Listen to the many Bitcoin critics long enough and you’ll inevitably hear the argument that Bitcoin can’t work because it has no intrinsic value. You can’t hold bitcoin in your hand, you can’t wear it, and you can’t do it Any thing with it as well as trading it with another person.
Gold bugs like to point out that unlike bitcoin, gold is used in all sorts of industries like electronics, jewelry, and dentistry. Cryptocurrency investors and economists like to point out that unlike stocks, bonds, and farmland, bitcoin doesn’t produce anything. However, what both groups fail to understand is that these are not bugs, but very key features of Bitcoin.
intrinsic value
To understand how to proceed in answering the question of the intrinsic value of bitcoin, we must first define the intrinsic value itself.
Investopedia defines intrinsic value as “a measure of what an asset is worth. This metric is arrived at by an objective calculation or a complex financial model, rather than using the asset’s current market price.”
This definition is, frankly, useless. Who decides which objective arithmetic or complex model to use? How do we determine which inputs and variables to include in these calculations?
There is no such thing as “intrinsic value” in the sense that a thing has an objective value in itself. As a thought experiment, think of assets that are usually assumed to hold intrinsic value such as gold, farmland, stocks, and real estate. Now imagine a world in which there are no humans. Do these assets still have value? The answer must be no, because value has meaning only in the context of human existence.
Therefore, the whole concept of intrinsic value is based on a false premise: value can be separated from evaluator, when in fact the two are intrinsically intertwined.
There can be no more value without a valuer than a buyer can exist without a seller, or heads can exist on a coin without tails.
Think of a man stranded on a desert island and came across an ingot of gold. Alone with no one to trade with, a gold bar is completely useless. If it is true that gold has something like intrinsic and objective value, then the gold bar will necessarily hold a value to the man. But on the island, a rod made of gold has no more value to a man than a rock of the same shape.
You might be tempted to assume that something like oxygen has intrinsic value. However, when we remove the resident again from the equation, the idea that there is a value for oxygen loses its appeal. Oxygen is valuable because humans need it to survive. Without humans, the idea of any physical object containing value becomes illogical.
Stick to this example, because we Act Giving value to life and always assuming that oxygen will always be valuable to us. But this is not the same as having an intrinsic value as determined by a self-contained objective value, which transcends human preference. What it does suggest, however, is the simple fact that while man has been given the ability to choose his own values, He cannot escape the consequences of these values. In other words, if a person values life (subjective), he needs to value oxygen (objective).
It is therefore illogical to speak of value as either subjective or objective. Just as a transaction is neither a buy nor a sale but both, the value is neither objective nor subjective, but both simultaneously.
To bring the conversation back to the world of economics, we can say: If a man values the preservation of wealth, he must save his wealth from money that cannot be magnified or destroyed. Or similarly, if a person values financial sovereignty, he must use money that cannot be confiscated or controlled. This means that any form of money with the characteristics that best meet these criteria will necessarily hold an objective value for anyone with the corresponding subjective values.
intrinsic characteristics
With our new perspective on the relationship between subjectivity and objectivity, it becomes fruitful to shift the conversation away from the concept of intrinsic value and toward the concept of intrinsic properties.
The question then becomes, “What is the intrinsic value of Bitcoin?” But what are our individual and shared personal values (what matters to us) and do the objective characteristics of bitcoin match those values?
It is safe to assume that for the vast majority of people on Earth, the accumulation and preservation of wealth is valued favorably.
For this reason, in combination with its intrinsic properties, gold has held a high monetary value for thousands of years.
The intrinsic properties of gold of extreme durability and high rarity in the earth’s crust set off a seemingly inescapable chain of events as humans wanting to preserve wealth amass it and use it as money.
It was not the intrinsic (objective) properties of gold or simply humanity’s desire to preserve (subjective) wealth that caused the use of gold as money, but both at the same time.
To determine if Bitcoin can achieve and surpass the level of success that gold has found over the millennia, we must analyze Bitcoin’s intrinsic properties. There are many intrinsic characteristics of Bitcoin, but for the purposes of this article I will identify and analyze four main characteristics.
Bitcoin Core Characteristics
1) decentralization
Bitcoin is decentralized, which means that it does not have a single point of failure. Unlike a company that has a CEO, headquarters and board of directors, the Bitcoin network is distributed all over the world and no one has the ability to make unilateral changes to the protocol.
In order to change anything related to the Bitcoin protocol, the change must first take place in the hearts and minds of Bitcoin users. Any node in the network that attempts to change the Bitcoin token will be rejected by the rest of the nodes. As the size of the network grows, the difficulty of making any changes will gradually increase. Bitcoin’s core design is like cement, in that it starts out flexible but gets tougher every day.
2) censorship resistance
Bitcoin is open to anyone and they cannot discriminate. At a time when many Western governments and corporations are completely embracing the idea of censorship, Bitcoin provides a means where no one can be censored because of race, politics, or any beliefs whatsoever.
Bitcoin does not and cannot distinguish between transactions. Any transaction involving sufficient mining fees ($1.37 on average, as of March 2022) will be included in the blockchain.
3) Final settlement
Bitcoin aims to settle transactions every 10 minutes. One of Bitcoin’s most overlooked but ground-breaking features is its ability to synchronize itself perfectly and without trust across time and space. With Proof of Work, Bitcoin uses the laws of thermodynamics to ensure that the system cannot be deceived.
As Gigi explains in his article “Bitcoin Is Time,”
“Proof of Work provides a direct connection between the digital world and the physical world. Deeper, it is the only link that can be established in an unreliable way. Everything else will always depend on external input.”
Nobody has the ability to cancel bitcoin transactions. Once a transaction gets many confirmations, it can be considered irrevocable.
4) Guaranteed rarity
Perhaps the most famous property of Bitcoin is its fixed cap of 21 million coins. Thanks to its digital nature, Bitcoin is able to offer what no physical object can – absolute scarcity. Robert Breedlove explains in more detail in his great article “The Number Zero and Bitcoin”
“The supply of a physical object can only be limited by the time needed to purchase it: if we can flip the switch and force everyone on Earth to do their only gold-mining tasks, the supply of gold will soon rise. Unlike Bitcoin, no physical form of Money can guarantee a permanently fixed supply—as far as we know, absolute scarcity can only be digital.”
Unlike fiat money, whose supply can be expanded at the click of a button by a small group of insiders, the supply cap of 21 million bitcoins is fixed for the rest of the time.
Intrinsic value and goal characteristics
Now that we have identified the main intrinsic properties of Bitcoin, the objective side of the equation, along with individual and group human preference, and the subjective side of the equation, we can unify them to get a clear picture of Bitcoin’s value in the end.
In its most basic sense, money is a tool that helps us achieve certain goals. Bitcoin derives its value from being a superior tool for achieving these goals more than any alternatives.
It has been empirically proven across generations of civilization that preservation of wealth and monetary sovereignty are two preferences shared by most people. We will define “wealth preservation” as the protection of value and the purchasing power of wealth. Monetary sovereignty is the ability of an individual to make free choices regarding the use of wealth without the threat of censorship or discrimination.
Paper money in the modern era falls short in both categories. The Federal Reserve and most other central banks have explicit mandates to devalue their currencies through what are known as inflation targets. In other words, currencies like the US dollar fail miserably to preserve wealth because they are tailored to not to preserve wealth. It would take more than $700 today to buy what $100 managed to buy in 1970.
Our current system of fiat money is entirely based on payment bars that travel through governments and banks, which means that transactions can be refused or censored for any reason. Banks can close customer accounts and governments can monitor financial transactions for anyone they like.
Golden Bugs like to stress that returning to the gold standard solves these problems. However, what they fail to mention is that it was the failure of the gold standard in the first place that led to our current monetary system. The physical nature of gold has made it vulnerable to centralization, a problem that bitcoin does not.
Given the well-being of Americans and citizens of many developed countries, the benefits that Bitcoin brings may not be as obvious to many people in developing countries. Inflation in the US has been going on, but it hasn’t been devastating over the past two generations, and most people have had no issues with closing their banking services. However, after the recent events in Canada and with inflation in the US at multi-decade highs, many people are now finding that the Bitcoin value proposition is too obvious to ignore.
Thousands of years ago, people gradually found themselves using gold to store and transact value. Unlike modern fiat money, gold was not “decree” to have value by any authority, but was simply chosen by people who implicitly and explicitly recognized its superior objective monetary properties.
In the same way, Bitcoin does not need to be forced on anyone in order to succeed. Gradually over time, rational humans with value preferences that go along with the preservation of wealth and monetary sovereignty will automatically be drawn towards Bitcoin as a direct result of its superior objective characteristics.
This is another guest post by Bob Simon. The opinions expressed are their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.