The St Louis Fed is Wrong: Bitcoin Has Intrinsic Value or Nothing Does
Recently, the St Louis Fed has entered crypto news stating that Bitcoin and government backed currencies have no intrinsic value. This is supposed to be in contrast to things like commodities, but this contrast doesn’t exist. To show why, let me first explain what the fed means by intrinsic value.
It’s easy to informally say that you value your red car with a cup holder, but that’s not quite right. You value being able to quench thirst on your way to your desired destination, plus whatever reputational benefits and excitement is achieved by owning a red car. Even this reputation is probably not directly valued, as it is useful for getting closer to other desired ends, though boosting your ego may be something of an end itself.
More over, value isn’t an amount; it’s a rank. Human’s have an implicit list of ends which they are trying to achieve and which they must choose between. Resources (including time) are scarce, so humans can’t do anything but prioritize between these ends. This list is what determines the value of any given end. Value is the position inside this prioritized list of ends.
How do you place a good in a list of ends?
But… you can impute the value of the ends onto goods which meet those ends, and create a new list of goods prioritized by your judgement of how well those goods will fulfill your prioritized ends. Think of yourself as the source of light, your list of ends as a projection slide, and the list of goods as the image on the screen. This list is derived from some combination of your list of ends and what goods you know are available, but it is still a list, and the position any particular good occupies in this list is a sort of value. So let’s call this list and the ranks which the goods in it occupy a virtual list with virtual values.
We have one more issue now. The goods in this virtual list are capable of directly meeting the ends in your list. What do we do with goods which are useful for creating these goods, but can’t themselves meet an end? Well, you create a virtual virtual list, imputing the virtual value onto the goods in the virtual virtual list. Let’s call this list V², the first list V¹, and the actual list of ends V⁰. With this process we can impute virtual value up through V¹,V² up through Vⁿ.
Which list do we place Bitcoin in?
Bitcoin, like most other goods, meets or is a factor in the production of more than one end. We’ll call the multiple instances of a good in these lists uses. For now, let’s list the most commonly thought of uses and describe how those can eventually lead to meeting ends.
1. Exchange use (e.g. cash)
2. Investment use (e.g. gold)
3. Appreciation use (e.g. art)
Appreciation is easy. Bitcoin is a V¹ good for this use. Much like owning art, or getting a massage, Bitcoin directly meets an end, a psychological benefit. The fact that people actually do value Bitcoin for this use is what most people assume enables the other two uses (even Satoshi Nakamoto said as much). Both value transfer and investment are Vⁿ uses. Actually investment is probably a Vⁿ⁺¹ use since its ultimate aim is to eventually exchange. Exchange can allow a user to obtain goods of any order. Based on how wide spread Bitcoin’s V¹ use is, this enhances how useful it’s Vⁿ usage is. This can have a snowball effect as a network of users exchanging because more people are using this means of exchange. Then because network of usage already grew, people take this into account and… etc.
This is the point that the St Louis Fed was driving toward by saying Bitcoin has no intrinsic value.
Every use of Bitcoin ultimately traces their effectiveness back to a single use, Appreciation. And because there are so many substitutes for Appreciation, if Bitcoin falls out of fashion, it’s exchange value can become unstable. Expectations of other people’s expectations is especially unstable. Owning Bitcoin can even become an embarrassment when price shocks happen.
Fortunately for Bitcoin however, the St Louis Fed is wrong. There is another use for Bitcoin which is entirely independent from it’s appreciation use.
4. Economic signaling (e.g. marble floors in banks)
This economic signal is derived from the fact that for each Bitcoin to be mined, a large expenditure of energy must be performed in the form of hash power and proof of work. As I’ve written before, because Bitcoin’s are proof that this energy was spent, and can be sent exclusively to a single recipient, you can both obtain the attention of potential business partners and signal honesty to them. This works just like the marble floors. You would not send them this proof of work if you did not believe you would be able to recoup your investment through continued mutually beneficial interactions. If you were dishonest, planned to cheat, or were otherwise useless to the recipient, after being found out, you would be cut off, and your investment lost.
This use is a Vⁿ use similar to exchange, as it can be input into initiating business relationships with strangers. Relationships are Vⁿ⁻¹ uses for nearly every good created in the world, and therefore imputes Bitcoin with near unlimited end meeting potential. This property also adds to the usefulness in exchange, since even if the appreciation use is no longer widely accepted, Bitcoin will still have the ability to signal, and so anybody who requires that ability will accept Bitcoin for some exchange. Hash power is one of the most valuable aspects of Bitcoin, and thus one of the reasons it should never be removed from the protocol.
This however, is not a property of government backed currencies. Those currencies are mere numbers in an account, and are proof of nothing other than a cheat performed by counterfeiters. The St Louis Fed might be able contend that Proof of Stake currencies with no hashing power are the same as government backed currencies, but not Bitcoin. Bitcoin, as well as any hash based crypto currency, is probably the most widely applicable goods in the history of the world. While it is not the fixed good with stationary value by which all other goods can be measured that economists have dreamt about since they discovered marginal utility, it’s probably as close to one as will ever be created.
People just need to know about this property intrinsic to Proof of Work in order to impute value on to those uses. Spread the word. Earn.com knows what I’m talking about.