subjective, money has value because people have demonstrated preference for it.

The value of money exist in our heads, not in money itself.

If I'm on a desert island with very little water, an ounce of Gold is going to be worthless to me, and fresh water is going to be very valuable to me.

All economic value is subjective

Gold and Bitcoin's value as mediums of exchange are not inside each Gold coin or Bitcoin, it is inside us, their prices are a reflection of the subjective valuations of individuals participating in the market process.

They have value, because people have valued them.

Characteristics that may make one medium of exchange more preferable than others are different, value is still determined subjectively by individuals after taking any characteristics into account.

While the characteristics of a good are intrinsic to it, and can influence how people value the good, the value of the good itself is subjectively created in the mind of the good's consumer, taking the good's objective properties into account.

It is important to distinguish a good's physical properties, from it's subjective value to consumers.

http://wiki.mises.org/wiki/Subjective_theory_of_value

Check out the Laissez-Faire Journal at LFJournal.com


"The State is a gang of thieves writ large." - Murray Rothbard

Legal Fraud and Extortion

Bitcoin, PayPal, Store Coupons, Frequent Flier Miles, Cell Phone Minutes, or packages of cigarettes and Ramen Noodles (in prison) work competitively as money/currency.

The point MISSED too often by anyone engaging in discussion that intends to lead toward improved life, higher quality life, and lower cost life, for all, if that is the point, if that is the point of discussion, then the point missed has to do with the legal monopoly power that creates the demand for legal fraud and legal extortion.

No money can contend with the one legal fraud money on equitable terms, since the one legal fraud money is demanded as payment for the legal extortion fee.

Arguments over the competitive qualities of any money, or any currency, or any money that is both money and currency, or any currency that is both currency and money, in the face of legal fraud money, demanded as payments for legal extortion, is like trying to vacuum the carpet in a small living room while the Huge Elephant in the room is taking a huge dump on the carpet.

The concept of a Liberty Dollar, or a PayPal, or a Bitcoin becoming any threat whatsoever to the Legal Money POWER is a point that is not missed by those people who earn their living through that legal fraud and that legal extortion: denominated in Federal Reserve Notes.

The value of any money, any currency, is measurable as the power to purchase, which is a relative measure, comparable to other forms of money, or other forms of currency, including those packages of cigarettes, barrels of oil, calories of food, kilowatt/hours of electricity, or lies told by very well paid liars.

Joe

That "medium of exchange" is the foothold the banksters will

exploit. The reason PMs have been held in such high esteem as money is because they serve as both a store of wealth and a medium of exchange. If you separate the two, you open the door to usury.
People are free to take whatever risks they like, but to me, this looks like a dotcom duck, it quacks like a dotcom duck, it waddles like a dotcom duck... I think the next generation has met their financial entrapment, but they are far too "tech savvy" to listen to stupid old people.

Love or fear? Chose again with every breath.

I have been a big bitcoin critic

I was thinking about it earlier today though and I've come the conclusion that I like the idea of having it around. I haven't bought any and perhaps I should dabble in it just to get a feel for it. I don't really have any need to buy any right now but the way I look at it this could be huge for anyone needing to hide money from government confiscation or anyone needing to transfer funds over a border without being detected and I trust there will be many people say getting divorced or going into bankruptcy and trying to hide money or even people who pass away that can put money into bitcoins to hide it from taxes to pass it on to their heirs. While I question whether it is "money" by the definition, I can't question its value in todays society. It certainly has a place where people will need it and use it and as people discover it can be used to their benefit more people will use it.

Correct. At minimum, it's

Correct. At minimum, it's currency competition. Same as gold or silver.

I don't really care what people think of bitcoin

I mine them and make money without even having to do anything. The ones who are always talking down about them are the ones who don't even mine them. If my computer is on it might as well be making money.

People can say its not worth the electricity consumption but if you have your computers on 24/7 anyways, it really does not matter.

Good stuff, great points, just one observation...

Paper money has as close to zero intrinsic value as is possible - no food value, takes a lot to wallpaper a room, very little heat when burned, very little insulation provided when crumpled or shredded...

Yet people accept them anyway. Why? Because they have faith that someone else desires them and will exchange goods or services for them.

It took a long time for people to start trusting and accepting paper money because of the reasons listed. The best, possibly only way to destroy faith in paper money is to stop accepting it when it is offered as payment (even though it says right on it that you have to accept it) with an explanation of why you are refusing to accept it.

One question for the author: Is the 'uncounterfeitability' of FRNs and bitcoins an intrinsic value?

Pandas eat bugs.

I actually debated

I actually debated whether to say, "paper money has 'no' intrinsic value." In retrospect, I'd say "negligible," but the point is that there are other goods that far exceed the price-to-performance ratio of any alternate functions of FRNs... ;)

'Uncounterfeitable' is not a property of FRNs, so long as someone can acquire or manufacture an instrument to create paper money which is identical to "legitimate" FRNs. So let's remove FRNs from the question completely.

'Counterfeitability' is impossible for Bitcoin (excluding the infinitesimally unlikely 51% attack). A bitcoin can only be "minted" by solving blocks on the Bitcoin network. While this is an "inherent characteristic" of Bitcoin, does this give a bitcoin "inherent value?" I don't think so, because the characteristic has no use outside of bitcoin.

I'm open to discussion on this, however ;)

Right off the bat, your

Right off the bat, your definition of "money" is wrong:

Pronunciation: \ˈmə-nē\
Function: noun
Inflected Form(s): plural moneys or mon·ies \ˈmə-nēz\
Usage: often attributive
Etymology: Middle English moneye, from Anglo-French moneie, from Latin moneta mint, money — more at mint
Date: 14th century
1 : something generally accepted as a medium of exchange, a measure of value, or a means of payment: as a : officially coined or stamped metal currency b : money of account c : paper money 2 a : wealth reckoned in terms of money b : an amount of money c plural : sums of money : funds 3 : a form or denomination of coin or paper money 4 a : the first, second, and third place winners (as in a horse or dog race) —usually used in the phrases in the money or out of the money b : prize money 5 a : persons or interests possessing or controlling great wealth b : a position of wealth
— for one's money : according to one's preference or opinion
— on the money : exactly right or accurate

http://i.word.com/idictionary/money

I hardly think a dictonary definition

I hardly think a dictonary definition is going to explain the difference between money and currency!

If you want to look at an economic dictionary definition:

"Money has three main qualities:

as a medium of exchange, buyers can give it to sellers to pay for goods and services;

as a unit of account, it can be used to add up apples and oranges in some common value;

as a store of value, it can be used to transfer purchasing power into the future."

(http://www.economist.com/economics-a-to-z/m#node-21529761)

Those definitions are a

Those definitions are a little loose to qualify as coming from an "economic dictionary".

How about we try a slightly more thorough source for their definition, Investopedia:

"Definition of 'Money'
An officially-issued legal tender generally consisting of currency and coin. Money is the circulating medium of exchange as defined by a government. Money is often synonymous with cash, including negotiable instruments such as checks. Each country has its own money, or currency, that is used as a medium of exchange within that country (some countries share a type of currency, such as the euro used by the European Union). The currency of one country can be exchanged for the currency of another via a currency exchange. The current exchange rate determines how much of one currency must be used to purchase a specified amount of the other currency. For example, the exchange rate between the euro and the US dollar may be 1.2596, where 1 euro can buy 1.2596 US dollars."

Investopedia explains 'Money'
Legal tender is a type of payment that can lawfully be used to meet financial obligations. Money, as legal tender, is a commodity or asset, or an officially-issued currency or coin that can be legally exchanged for something of equal value, such as a good or service, or that can be used in payment of a debt. Currency may include notice of the legal tender status. In the United States, for example, the paper money includes the statement, "This note is legal tender for all debts, public and private;" in Australia, the notes include, "This Australian note is legal tender throughout Australia and its territories."

http://www.investopedia.com/terms/m/money.asp

Either way, your personal definition does not fit the definition of the wider English speaking world.

intrinsic value is a myth

all value is subjective ...

True, sort of...

True, from a philosophical perspective... A grizzly bear has no need for gold... and if we want to live like grizzly bears, neither do we. ;)