Intrinsic value of bitcoin: do you agree with my explanation?

[greyman]

I've been thinking hard today about the issue of "intrinsic value of bitcoin", whether it does have it or not.

I have found out somewhat dubious (at first sight) quote in one older Bussiness Insider article:

"[...]fiat currencies have tremendous intrinsic value because governments say they do. That's why they're called fiat currencies. They have value by government fiat."

According to the dictionary, intrinsic means "belonging to the essential nature of a thing", so initially I though that there is a contradiction in that sentence - intrinsic means something "innate", and not that someone external (government) declared that it has the value. Because, fiat is just that, a declaration.

But thinking about it more, the sentence is actually correct: the government declared how that fiat currency will work, and maintains the rules and the technology surrounding it, so it can be successfully used as a medium of exchange and a store of value. So, the intrinsic value of state money, like USD for example, is not that it can be exchanged for other thing, the intrinsic value is indeed the fiat itself, and its other characteristics are just a consequence of this government backing. The fiat is an innate characteristics of the fiat currency.

Now, my main understanding is this: fiat currency is to government what bitcoin currency is to the bitcoin community. Government gives intrinsic value to currency by issuing fiat, and the bitcoin community (mostly the main developers) gives intrinsic value to bitcoin currency by issuing the source code of the bitcoin network. To simplify it a bit, this is the corresponding relationship:

fiat money - bitcoin
fiat, government laws - bitcoin source code
government officials, bankers - bitcoin programmers, miners

Now, if I am reading this correctly, since both fiat money and bitcoin can be used as a medium of exchange and a store of value, it's now more clear to me, that the bitcoin network is basically a direct competition to the government in the area of finance, in exactly the same way as for example email is a competition to a postal service. If both options will be freely available in the future (fiat and crypto-currencies), everyone will have to decide whom one believes more, government or bitcoin network, or how much trust one gives to each one.

To sum it up, intrinsic value of the bitcoin currency lies in the bitcoin technology, the same way as the intrinsic value of dollar lies in the government fiat. Or if we take the more strict definition of the word "intrinsic", neither dollar nor cryptocurrency has any. But there isn't any fundamental, "intrinsic" difference between them.

Now of course I don't say I am correct, it's just my current understanding, but at least let's agree, that we need to differentiate between Bitcoin currency as one thing, and Bitcoin network (technology+people running it) as another thing. Many people jumble these two things together and then can't come up with logical conclusions.

[odolvlobo]

Nobody agrees on what intrinsic value means because value is completely subjective.

To me, intrinsic value is the value you might assign to something assuming you could not exchange it. By that definition, dollars and bitcoins have no intrinsic value because they are good for nothing but exchange. On the other hand, the ability to exchange dollars and bitcoins gives them extrinsic value.

[infinitybo]

Any currency has an intrinsic value proportional to the amount of transactions denominated in the currency, furthermore, the only intrinsic value that Bitcoin might eventually have is as a medium of exchange.

[t1000]

I've been thinking hard today about the issue of "intrinsic value of bitcoin", whether it does have it or not.

I have found out somewhat dubious (at first sight) quote in one older Bussiness Insider article:

"[...]fiat currencies have tremendous intrinsic value because governments say they do. That's why they're called fiat currencies. They have value by government fiat."

According to the dictionary, intrinsic means "belonging to the essential nature of a thing", so initially I though that there is a contradiction in that sentence - intrinsic means something "innate", and not that someone external (government) declared that it has the value. Because, fiat is just that, a declaration.

But thinking about it more, the sentence is actually correct: the government declared how that fiat currency will work, and maintains the rules and the technology surrounding it, so it can be successfully used as a medium of exchange and a store of value. So, the intrinsic value of state money, like USD for example, is not that it can be exchanged for other thing, the intrinsic value is indeed the fiat itself, and its other characteristics are just a consequence of this government backing. The fiat is an innate characteristics of the fiat currency.

Now, my main understanding is this: fiat currency is to government what bitcoin currency is to the bitcoin community. Government gives intrinsic value to currency by issuing fiat, and the bitcoin community (mostly the main developers) gives intrinsic value to bitcoin currency by issuing the source code of the bitcoin network. To simplify it a bit, this is the corresponding relationship:

fiat money - bitcoin
fiat, government laws - bitcoin source code
government officials, bankers - bitcoin programmers, miners

Now, if I am reading this correctly, since both fiat money and bitcoin can be used as a medium of exchange and a store of value, it's now more clear to me, that the bitcoin network is basically a direct competition to the government in the area of finance, in exactly the same way as for example email is a competition to a postal service. If both options will be freely available in the future (fiat and crypto-currencies), everyone will have to decide whom one believes more, government or bitcoin network, or how much trust one gives to each one.

To sum it up, intrinsic value of the bitcoin currency lies in the bitcoin technology, the same way as the intrinsic value of dollar lies in the government fiat. Or if we take the more strict definition of the word "intrinsic", neither dollar nor cryptocurrency has any. But there isn't any fundamental, "intrinsic" difference between them.

Now of course I don't say I am correct, it's just my current understanding, but at least let's agree, that we need to differentiate between Bitcoin currency as one thing, and Bitcoin network (technology+people running it) as another thing. Many people jumble these two things together and then can't come up with logical conclusions.

We are in agreement.

If we had to find intrinsic value in them, this would be it.

If this isn't it, then the intrinsic value of something like gold is much less than its valuation today.

[oscarg]

Hi Guys.

In My Humble Opinion;
The intrinsic value of a Bitcoin is its guaranteed uniqueness.

Each Bitcoin is represented by a (unique) private key.

If you consider each Bitcoin to be a letter in a massive alphabet of characters (21 Million total)
and that alphabet is used for financial communication,

Then we could say each bitcoin has intrinsic value in a similar way the letters of the standard alphabet do.

But the system is more than that, and more than just the sum of its parts.
The question is also.. does the Bitcoin system have intrinsic value over and above the intrinsic value of each Bitcoin.

A Currency fiat note can be forged, in fact most things that can be made can be forged.
I would argue that a Dollar bill has very little intrinsic value, it represents something that need not even exist.

But the factors of a prime number (effectively) cannot.
So the inherent security of each Bitcoin is an intrinsically valuable characteristic of Bitcoin

An important point.
It is easy to get sidetracked thinking that because Bitcoins are made up of data, that they are somehow "not quite real" or "virtual stuff"
Information theory is very clear here.
Information MUST be represented physically (ie as magnetic imprints on a hard drive),
and once that is the case, the data is in every sense as corporeal as anything else.

Thanks

R.

[Erdogan]

Unless you want to be hairsplitting, neither bitcoin nor fiat have intrinsic value. They have exchange value, that is what makes them money.

[ZephramC]

fiat money - bitcoin
fiat, government laws - bitcoin source code
government officials, bankers - bitcoin programmers, miners

How easy is it to modify government law, rewrite it and create a small voluntary community bound by these laws? How easy is it to choose which part of government law you will be following (with the consequences imposed only by other law abiding citizens and not by government itself)?

How easy is it to switch to the authority of other set of government officials, or even to become government official for yourself? How easy is it to switch your banker in one minute several times a day?


In any case... very interesting post.

[hashman]

...  that the bitcoin network is basically a direct competition to the government in the area of finance, in exactly the same way as for example email is a competition to a postal service.

That is a valid analogy because email is IN NO WAY a competition to the postal service.   Notice how the postal service thrives now and remains the core of society and we use email to check our postal deliveries.  Many nations postal service has expanded to include financial services and I wouldn't be surprised to see bitcoin in the mix there eventually. 

Did netflix destroy hollywood?  Did the internet drive phone companies out of business?  Did electronic trading platforms drive the NYSE out of business?  No, no, and no.  Technology will change things but there is not as much a dichotomy as you present. 

[johnyj]

The most obvious intrinsic value of bitcoin is entertainment: It is fun to be your own central bank! The central bank game has been exclusively reserved to be played by a few bankers and they played it lousy. Now everyone can play it, fair and easy. This is the most funny game in the world 

[amencon]

I consider "intrinsic value" to be an in-congruent sequence of words, like "absolute opinion".

[guybrushthreepwood]

I don't think it has intrinsic value.

[greenlion]

I think that unless you have a very specific business reason to convince people that an enterprise involving Bitcoin is desirable, it's worth it just to drop this entire subject altogether.

"Intrinsic value" is a very specific financial term that is being crassly misused by uneducated popular online magazine authors and commentators, and they're convoluting the entire discussion to fit into a fictional framework that rationalizes their complete lack of understanding of what any of this actually represents.

Bitcoin has value, the value is going up as more and more people become aware of the utility of what the network represents, and what a bunch of pretentious dinosaurs want to convince you via sophistry and other such babblings has no impact on what's going to happen in reality.

[ZephramC]

One can say that for a value to be truly intrinsic it should be independent on the existence of human race or inteligent life in the universe. Right?

[piramida]

nothing has intrinsic value. value of everything is rooted in the system of values of somebody holding it. from the standpoint of an alien from another galaxy, intrinsic value of our whole planet is nil, maybe apart from rhodium, so he'll extract that and leave the stone behind.

and don't listen to the sillies who say that gold or fiat have intrinsic value. of course they do not. when we are back to stone age, you can try and be powerful with your golden axe, but you'll quickly learn that a good sharp rock has much more value in this new system of values.

what they are talking about is the immediate *today* value. but bitcoin definitely has much more *value potential* than fiat or gold, because we can see the shift in the system of values going on in the world.

[guybrushthreepwood]

nothing has intrinsic value. value of everything is rooted in the system of values of somebody holding it. from the standpoint of an alien from another galaxy, intrinsic value of our whole planet is nil, maybe apart from rhodium, so he'll extract that and leave the stone behind.

and don't listen to the sillies who say that gold or fiat have intrinsic value. of course they do not. when we are back to stone age, you can try and be powerful with your golden axe, but you'll quickly learn that a good sharp rock has much more value in this new system of values.

Gold has intrinsic value because it's a usable metal.

[mgburks77]

nothing has intrinsic value. value of everything is rooted in the system of values of somebody holding it. from the standpoint of an alien from another galaxy, intrinsic value of our whole planet is nil, maybe apart from rhodium, so he'll extract that and leave the stone behind.

and don't listen to the sillies who say that gold or fiat have intrinsic value. of course they do not. when we are back to stone age, you can try and be powerful with your golden axe, but you'll quickly learn that a good sharp rock has much more value in this new system of values.

Gold has intrinsic value because it's a usable metal.

Depends on the social context. In the given example using gold to make a golden ax didn't create value. In that context gold isn't really usable until some additional social development occurs and gold is being used for exchange in an economic system. Then it has value according to what it represents to people in the community.

An unit of exchange only represents something tangible. It is the tangible good or service that has value, not the medium of exchange itself. Which is exactly why bitcoins are interesting.

As someone said earlier value is completely subjective. Something is only "worth" what someone else is willing to exchange for it.

[piramida]

Gold has intrinsic value because it's a usable metal.

Bitcoin has intrinsic value because it's a usable product of hash computation. What's your point? Can you wear bitcoin on your neck? No. Can you send gold over internet? No. Which one is actually more useful? For me it's clear.

[woutersteven]

Something has intrinsic value when it has value by itself.

Gold has intrinsic value, because it can be used as a component in electroncics, because it is beautiful and because you know others would want to buy it, it has a long history of acceptance.

By that definition, bitcoins have no intrinsic value. One BTC by itself is useless. What bitcoins do have is intrinsic utility similar to cell phones. One cellphone is useless, give a billion people a cellphone and a network and it becomes very - very useful.

In that situation, if intrinsic value is determined in (great) part by intrinsic utility, the intrinsic value will only go up for bitcoins.

[guybrushthreepwood]

Gold has intrinsic value because it's a usable metal.

Bitcoin has intrinsic value because it's a usable product of hash computation. What's your point? Can you wear bitcoin on your neck? No. Can you send gold over internet? No. Which one is actually more useful? For me it's clear.

It doesn't exist in the real physical world. It has value, but not intrinsic value. See this:

Something has intrinsic value when it has value by itself.

Gold has intrinsic value, because it can be used as a component in electroncics, because it is beautiful and because you know others would want to buy it, it has a long history of acceptance.

By that definition, bitcoins have no intrinsic value. One BTC by itself is useless. What bitcoins do have is intrinsic utility similar to cell phones. One cellphone is useless, give a billion people a cellphone and a network and it becomes very - very useful.

In that situation, if intrinsic value is determined in (great) part by intrinsic utility, the intrinsic value will only go up for bitcoins.

[greenlion]

Gold has intrinsic value because it's a usable metal.

Bitcoin has intrinsic value because it's a usable product of hash computation. What's your point? Can you wear bitcoin on your neck? No. Can you send gold over internet? No. Which one is actually more useful? For me it's clear.

It doesn't exist in the real physical world. It has value, but not intrinsic value. See this:

Something has intrinsic value when it has value by itself.

Gold has intrinsic value, because it can be used as a component in electroncics, because it is beautiful and because you know others would want to buy it, it has a long history of acceptance.

By that definition, bitcoins have no intrinsic value. One BTC by itself is useless. What bitcoins do have is intrinsic utility similar to cell phones. One cellphone is useless, give a billion people a cellphone and a network and it becomes very - very useful.

In that situation, if intrinsic value is determined in (great) part by intrinsic utility, the intrinsic value will only go up for bitcoins.

These are all completely made-up fictitious internet terms and concepts.