The 'intrinsic value' discussion

[LootHoarder]

I have been collecting bitcoin and other crypto for a while now, but I have to admit I never truly understood what gives it (intrinsic) value, if anything. Some people just buy it because they think others will pay more for it later. I was one of those people. However, my stash has become large enough in fiat terms that I now need to be convinced of bitcoin's value, in order to still feel comfortable holding it. I do believe strongly in 'value investing' and the idea of 'intrinsic value'. The big question is: does bitcoin have any. If not, why does it not need it?

Note: I am not as interested in the discussion of whether bitcoin is mainly a store of value or a currency for transactions, as neither explains why the asset being stored or transacted had any value in the first place.

I've listed some common pro bitcoin arguments, along with the reasons why I am not convinced.

1) It can be transferred easily.
Well, there are more things that can be transferred easily, over the internet, just like bitcoin.
These include e-mail, or voice-over-ip. Those are not scarce. However, if they would be scarce, they might have (usd) value because of what is being transfered: the e-mail message itself, and the voice message itself. Being convenient to transfer is not what gave it value in the first place, it depends on the content of that being transfered.

2) It is a store of value.
Yes, bitcoin is very convenient and safe to store (if done properly). But once again, being able to store an asset does not determine its value. A piece of paper is more convenient to store than a fridge, yet we all know which has more value. So I still don't know where the 'value' is in 'store of value'.

3) It is scarce.
I could create my own digital coin today called 'SingleCoin', of which there exists only one! That is super scarce! Without any other action taken though, no one should think it has value. Being scarce alone does not give something value.

4) The network effect gives it value.
Let's look at another network that is believed to have value: facebook. The facebook network consists of people that can be targeted via this network for advertisement. Advertisers want to pay for that, hence the value. What's more, a lot of personal information about these people is on this network. This information is valueable, arguably to malicious big data consuming actors. Bitcoin's network thankfully does not have (much) personal information about people, nor is it used for advertising. You could say the bitcoin (miner) network is there only to accomodate for reasons 1 and 2: enabling bitcoin to be transfered and stored reliably (prevent double spending amongst others). As we saw these aspects on their own did not give bitcoin any value. Hence, having (or being) a network on its own does not give something value.

5) It is censoreship resistant.
Yes it is, but so is a private conversation with a friend or family member. Does that alone assign a monetary value to it? I think not.

6) It is costly to produce.
The general notion here is that miners pay a lot in hardware and electricity costs, thus bitcoin should at least be worth those costs!
Let's go back to my own digital coin 'SingleCoin'. Though I am the only miner, I tweak the parameters such that it takes me 30 years to finally mine it succesfully. Let's say it cost me over a million dollars in costs to create it. Are there now any takers to buy it from me at that price? Probably not.

To sum up the property arguments, we can say that on it's own...
...being able to transfer something does not give it value.
...being able to store something does not give it value.
...being scarce does not give it value.
...having a large network does not give it value.
...being censorship resistant does not give it value.
...being costly to produce does not give it value.

I have a strong feeling that these things are all of the accomodating kind. They are valueable properties only if the underlying asset (bitcoin) has value on its own.
You could say: but bitcoin does not have only one of these properties. It has all these properties combined, and that is why it has value. Well then please explain, how does a combination of properties that do not give value to something on their own, magically create value when they are combined?

7) Bitcoin has value because enough people think it has value.
Yeah... you can guess what's wrong with this one, right? People might just as easily come to the conclusion that it does not have value after all. Things that have intrinsic value such as gold, will not drop to zero because at the very least it can be used for manufactoring purposes. Bitcoin does not have such a last fallback. There is nothing preventing it to go to 0.

8 ) Ok! Bitcoin has no intrinsic value. But nor does fiat currency! It doesn't need intrinsic value.
I believe this is false. Fiat currency does have intrinsic value. This is because governments make it have value: they make it such that people have to pay taxes in it, and they distribute subsidies in it. The intrinsic value is lawfully enforced if you will. Many bitcoiners understandably do not like that kind of forced value, but it is value nonetheless. And yes, it only has intrinsic value if there is a stable government behind it, and if the general public is more or less OK with that government. This is one of the reasons why you see wild drops of fiat value in places where the government is falling apart.
In short: I do not know of any other asset that truly does not have intrinsic value and gets away with it.

9) Bitcoin cannot be copied. (as remarked in the comments by davis196).
This is true. However, I do not think the fact you cannot copy it implies it has value. Why do people want to copy something? Because the original has value. Why do people want to create fake USD? Because the original USD has value. When something cannot be copied, that is a protection of its value, not the reason for its value.

So here it is. This is how my mind 'debunks' these reasons. Do you feel I was wrong about some of them? Do you think I missed other reasons? Please comment, and let's keep the discussion civilized. I am not anti bitcoin, I merely have doubts. I believe it is healthy to critisize.

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[davis196]

You didn`t answer one question.Can you create a fake bitcoin?
It is possible to create fake fiat money,but can you fake one bitcoin core?I don`t wanna talk about all the forked bitcoins like bitcoin cash,bitcoin gold or every other altcoin.
BTC has value because the people have trust in bitcoin and they trust bitcoin because bitcoin can`t be faked(it can be forked,unfortunately,but this is another topic).

[kaya11]

I have been collecting bitcoin and other crypto for a while now, but I have to admit I never truly understood what gives it (intrinsic) value, if anything. Some people just buy it because they think others will pay more for it later. I was one of those people. However, my stash has become large enough in fiat terms that I now need to be convinced of bitcoin's value, in order to still feel comfortable holding it. I do believe strongly in 'value investing' and the idea of 'intrinsic value'. The big question is: does bitcoin have any. If not, why does it not need it?


1) It can be transferred easily.
Well, there are more things that can be transferred easily, over the internet, just like bitcoin.
These include e-mail, or voice-over-ip. Those are not scarce. However, if they would be scarce, they might have (usd) value because of what is being transfered: the e-mail message itself, and the voice message itself. Being convenient to transfer is not what gave it value in the first place, it depends on the content of that being transfered.

It is made to be a currency. A currency that can be easily transfered is better than one that has high fees and takes time. Put it simply like this, if you wanna transfer $1B to another place, how much money would be wasted in fees, and the time it takes to complete the transfer? Unless transferring it in a digital currency that has minimal fees and in just few seconds or minutes. That's why it is better than fiat. That's why it has value. it's chosen by the digital community, it's sole purpose to be a currency used in all part of the world rather than $. You can't use email and voice message to pay goods and services, They are not currencies, they are not similar.

[LootHoarder]

@davis: You are right, I forgot to list that one. Thank you.
However, I do not think the fact you cannot copy it implies it has value. Because why do people want to copy something? Because the original has value. Why do people want to create fake USD? Because the original USD has value. When something cannot be copied, that is a protection of its value, not the reason for its value.

@kaya: I know btc was intended to be a currency, though nowadays not everyone agrees. However the intention does not justify it being used as a currency, nor gives it value. Some movies where intended to become blockbusters, but instead flopped. Intention itself proofs nothing. Your other point, being cheap to transfer, just falls under my category 1: being transferable does not mean value if the thing you are transferring (btc) does not have value.

[kaya11]

@davis: You are right, I forgot to list that one. Thank you.
However, I do not think the fact you cannot copy it implies it has value. Because why do people want to copy something? Because the original has value. Why do people want to create fake USD? Because the original USD has value. When something cannot be copied, that is a protection of its value, not the reason for its value.

Then let's go back to the time where gold and silver and other precious stones are being used to pay goods and services. They cannot be copied. USD can be copied, in fact all fiat are being copied everyday, it's just the serial number is different. While Bitcoin has only a 21m in circulation.

[aoihs00]

I think you are not perfect in regards with transferring of the bitcoin. Im dam sure that bitcoin is far greater than transferring the E-mail, etc. It is well thought algorithm which can actually get the value transferred form one point to another and then we can also store the same securely at particular location. :-)

However, let me assume different scenario as well. The transferring of the bitcoin has not been easy now a days. After all the prices being up always the miners are taking too much fees for the miners stuff and it gets difficult to transfer little transactions. Then there is reality where we might need buy small stuff like chocolate worth 1 dollar or something then how would you buy it int he future if bitcoin is being accepted everywhere. I mean thats just smile example. It will also be difficult when you will do mega transaction to buy a house, then? Then fees would be more than price of garden in front of that house!

So may be the transfer is not as easy as we would really think.  

[webtricks]

8 ) Ok! Bitcoin has no intrinsic value. But nor does fiat currency! It doesn't need intrinsic value.
I believe this is false. Fiat currency does have intrinsic value. This is because governments make it have value: they make it such that people have to pay taxes in it, and they distribute subsidies in it. The intrinsic value is lawfully enforced if you will. Many bitcoiners understandably do not like that kind of forced value, but it is value nonetheless. And yes, it only has intrinsic value if there is a stable government behind it, and if the general public is more or less OK with that government. This is one of the reasons why you see wild drops of fiat value in places where the government is falling apart.
In short: I do not know of any other asset that truly does not have intrinsic value and gets away with it.

This could be better understood with the concept of legal tender. In every country, only paper notes and coins are considered as Legal tender. Instruments like cheque, B/E, etc are considered non-legal tender but they still have value because people believe in the value written on those piece of papers.
Similarly, Bitcoins have X value because there exist public ready to buy it at X price. Hence the basis of valuation of Bitcoin is Demand. When group of people believe Bitcoin has X value, why would we need some factor to support its X value!
There are many metals which are more scarce than Gold but have much less value than Gold because shiny Gold make people believe it is more valuable. The biggest intrinsic economic model is Demand itself!

[LootHoarder]

@davis: You are right, I forgot to list that one. Thank you.
However, I do not think the fact you cannot copy it implies it has value. Because why do people want to copy something? Because the original has value. Why do people want to create fake USD? Because the original USD has value. When something cannot be copied, that is a protection of its value, not the reason for its value.

Then let's go back to the time where gold and silver and other precious stones are being used to pay goods and services. They cannot be copied. USD can be copied, in fact all fiat are being copied everyday, it's just the serial number is different. While Bitcoin has only a 21m in circulation.

True, only 21m. But this is the scarcity argument again, which I tried to debunk in my original post.

[LootHoarder]

Similarly, Bitcoins have X value because there exist public ready to buy it at X price. Hence the basis of valuation of Bitcoin is Demand. When group of people believe Bitcoin has X value, why would we need some factor to support its X value!
There are many metals which are more scarce than Gold but have much less value than Gold because shiny Gold make people believe it is more valuable. The biggest intrinsic economic model is Demand itself!

Saying that demand means value is flawed. Demand (and scarcity) can determine the price, but not the (intrinsic) value. In a healthy market, demand should originate from underlying value, not the other way around. Otherwise it is speculation only.
Its like saying apples have value because there is demand for it, while the reasoning should be: there is demand for apples because they are edible, and healthy (its intrinsic values). And because that demand is there and there are X apples available, it has a certain price.

[squatz1]

This is the sad thing about Bitcoin today, it's not the fact that people want to use the technology. The technology which could be used to revamp massive amounts of financial institutions and save tons of money. People just want to use it to hold, and then sell it later on for a profit. Bitcoin has become a traded commodity, and not a CURRENCY as satoshi wanted it to be.

Similarly, Bitcoins have X value because there exist public ready to buy it at X price. Hence the basis of valuation of Bitcoin is Demand. When group of people believe Bitcoin has X value, why would we need some factor to support its X value!
There are many metals which are more scarce than Gold but have much less value than Gold because shiny Gold make people believe it is more valuable. The biggest intrinsic economic model is Demand itself!

Saying that demand means value is flawed. Demand (and scarcity) can determine the price, but not the (intrinsic) value. In a healthy market, demand should originate from underlying value, not the other way around. Otherwise it is speculation only.
Its like saying apples have value because there is demand for it, while the reasoning should be: there is demand for apples because they are edible, and healthy (its intrinsic values). And because that demand is there and there are X apples available, it has a certain price.

And I'll be agreeding with this guy, demand really means nothing when the demand is for it to be a certain price.

[slyfox]

You didn`t answer one question.Can you create a fake bitcoin?
It is possible to create fake fiat money,but can you fake one bitcoin core?I don`t wanna talk about all the forked bitcoins like bitcoin cash,bitcoin gold or every other altcoin.
BTC has value because the people have trust in bitcoin and they trust bitcoin because bitcoin can`t be faked(it can be forked,unfortunately,but this is another topic).

But the forks are not bitcoin they are something else pretending to be bitcoin, if they were something else they will take bitcoin out of their name but that will make them lose recognition among the community that is why you see so many forks but the only thing common between them is they do not want to take bitcoin out of their name, so those coins are copies and are not the original, you cannot counterfeit bitcoin the same way you cannot counterfeit gold, you can create something similar but never something that is the same.

[jseverson]

To sum up the property arguments, we can say that on it's own...
...being able to transfer something does not give it value.
...being able to store something does not give it value.
...being scarce does not give it value.
...having a large network does not give it value.
...being censorship resistant does not give it value.
...being costly to produce does not give it value.

I agree with these points, except the scarcity one. Scarcity, by itself as per your example, does not give it value. Scarcity plays a vital role in supply and demand though, where Bitcoin gets most of its value. Everyone wants to jump on the train, and because there are limited seats, you will have to pay a premium.

In the end, Bitcoin has value because the people give it value. People believe it to be the future of finance, and the points you listed are merely a unique blend of features which give it precisely that potential. You either believe or you don't, the same way people believe in their governments to maintain their fiat value, or the same way people believe gold will still be a premium commodity tomorrow.

[merchantofzeny]

You didn`t answer one question.Can you create a fake bitcoin?
It is possible to create fake fiat money,but can you fake one bitcoin core?I don`t wanna talk about all the forked bitcoins like bitcoin cash,bitcoin gold or every other altcoin.
BTC has value because the people have trust in bitcoin and they trust bitcoin because bitcoin can`t be faked(it can be forked,unfortunately,but this is another topic).

Well, I'm already good with that reason alone. With Bitcoins, it's the trust and demand of the people that determines the value. With fiat, it's the government and their bankers, who don't always have our best interests in mind.

[LootHoarder]

I agree with these points, except the scarcity one. Scarcity, by itself as per your example, does not give it value. Scarcity plays a vital role in supply and demand though, where Bitcoin gets most of its value. Everyone wants to jump on the train, and because there are limited seats, you will have to pay a premium.

You seem to agree that scarcity on its own does not give value. And yes bitcoin is wanted so scarcity plays an important role for price, but why is bitcoin wanted? Basically what I'm looking for in this topic is: is there anything that gives bitcoin value on its own?

In the end, Bitcoin has value because the people give it value.

This refers to my point 7:
7) Bitcoin has value because enough people think it has value.
I already explained why this is dangerous. Peoples opinion can change quickly. If there is no fallback of an intrinsic value, something that bitcoin can always be used for even when unpopular, there is nothing stopping the price going to zero if people stop believing it has value.

and the points you listed are merely a unique blend of features which give it precisely that potential.

As I asked in my original post: how does a combination of properties that do not give value to something on their own, magically create value when they are combined?

You either believe or you don't, the same way people believe in their governments to maintain their fiat value, or the same way people believe gold will still be a premium commodity tomorrow.

I already explained fiat has value because it is enforced by the government ('at the very least' can still be used for taxes), and gold 'at the very least' can be used for production of electrical devices, or jewelry.
What can bitcoin do for you 'at the very least', if it ever became wildly unpopular?

[yinyangwinwang]

I used to be in the camp that thought Bitcoin doesn't have value but you must ask yourself how much money does it cost to produce one Bitcoin? The answer is quite a lot of money and that is what determines the price that the miners will sell at because they don't want to mine Bitcoin, pay for electricity, and then lose while selling it. On the other hand how much money does it cost to print fiat money? Answer nothing because the government can and when you think about this production it is clear that one has value and a certain price point whereas one doesn't and making more fiat money only devalues the current fiat money. Mining new bitcoins does not devalue the current bitcoins, completely different ball game.

[jseverson]

You seem to agree that scarcity on its own does not give value. And yes bitcoin is wanted so scarcity plays an important role for price, but why is bitcoin wanted? Basically what I'm looking for in this topic is: is there anything that gives bitcoin value on its own?

No. Nothing has value on its own. It's not that black and white. It has to have utility, it has to not be too widely available, and it has to have demand. I could do a similar tear-down of gold and no single quality will give it value.

This refers to my point 7:
7) Bitcoin has value because enough people think it has value.
I already explained why this is dangerous. Peoples opinion can change quickly. If there is no fallback of an intrinsic value, something that bitcoin can always be used for even when unpopular, there is nothing stopping the price going to zero if people stop believing it has value.

Again, value is a man made concept. Money is a man made concept. If people stopped believing that gold is precious, its value would also plummet.

As I asked in my original post: how does a combination of properties that do not give value to something on their own, magically create value when they are combined?

You're just meat and bone and blood, yet you can't create a human by combining all three, right? A whole is typically greater than the sum of its parts.

I already explained fiat has value because it is enforced by the government ('at the very least' can still be used for taxes), and gold 'at the very least' can be used for production of electrical devices, or jewelry.
What can bitcoin do for you 'at the very least', if it ever became wildly unpopular?

Governments don't have complete control over fiat value. Check out the Zimbabwean Dollar. Everything can lose value.