In November of 2018, I wrote an article titled “Bitcoin: Honest Money”. There, I made several claims and comments about intrinsic value. When I wrote it, I told myself I needed to write more about the concept since I felt I missed out a lot that needed to be said. Several people have pointed out that article specifically to me when I’ve also openly and publicly said that intrinsic value doesn’t exist. So it’s time to say those things that I should’ve said then but didn’t.
It’s tempting to go back and edit old articles to add more and clear up misunderstandings but unless I decide to compile my thoughts in to a more ordered structure such as a book at some point in the future, I prefer to leave things as they were and let newer articles such as this one provide the necessary context should the reader seek it out.
To begin: I both stand by (almost) everything I said about intrinsic value in that article as well as my statements that intrinsic value doesn’t exist.
In case that leaves you scratching your head, what I would try to add to the Honest Money article if I were to attempt to revise history is that the term “intrinsic value” really should be understood as “intrinsic properties that are valued”.
Conscious entities such as humans have desires. How to define these desires and from whence they come is a topic I’ll expand on in another more philosophically focused article but for now we can accept it as axiomatic. Conscious entities want things. We are conscious entities. Therefore, we want things.
The way that we describe the strength of these wants is ultimately what we call “value”. Economists of different kinds have tried to add things around this definition to say things like “value is determined by what things cost” or “value is determined by the effort put in to creating it”, but neither of these are accurate. I could sell my toenail clippings for a million apiece and even if one person were crazy enough to give me that, it doesn’t by any stretch make them that valuable to anyone other than the person who was willing to pay that. Equally, I could put a huge amount of effort in to crafting a unique sculpture out of carefully collected earwax and then describe its value in terms of the hours I put in and the difficulty of collecting and working with that amount of earwax. It doesn’t mean anyone else is actually going to agree with my valuation.
Value is inherently personal. How I value something is different to how you may value that same thing. It’s also different over time. Right now, I’m a bit thirsty and slightly too warm, so I’d value a cool drink higher now than I would if I weren’t thirsty and/or if I were cold.
The price of something is the point where a coincidence of differences in value occurs. If I value a bottle of cola more than I value 20000 satoshi while someone else values 20000 satoshi more, then we will trade the cola for the Bitcoin and both be happy about it. The price in this transaction was 20000 sats, but that doesn’t mean that there’s some universally accepted value assigned between the two or even that anyone else would necessarily consider either end of this trade to be worth doing from their personal perspective. When a thing does have a commonly understood trading value that is generally agreed upon at least roughly by the majority of people within an economic area, this is what we call a market value. A market value however also isn’t an intrinsic property of the thing, but rather just emergent from the individual values placed on it by all participants within that market.
What does that mean for the term “intrinsic value”? Of course, the concept is obviously meaningless. A thing can’t have a value intrinsically since the value of that thing is entirely subjective to the person (or other conscious being) that desires it. Gold has no intrinsic value; Bitcoin has no intrinsic value; dollars have no intrinsic value.
So why did I talk about intrinsic value in that article? As mentioned, what I was really talking about were intrinsic properties that make something likely to be valued given a specific set of assumptions about the beings that are valuing it. The term “intrinsic” is important in this context since it adds a distinction from extrinsic properties.
This is where I made a mistake in my previous article that I want to own up to, and why I said I stand by almost everything. I said that money has intrinsic value as a medium of exchange and store of value. That was wrong. These are extrinsic properties not intrinsic. They are reasons that things used as money have value, but they’re extrinsic to the thing itself. The thing has these properties because we assign them to it, not as a natural property of the thing itself.
However, I wasn’t just speaking from a place of ignorance; I was actually just jumping several steps ahead of myself and failing to explain that jump to the reader. We bestow these extrinsic properties on to a thing only when it has intrinsic properties that make it valuable for us to do so. If we tried to bestow these extrinsic properties on things that are unsuitable because of their intrinsic properties, we’d quickly lose them. It’s hard to use “fresh air” as a medium of exchange because transporting it effectively is difficult, and most simple acts of verifying it tend to ruin it in the process. Gold is much better than air. And Bitcoin is much better than gold. These aren’t due to the extrinsic properties we assigned but indeed due to the intrinsic properties that allow us to assign these extrinsic properties more firmly.
“Gold bugs” like the outspoken American economist Peter Schiff fail to understand this. They talk about intrinsic value in relation to the reasons people value a thing outside of monetary value. That is, they consider gold to be intrinsically valuable because you can use it in electronics and jewellery, food to be intrinsically valuable because you can eat it, wood to be intrinsically valuable for your ability to burn it for heat and so on.
They’re not actually wrong, they just miss the point. I even mentioned several of these things as intrinsic values (again: intrinsic properties that people find valuable) in the Honest Money article. The point however is that these “intrinsic values” have nothing to do with whether or not the thing in question functions well as money and – as discussed further in the Honest Money article – they actually detract from a thing’s ability to find a fair market value as they distort both the supply and demand sides of the equation causing them to be worse money than if they didn’t have other non-monetary uses/value.
To summarise: Properties of things – both intrinsic and extrinsic – are why we value things. Value is subjective and personal. Market value is an emergent aggregation. Good money has intrinsic properties that make it easy to bestow the extrinsic properties of money upon it.