Intrinsic Value

"It has no intrinsic value" is the criticism of Bitcoin that has been made longest and by the most credentialed people. Alan Greenspan said it on Bloomberg in December 2013, in the middle of the first run past $1,000: it was a bubble, because a currency "has to have intrinsic value." Warren Buffett has said versions of it every year since, the best-known being "probably rat poison squared" in May 2018. The phrase means that a thing should be worth something on its own, by virtue of what it is or what it can be used for, independent of anyone's opinion. Gold can be made into jewelry and electronics. A house keeps the rain off. Bitcoin, the argument goes, is entries in a database, and a database entry does nothing.

The problem is that economics abandoned intrinsic value as a concept in the 1870s, and for a good reason. Carl Menger in Vienna, William Stanley Jevons in Manchester, and Leon Walras in Lausanne each arrived, separately, at the same conclusion: value is not inside objects. It is a judgment people make about how much of one thing they will give up for another, and it changes with circumstances. Water is worth more in a desert. A bulb is worth a canal house for one winter in Haarlem and a bulb the next spring. Nothing about the object changed. This is called the subjective theory of value, it is the foundation of every price theory taught since, and it means the phrase "intrinsic value" describes a category that does not exist.

The critics' own examples show it. Gold's industrial and dental use accounts for a small fraction of the demand for it; the rest is people holding it because other people will hold it, which is a monetary premium, not an intrinsic property. And the dollar has had no commodity backing at all since 15 August 1971, when the US ended convertibility to gold. What gives a dollar its value is that people expect to be able to spend it tomorrow, plus the fact that the government demands taxes in it. Greenspan ran that currency for eighteen years. If intrinsic value were the test, he had been issuing something that failed it.

What the critics are usually reaching for is a narrower and fairer point: Bitcoin has no cash flow. You cannot value it the way you value a company, by discounting the money it will pay you, because it will never pay you anything. Its entire price is a monetary premium, the amount people will pay to hold and move it. That is true. It is also true of gold, of cash under a mattress, and of the dollar in a checking account, none of which pay you either. "No cash flow" is a correct description of money. It is not the same as "worth nothing."

So the question is not whether Bitcoin has intrinsic value, since nothing does, but whether its properties are worth a monetary premium. Those properties are specific and checkable. The supply is fixed in code and cannot be inflated by anyone. Transfer needs no permission from a bank or a government. It divides to a hundred-millionth. And the ledger can be audited by anyone with a node, which is more than can be said for the Federal Reserve or a gold vault. Whether those properties are worth $100 or $100,000 per coin is decided by price discovery, the same process that prices gold and farmland, and the market has been arguing about it, loudly, since 2010.

The honest concession is that a monetary premium can go to zero. Gold's has survived five thousand years; Bitcoin's has survived seventeen, four crashes of 75 percent or more, and 477 obituaries. If people stop wanting the properties, the price follows. That is a real risk, and the fiat entry explains why the same risk applies, on a longer fuse, to the money in your pocket.