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Bitcoin and Intrinsic Value.

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Someone at the Mises Forum asked me to explain about intrinsic value, and how it applies to bitcoin. Without further ado:

To sum up what is happening with intrinsic value. It is one of those phrases whose meaning changes depending on the context.

1. When Austrians say nothing has intrinsic value, that all value is subjective, they are speaking in a certain context. The discussion there centers about the question, why does bread cost a dollar a pound? What makes it worth exactly a dollar?

The old way of thinking was that there was some mystical entity hidden in the loaf of bread that made it worth a dollar. That’s what they meant when they were discussing the intrinsic value of a loaf of bread. There were those who thought that the mystical entity inside the bread is “cost of production”. Others thought that the mystical entity is “amount of socially necessary labor put into the loaf”.

The Austrian conclusion is that there is no mystical entity, no intrinsic value. The price, the value, of the bread comes from something outside the bread, mainly, from the potential customer who is willing to pay a dollar for it. In other words, its value is subjective, not intrinsic.

That is one context in which intrinsic value is used, and in that context, there is no such thing as intrinsic value.

2. The other context in which the phrase is used is when discussing the value of money. In the article in my blog, Bitcoin Takes a Beating, I quote and explain Mises at length on this subject. Mises analyzed the value of money, say of a gold coin, as being made up of two elements.

The first value comes from answering the question, “What could Robinson Crusoe do with it?” Crusoe had nobody on his island to buy from or sell to, so the gold coin had no use as money. But it did have some use. He could use it for jewelry, if he was vain. He could use it as a component of his computer chips, or whatever.

OK, now Crusoe comes off the island back to civilization. He finds that everything has a price pretty much as he valued things on the island, except for one thing. His gold coin, he finds, is worth much more than he thought. “Why are people setting such a high value on something of so limited a use?” he wonders. Then he finds out that gold is the coin of the realm. Aha, that explains it. It has a use in civilization it never had on the island. You can easily buy stuff with it, anything from everyone. That is a useful feature, that increases the usefulness, and thus the price, of gold.

So those are the two sources of value that money has. Mises gave those values clumsy names, industrial value for the first, and exchange value for the second. As time went on, people [including Mises himself and other respected Austrians, as I have quoted at length somewhere in these forums] instinctively starting calling that first value, that Robinson Crusoe had for it when alone on the island, its “intrinsic value”.

Now one can readily understand why someone who wrote in the forum that bitcoin has “intrinsic value, as money”, was being quite amusing, like a clown falling off a bicycle. Intrinsic value is what it has on the island, and there it has no use as money.

[Note that in this context, intrinsic value is also subjective, because the two concepts are not contradictory.  Whereas in the first context a subjective value and an intrinsic value cannot be the same. If you grasp these last statements, you now understand the two meanings of intrinsic value.]

Mises’ Regression Theorem states and proves that a money cannot have that second value, what Crusoe saw off the island back in civilization, unless it first has intrinsic value, meaning that Crusoe had a use for it on the island. In the article Bitcoin Takes a Beating, I explain his reasoning at length.

Since bitcoin is totally useless on the island, obviously, then by the Regression Theorem it will remain useless off the island. The bitcoin crowd howls at this obvious statement, trying to find some flaw. The most common thing they try is saying that we see it has some value, just go to mtgox.com. So Mises must be wrong.

The second thing they try is to say that bitcoin has some magical property that excludes it from the Regression Theorem, which was only talking about non magical objects. I’ve addressed both these arguments many times.


  1. Anonymous says:

    The so called regression theorem is as unproved as Jesus walking on water. It is completely worthless.


  2. mark says:

    Robinson Crusoe is on an island – he has an idea for a peer to p2p cryptographic currency. He thinks about it day and night and starts to develop the software. The idea has value to him – ideas have value.He's saved from the island and he starts talking to people about his idea – he develops the software and people start investing in this idea with cpu cyles paid for by electricity.He then hears about Mises regression theory and concedes Mises was right – he had an idea, and that idea had intrinsic value.


  3. Anonymous says:

    You can't even sell an idea because as soon as you show it it's released and you have no control over it. You can't own an idea. At least it shouldn't be the case. He invest's in an enterprise according to his idea, not in his idea. He's investing in a firm not in a plan of a firm. Ideas have value in metaphisical way I'd say, but can't have prices.What is y our logical fallacy? ambiguity


  4. Anonymous says:

    AI have some bits of paper in my pocket with the Queen of England's head printed on them. I want to buy a bag of weed off my friend.My friend agrees to accept some of those bits of paper in exchange for his weed.BI have some Bitcoins stored on my laptop. I want to buy a bag of weed off my friend.My friend agrees to accept some of those Bitcoins in exchange for his weed.I don't care what theories Mises had, there ain't a jot of difference.


  5. Nice theory. Unfortunately it was written before digital currencies exists and could use a little more time back at the drawing board.About 15,000 time a day now it doesn't matter what is theorized: – http://blockchain.info/charts/n-transactions-excluding-popular?daysAverageString=7


  6. Stephen Pair says:

    Bitcoin does have intrinsic value. That's the essential point that a lot of Bitcoin detractors completely miss. Bitcoin is not just money, it's also a payment system. It happens to be a very secure and convenient payment system. It's arguably the payment system best suited for the Internet. You have to have bitcoins in order to use this payment system. That's the intrinsic value of a Bitcoin. The regression theorem may be valid and Bitcoin might fit perfectly well into it when viewed in this light.


  7. Math says:

    You see generally accepted as a black or white think. Are you that close minded ?


  8. Math says:

    It's not the idea per se that has a value it's the implementation of it, a secure and distributed ledger system.In light of what Bitcoin has become why don't you propose something better ? I think you lack the technical skill and thus make all sort of moot arguments to make you feel relevant. Hint: YOU'RE NOT, Get a clue !


  9. Anonymous says:

    Not always. I took USD to a bank, deposited it into an exchange's account, swapped it for BTC, transferred them to my personal wallet, then sent them to a hardware manufacturer as payment. Disclosure – the manufacturer is Butterfly Labs, which makes devices for BTC mining. I bought a unit from them before through PayPal. They now take BTC or bank wire. Why did I go through all the above? Because bank wire costs me $20 USD and about an hour to do it at my bank, and then later I get the confirmation. The aforementioned took slightly less than that and at this point in the BTC environment there is no fee. I think I would have the same value for a gold coin as for my BTC wallet on a SD card if I was isolated on an island – nice to look at.?


  10. […] He has written several articles about the demise of bitcoin. In one of this articles, “Bitcoin and Intrinsic Value,” he describes a hypothetical situation where Robinson Crusoe is isolated on an island where […]


  11. flyingaxe says:

    But doesn’t paper money, that has no intrinsic/industrial use on an island, suddenly gain value when Crusoe goes out to society? Is that only a product of the state’s coercion?


  12. Smiling Dave says:

    The answer to the question about paper money is that yes, it has value off the island, and that value is indeed only its value as a medium of exchange [to buy and sell with], not intrinsic value. Exactly the point we are trying to get across.

    Maybe you are asking how the paper money gets exchange value with no intrinsic value.

    I don’t think coercion is the answer. Even if there was coercion, coercion at what rate? Could the govt insist one dollar be able to buy a loaf of bread, or a quart of milk, or whatever? Maybe, but it’s never been done. Would probably, like all wage and price controls, cause serious shortages of bread, or milk, or whatever.

    I’ve heard that coercion in the sense of having to pay your taxes in paper money would give it some value. people would want to have some saved up to pay taxes with. Note that this would be akin to intrinsic value. In our little parable, it’s as if there was a tax collector on Crusoe’s island.

    Let’s keep in mind the essential problem behind the regression theorem. On the first day a money is used, how do people decide how much it is worth?

    If the money is a commodity, we have an answer. It’s worth what you can sell it for as a commodity.
    With paper money, for countries that introduced it when they were on a gold standard, the answer is it’s worth what it can be redeemed for in gold. Thus the price is set. Even if the country then dissociates the paper from gold on Monday, people have something to go by, what it was worth on Sunday.

    What about if paper money was introduced today with no gold standard to go by, for example in a newly created country. Krapistan. Then the govt will have to declare it redeemable for the old money used in the country [which, if you back far enough, was redeemable in some commodity]. Again, there is something to go by.

    That’s the gist of Mises’ answer in http://mises.org/humanaction/chap17sec9.asp


  13. Smiling Dave says:

    And yet Mises claimed he laid out a rigorous logical proof. Would you kindly enlighten us by showing where the flaw is in his reasoning?


  14. Smiling Dave says:

    1. The idea has value to him, yes. Can he go to the supermarket and buy carrots with it? Not unless it has value to the grocer as well. When we talk about money we are talking about buying carrots from people, not about feeling happy about a valuable idea.

    2. “…people start investing in his idea…” Begging the question [Look it up].

    3. “That idea had intrinsic value.” What exactly could he do with his idea on the island, [even given that he had all the resources to build a computer and install his software on it]? Answer: Nothing.


  15. Smiling Dave says:

    The jot of difference is that you can go the mall with British pounds and buy everything there, because the shopkeepers will accept the pound. But you cannot do that with bitcoins, can you? It has to do with “generally accepted”. Nothing is money until it is generally accepted. This is not an Austrian criterion. Every economist agrees with this. See Wikipedia on Money.

    Maybe your argument is that fiat currencies and bitcoin are the same. Just as your friend and everyone else in England accepts fiat currency, so too they will someday accept bitcoins.

    But Mises explained that fiat currencies, since they were initially linked to gold, satisfy the regression theorem. Bitcoin was never linked to anything, and so does not. Link: http://mises.org/humanaction/chap17sec9.asp


  16. Smiling Dave says:

    Please quote exactly which line of the proof is incorrect because digital currencies now exist. After all, if you claimed some theorem of mathematics is no longer true because we live in a computer age, you would need to show exactly which line of the theorem’s proof is flawed in a digital age. Same thing with the regression theorem. Where is the logical flaw?

    Those 15,000 times a day are bitcoin speculators swapping bitcoins for money. They are not incidences of bitcoin being used as money, meaning somebody going to the supermarket and buying something with a bitcoin.


  17. Smiling Dave says:

    A payment system is just another phrase for money. Your argument seems to be that it is a superior money, secure convenient, best suited for the internet. But all that is not intrinsic value, which means non money value.
    A careful reading of the article may enlighten.


  18. Smiling Dave says:

    Generally accepted is not black or whitek. It is a prerequisite for something to be considered a money. And bitcoin is not generally accepted in any meaningfull sense.

    Even if we allow shades of grey, bitcoin is light years away from being generally accepted. It’s almost never accepted. Go to twenty major online stores. places like Walmart and Amazon, and see what you can buy with it. Answer: nothing.


  19. Smiling Dave says:

    Not sure what you are saying here. I’m not claiming that bicoin is insecure. I’m claiming that even if it 100% foolproof, it is not a money, and never will be, because it has no intrinsic value. Implementation of an idea does not give the idea intrinsic value.

    Bitcoin is not a ledger system. A ledger system is a record used in double entry bookkeeping. Quickbooks is a ledger system, bitcoins isn’t.

    We aren’t here to discuss my skills or relevance. We are here to discuss ideas. Please spell out exactly where my arguments are mistaken.


  20. Smiling Dave says:

    Yes, I stand corrected. You, and probably a few other people, made one purchase this one pay using bitcoins. What percent of your annual income is used to buy things with bitcoins, and what percent with USD? Am I correct in guessing it’s over 99% dollars?

    About the gold coin and the bitcoin. Do a search for “gold technological uses”.
    Also https://en.wikipedia.org/wiki/Gold_Strike_%28drink%29


  21. afbitcoin says:

    Interesting article. I agree about value being subjective rather than intrinsic. Nothing illustrates that principle better than bitcoin. But the same is true of gold, silver, houses and bags of weed and bits of paper with the queens head on it.

    I don’t see any value in the experiment you described though maybe I’m misunderstanding it.


  22. Smiling Dave says:

    The gist is this. A thing can be useful as money, useful for something besides money, or some combination of the two.
    Mises argued that it is impossible for something be useful only as money. The problem with such a thing, for example bitcoin, is how will people know what value to assign to it?
    Should they exchange a bottle of milk for a bitcoin, or two bottles?

    His argument is laid out in my article Bitcoin Takes a Beating.

    The point of this article was to explain the difference between useful as money and useful as something else.
    Gold, houses, bags of weed, are all useful for something even if they are not money.

    Bits of paper with queen’s head is a slightly different story. It is fiat money that in the past was redeemable for gold.
    See http://mises.org/humanaction/chap17sec9.asp
    See also previous comment, and the reply.

    Hope this clarifies things a bit.


  23. Anonymous says:

    Couldn’t bitcoin be said to have intrinsic value in the same way that items in a video game have intrinsic value? A bitcoin could be thought of as a sort of “geek” status symbol or some fashionable token, much like items in a video game can be thought of. Some people are willing to pay lots of money on ebay for these items because they don’t have the time to invest acquiring them on their own. Clearly bitcoin is not currency, but I think it is wrong to say there is no _intrinsic_ value as we definitely can imagine situations where people derive psychic satisfaction from owning bitcoins, absent of their marketability.


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