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Sunday, July 8, 2012

Bitcoin and Intrinsic Value.

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

    1. 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?

  2. 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.

    1. 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

    2. 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.

    3. 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 !

    4. 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. Not sure what you are saying here.

      Why do bitcoin fans get personal always, instead of addressing the issues?

  3. A
    I 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.

    I 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.

    1. 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's called "generally accepted". Nothing is money until it is generally accepted. This is not an Austrian criterion. Every economist on the face of the Earth agrees with this. See Wikipedia on Money.

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

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

    4. Let's stick to the issues and not to personal things. Not sure what you mean by generally accepted being black or white think.

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

  4. 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

    1. Please quote exactly which line of the proof is incorrect because digital currencies now exist. Hint: There is no such line.

      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.

    2. 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.?

    3. 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?

    4. Oh, and about the gold coin and the bitcoin. Do a search for "gold technological uses".

    5. And let[s not forget https://en.wikipedia.org/wiki/Gold_Strike_%28drink%29

  5. 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.

    1. Bitcoin's intrinsic value is it's timestamping ability. You can use a bitcoin to timestamp anything. Why would you want to timestamp something? Well, to prove that you were the first to think of the idea. This is an important concept in copyright and computer science.

      You can also actually use the blockchain to embed things in it for everyone to see. This has already been done.

      Also, bitcoin now has the capability to do multisignature transactions. This is an intrinsic property. This has never existed before and it is like the Internet just came out and no one knew what it was. Basically, multisignature transactions has the capability to eliminate all paper contracts. Sounds like magic, but what people don't understand tends to sounds mystical.

  6. Bitcoin is a form of digital currency created through a special process known as mining. The mining process involves difficult mathematical algorithms that make the currency scarce. Read more
    Bitcoin to bank transfer || Bitcoin|| Bitcoin to Bank wire