People might mean different things when they say Bitcoin has no intrinsic value. Some may be uncomfortable that they can’t touch it, and conclude that they can’t trust it. Some may have an issue that it has no utility other than money, and then usually conclude from this that Bitcoin must be a Ponzi. There are intellectuals also, that cite Mises’ regression theorem, and Aristotle’s properties of money - they are wrong too.
by Arman The Parman on 25 Mar 2022
This is a very, very common objection to Bitcoin, and I will attempt to thoroughly debunk this criticism here. In this piece, I will start by defining and dismissing the literal meaning of "intrinsic" value, then go on to address the underlying criticisms - lack of "utility", and no "backing".
I will then address the rarer concerns of Bitcoin supposedly not satisfying Mises's Regression Theorem, nor Aristotle's properties of money.
I've included an appendix that describes the properties that make good money in the modern interconnected world (spoiler alert - Bitcoin excels). There are also sections discussing how gold eventually failed as money (and why mining cost does not support its price), and another on fiat money.
Debunking the literal meaning of “intrinsic value”
We must start with some definitions so the following arguments can be meaningful.
Value: Value is something that a human appreciates as being favourable to him/her in some way. We sometimes can put a number to it (using money), to help us rank the things we value.
Intrinsic: Intrinsic, in this context, refers to a property outside of the human mind. It comes from within the object itself, and not our opinion.
Intrinsic Value: This means that something is valuable regardless of what the human thinks. The value is from the object, not our assessment of it.
Basically, intrinsic value is a nonsense term that expresses: “This is valuable to a human whether the human values it or not.”
Can you see the problem? Carefully read it again if not.
A hypothetical rebuttal: One might argue (incorrectly) that water has intrinsic value because it sustains life. But that assumes that every human at any moment in time prefers to remain alive. Many do, but just one exception breaks the claim that water has intrinsic value. There is nothing in the universe that every human will always value, therefore nothing has INTRINSIC value.
This definition of intrinsic value, and the logical proof that nothing has intrinsic value, should by itself be enough to debunk the criticism that “Bitcoin has no intrinsic value” - But no, that is only debating the semantics. What people really mean when they say “no intrinsic value”, is that Bitcoin has no value other than for its properties as money. It has no other use, or no “utility”, other than money. They believe money must have some alternative use to give it “backing”. I will address both in turn:
I feel I must also debunk the improved (yet inadequate) version of the original criticism, and state it this way: “Bitcoin has no utility”.
To this, I say: “Yes, there is no utility other than for being money - and that’s fine!” This is because money does not need to be anything besides money - In the same way that a TV does not also need to be an air-conditioner! Historically, money has always had utility, but that’s only because pure money (Bitcoin) hadn’t been invented.
Does utility really assist in an item becoming monetised?
Let’s look at aluminium. It has many uses. It takes energy to produce. It has some good monetary properties. But it’s not money and never will be. That’s not to say it doesn’t have value; it has utility value, but not monetary. Possibly the biggest monetary weakness is its abundance. The same can be said for many other useful metals or commodities.
Let’s try salt. Salt used to be money. Its utility helped it gain monetary status, but it failed as money because of its poor monetary properties, and a superior competitor displaced it.
Now let's look at gold. Gold has excellent monetary properties (but no longer good enough, see Appendix B) and it evolved from a societal state of barter into the dominant money for humanity. It has reigned worldwide for a long time, until it failed as money and allowed the development of fiat money, which overcame some of gold’s weaknesses but introduced many new problems. But gold also has many industrial uses and interesting physical properties. If you study how money evolves from barter, you’d learn that utility is a prerequisite to triggering the initial stages.
Briefly, monetary evolution from barter happens as follows:
Many people will value an item for its utility. If it is durable, then it may be stored or collected by many people in that economy. This leads to the good becoming a store of value (initially just the value for its utility, but during the next phase a monetary premium grows). This is really important. A durable item begins with a store-of-value component, its utility value. Without some value to begin with, storage of the item never becomes commonplace.
Once commonly held, it is then able to be exchanged for other goods and services (develops as a medium of exchange) in order to overcome the difficulties in trade that barter poses - this allows the economy to grow. This facilitation of trade increases the store-of-value premium of the item over and above the utility-value. Then this leads to more people storing it. A positive feedback loop results, until the utility-value pales in comparison to the much larger premium-value.
The final stage of the evolution of money is when goods and services are priced in the new money (unit of account). This is well described (I recommend Vijay Boyapati’s, The Bullish Case For Bitcoin), so I am not discovering anything new, just summarising. It is also worth noting that this describes a free-market money, not one that is forced on people by governments, i.e. fiat money (more on that later).
Back to gold
If you look at gold’s price now of around $2000 per ounce, it’s not difficult to appreciate that the vast majority of this price is composed of a monetary premium, above an unknown industrial (or utility) value. Perhaps the true industrial value is $50 or $100 per ounce? We can’t precisely calculate it. But consider this - is this approximate $100 per ounce of value really “backing” gold as money? I would say “no”, because a failure of gold as money would leave the investor holding a useful metal worth approximately $100 per ounce, in the red by $1900 per ounce - hardly any compensation for making a mistake in choosing the wrong money.
If it’s not compensation for being wrong, then is it really a “backing”? No. What’s more, if gold is abandoned by the world as money, tonnes and tonnes of yellow metal held in central banks will flood the markets and eventually be bought by industry, further reducing the price of gold. Gold would also lose much of its desire as jewellery. I’m not suggesting this is going to happen any time soon, but I do think it will happen gradually over many years as Bitcoin continues to absorb more and more of the world’s desire to store value. You don’t need to accept this to understand the broader argument about utility.
If you believe gold's cost to mine "backs" its price, that is debunked as well in Appendix D.
To summarise the point on utility
Utility can help an item become money in the early stages of its evolution, but it is no longer required after that. A commodity that is poor as money has no additional monetary value from having a high utility value. And if gold magically lost all its industrial properties (it’s hypothetical, just bear with me) and kept its good monetary properties, it would still be money, no better, no worse.
So whether a money has some residual utility or none, makes no difference to its suitability and sustainability as money.
2. “Bitcoin is not backed”
Some people might mean when saying, “Bitcoin has no intrinsic value”, that Bitcoin is not backed by anything. They may also believe that gold is backed by its physical properties and that the US dollar is backed by the government, the economy, the US military, or oil.
There may also be a misunderstanding of what “backed” means. It’s a similar thought process to believing money’s alternative “utility” supports its value - it doesn't, as explained earlier.
The following might sound startling at first:
Money is not backed by ANYTHING.
That’s right. Money has no backing - it’s just valuable as money. What does have backing, is currency, by definition:
Currency is a unit that is backed by money, and used as money, in place of money.
The US dollar used to be backed by the promise of gold. In this arrangement, a currency (USD), was backed by money (gold). When the dollar was a currency, it needed the “full faith and credit of the United States Government” - Faith that you’ll get your gold with the piece of paper in your hand.
Once USD was no longer pegged to gold, since Nixon’s “temporary” cessation of USD’s convertibility to gold in 1971, USD became unbacked, and so, was transformed from currency to money, albeit a very poor money. “The full faith and credit” statement is now nonsense because the US already defaulted.
As I discussed earlier, gold has no backing either. It has a utility value (small), and a monetary value (majority). The utility value together with the monetary value makes up the total value. Gold’s utility backs its utility value, but nothing backs the monetary value apart from the fact that it is believed to be good money. If that belief disappears, there is no compensation to the gold investor apart from some utility, and hence, no backing. At best, you can say it is insignificantly backed by its utility value (although I’ll disagree with the terminology).
Really? Backed by NOTHING?
It will make more sense if you think of money as a LANGUAGE, something that communicates the value of goods and services. Money is the language of value.
Let’s compare to another language - English; the language of meaning.
Ultimately, English is a collection of symbols (the alphabet), sounds (speech), and rules (words, grammar), which together form English and are used to communicate meaning. Nothing backs the English language. There is no “intrinsic meaning” in the symbols, rules, or speech. Even if you find some intrinsic meaning through some technicality, it doesn’t matter - the point is that nothing intrinsic is needed, and is not “backing” the language.
So, what gives the English language meaning, or value? The fact that it has good enough properties as a language, AND, the fact that there is a large network of people USING it. Once a large network of people use the language together, they all benefit; i.e. they all gain value from using it. If a better language comes along, they do not abandon the language and switch to another, because anyone who does so leaves the valuable network. They must take everyone with them to the new language for the incumbent language to be abandoned. The same is true for money.
If you are the only person in the world who speaks a language, no matter how good the language is, the language is useless to communicate meaning. If you are the only person in the world who uses a particular money, no matter how good the money is, the money is useless to communicate value. It is either worthless, or has utility value only - or in debunked terminology, “intrinsic value” only.
An important nuance here is that for a language of meaning, a person can adopt more than one, and so learning a new language does not mean they abandon the one they know. But for money, every unit of value can ONLY exist in one form. For example, an ounce of gold cannot be stored in Bitcoin as well as gold. One must choose, and in doing so, that unit of value abandons one for the other. This “forced” choice is a major reason why a money with sufficiently favorable technical properties and the lead in the network participants is going to absorb the value from its competitors eventually - because monetary network participants must make a choice - people will tend to opt for the best choice when storing their wealth.
Now switch back to thinking about gold as money. Why does gold have monetary value? It’s because gold was:
- Good enough to function as money (and was the best)
- Developed an increasingly large network of people who valued it as money, and spoke that “language” of value.
Now let’s look at Bitcoin:
- The best technical properties of money humanity has ever seen.
- In the free market, Bitcoin is the 2nd largest network of people using it as money (2nd to gold, and excludes fiat money because that is by force, not the free market, see Appendix C).
For now, we can’t call Bitcoin “good money” - it has the best technical properties of any potential money, but it does not yet have a large enough network of people using it to call it money. This is why it is premature to say “it’s too volatile” or “people don’t accept bitcoin, it can’t function as money”. The point is it WILL be money, because the technical properties are not just better than anything else, but VASTLY better. People are gradually abandoning the old network with initially small, then larger portions of their wealth. Bitcoin is evolving as money.
Academic arguments - Regression Theorem
I have heard criticism that Bitcoin does not fulfil Ludwig von Mises’s Regression Theorem of money. The theory was first proposed in his 1912 book, The Theory of Money and Credit, and was used to explain away an apparent circular argument of money.
The Theorem is not supposed to be used for an isolated money such as Bitcoin, but why should money have value, generally.
Money of the free market (not fiat), as per the Austrian School of Economics, derives value from the fact that other people value it. But this creates a circular argument:
Why do other people value money? Because other people value it - You can see the circular problem.
Mises was able to explain away this criticism of money by introducing the Regression Theorem. He said that people valued money TODAY, because other people valued it YESTERDAY. And they valued money yesterday because people valued money the day before that… “regressing” all the way back to a point where someone valued money not because of someone else's value appraisal, but value for what it is, or its utility, as a commodity. Thus, the circularity of the argument for money was broken.
To come up with this insight is quite genius. But how does this apply to Bitcoin? It applies partially:
First, think about what makes Bitcoin trade at its current price. The market price of Bitcoin is an indicator of how Bitcoin is collectively valued today. This price is related to the price yesterday. Yesterday’s price was related to the price the day before, etc, all the way back to the moment it was first priced - Bitcoin Pizza Day, May 22, 2010. On this day, two pizzas were purchased by poor Lazlo Hanyecz for 10,000 bitcoins, and in doing so, connected the value of Bitcoin to pizza. Pizza’s value is connected to dollars, and so, Bitcoin’s value was publicly connected to US dollars.
In this way, the regression theorem was partially satisfied, breaking the circular argument until we reach USD. Bitcoin's responsibility to satisfy the regression theory of money ends here, and is passed over to USD.
From Pizza Day, subsequent prices of Bitcoin were related to that price, and other people valued Bitcoin because other people valued it, a natural way that money evolves. The price increased as more people joined in to collect bitcoins, choosing it as their potential future money.
It can be argued that Bitcoin’s value (not price) can go back further than Pizza day. People were mining Bitcoin using electricity, and so were choosing to endure this cost to collect bitcoins on their computers. A certain amount of electricity was required to produce bitcoins, and electricity is priced in dollars so bitcoin was loosely related to dollars even before Pizza Day (loosely, because everyone's costs are different).
Exactly what value people saw in mining bitcoins early on is actually irrelevant - what matters is that they chose to do it, at a cost. It is true that the bitcoins they mined could not fulfil any physical need, but they did fulfil a human want - whether it be curiosity, anarchist tendencies or whatever, that is most definitely related to value. It doesn’t matter that it wasn’t a physical commodity; it doesn’t need to be, to satisfy Mises’s Regression Theorem. It was valued, and that is enough.
I have heard people on Bitcoin’s side argue that Bitcoin does in fact have intrinsic value because of the network; that Bitcoin allows unconfiscatable, immutable, permissionless payments without a 3rd party - but this argument is not a good rebuttal, because all these properties are dependent on bitcoins having value. The network is useless without bitcoins being valuable, and so a circular argument exists again. The explanation I gave above is the correct one - Bitcoin satisfies the Regression Theorem to USD, and thus, the network’s value.
The regression theorem as far as Bitcoin is concerned goes back to USD. Then the question remains generally for money, "why does it have value?" The answer as to why USD has value is because people valued it yesterday, regressing back to when it was pegged to gold.
Then why should gold have value? Again, we regress backwards in time to when gold was only valued for its utility, to the moments when money arose from barter.
To summarise the Regression Theorem Rebuttal:
Bitcoin regresses back to pizza (or electricity, a commodity), which regresses back to USD. USD regresses back to gold as money, which regresses finally to gold's utility. Therefore gold’s commodity value breaks the circular argument for money generally.
Academic arguments - Aristotle’s Properties of Money
Aristotle defined the characteristics of good money with 5 properties:
- Intrinsically Valuable - The value of money should be independent of any other object and useful with inherent value contained in the money itself.
It appears that Bitcoin does not satisfy the 5th criterion. Is Bitcoin really “useful with inherent value contained in the money itself”?
There are three points to make about this.
- Nowhere does it say HOW “inherently” useful the money needs to be. One could argue that bitcoins are useful in demonstrating a digital network of money as an intellectual exercise to cryptographers. Maybe that’s not very useful, but can we say there is ZERO use? And who are we to judge what others must find useful?
- Aristotle lived in a time when there were no computers. He had no concept of the digital. In the pre-digital era, it seems very reasonable that only a commodity can evolve into money. But if Aristotle were alive today, he’d have the benefit of seeing that digital (non physical) items can have value to people. Perhaps it is true in that era, no physical item could ever have been money without some alternative value. Perhaps it requires the invention of Bitcoin to break this rule. How can Aristotle be expected to have predicted the digital age, and the possibility of Bitcoin?
- USD is money. It has been functioning seemingly well enough for 50 years. It has no inherent value contained within itself either. It is accepted all over the world where the US government has no authority to enforce its acceptance.
Appendix A - What are the Good Properties of Money?
The properties of money can be divided into two major components:
Hard (difficult to produce more of; vs “easy”)
Inexpensive and easy to secure/store
Borderless (can send internationally without hindrance)
Unstoppable by governments
Resistant to confiscation
Resistant to censorship
Neutral (anyone can use it without permission)
Open-source (the technology is not secret and not owned by anyone; no patents)
Antifragile and adaptable
Resistant to unwelcome changes
The number of people using it (Metcalfe’s Law: the value of a communications network is proportional to the square of the number of its users)
Fair (created without a pre-mine - ie the founders did not enrich themselves)
No central control
Sufficiently distributed with tendency to further distribute (note: even distribution is impossible to begin with)
Appendix B - What happened to Gold and Why did it Fail?
Gold was great. Humanity flourished with gold as money, because people could save for the future with little concern that their purchasing power would evaporate. Being able to save means you can think about and plan for the future. Not being able to save means you are always thinking about satisfying your needs now, without long term thinking. Great things are built with long term thinking, not short term thinking.
The weakness of gold though is that it is difficult to transport long distances, and difficult to keep safe and store. This led to people keeping gold in banks, which, on its own, is not a problem. Banks provided a valuable service.
However, this allowed banks to issue currency backed by gold: "paper money". Paper money is an easier way to transport value. Also, the records of accounts kept by banks meant that international payments could be made without the need for the movement of gold to make payments. Banks could simply update their ledgers which stated what is owed to who.
Eventually, gold became more and more concentrated in the hands of banks and then central banks. The banks also practised what’s called fractional reserve lending, which means they lend out paper money that was not backed fully by gold that they held. Central banks then took over the business of issuing currency backed by gold, and they also created more paper money than was matched by gold supplies.
People were then forced to accept paper money and were forced to hand in their gold to the government in exchange for gold in 1933 (See Rooservelt’s Executive Order 6102). Gold became illegal to use as money (for the public only). It was only used to settle accounts between countries and banks.
The US printed so much money over and above its gold reserves, they began to run out of gold as other nations made more and more claims. Then in 1971, President Nixon “temporarily” suspended the convertibility of the US dollar to gold (Nixon Shock).
Basically, it would no longer meet its obligations to pay gold for US dollars, effectively defaulting. The use of the US dollar was forced on the world though, due to USA’s military might and deals they made with Saudi Arabia (The Petro-Dollar). Saudi Arabia, the world’s greatest oil producer, agreed to only accept US dollars for oil in exchange for US protection.
To keep the USD as the world reserve currency, gold’s price needed to be suppressed artificially by central bankers. This was done through the derivatives market by creating short positions. It is suggested that for every ounce of gold in existence, there exists 100 ounces worth of paper claims; just like a fractional reserve mechanism, artificially inflating the supply of gold to keep its price suppressed. This can go on forever unless people demand physical gold. Because gold is not a well-suited means of international payment and is difficult to store, the demand for holding the physical version of the gold seems not to be sufficiently high enough to break the manipulation.
The history of gold’s failure is interesting and I won’t say much more as I’m not an expert, but I’m just pointing out that gold failed, which is why we have government fiat money today. If gold was easy to spend across the world, without ever giving it to a bank, then it would not have become centralised.
Appendix C - Fiat money
The explanations about money in this piece relate to money of the free market. Fiat money, or government money, on the other hand, is money that citizens use initially by force. It is illegal to decline a payment made with fiat money, and taxes are required to be paid in the local government money. One must also convert all profits of assets into local fiat denomination and pay tax accordingly. This keeps the fiat money surviving longer, even though it is “easy money” (easy to produce with low or no cost).
We can not talk about money evolving when referring to fiat money. People are made to use it, without choice. Money of the free market tends to resolve to a single dominant money, but in the fiat system, there can be, and are, many varieties of money that exist in relative stability.
Interestingly, the regression theorem can apply to government money also. All government money is related to the price of something previous. A new money might be initially pegged to something else, for example, USD was pegged to gold. Once the peg or “intrinsic” value of the dollar was removed, people were valuing the dollar not just because they are forced to use it, but because “other people valued it yesterday,” as I described earlier in the section about Regression Theorem.
The dollar is not really backed by the government, or gold, or taxes, or the military; it is unbacked, like all money. USD is a form of money that required government force for it to be adopted in the first place, but now it is a form of money with no real backing; simply valued because other people value it.
Appendix D - The Cost to Produce Gold is not what Supports its Value.
This thinking is actually backwards in logic. The correct way to think of it is as follows:
As an example, think of gold having been demanded because it was valuable to people for its utility, then as money. The available supply was taken. More was demanded. So more was mined. The supply was taken. Once all cheap forms of mining were consumed, more expensive ways to extract gold was embarked upon (because it is economical, since the price is going up, due to buyer demand).
Now imagine the opposite. Miners start producing more and more gold, initially cheaply, then at greater expense, as the cheap options are exhausted. But imagine there is no demand. Will the mining of more and more, at higher and higher cost, increase the market price for gold? Of course not, that is absurd, as there is no demand as per the initial condition.
Now consider gold losing its appeal as money. Will the cost to produce gold at $1500 per ounce support the price? Of course not. That's like suggesting the price of anything, say a handmade mahogany trash can, is supported by its production cost. If nobody is willing to pay for it, production of the trash cans ceases, until such time the demand incentivises production at whatever the cost may be - and it may never happen.
So, if gold were to lose its monetary status, many tonnes of gold would be available from bank vaults, satisfying demand, and mining would become unprofitable. It would NOT support the price of suddenly abundant gold.
However someone might use the term "intrinsic value", I have presented an exhaustive logical rebuttal of this criticism which I believe is air-tight.
Not understanding the concepts explained within this article is no excuse to continue spreading such FUD about Bitcoin. If you don't understand the arguments or find them hard to accept on emotional grounds rather than logical, and still don't wish to adopt a money that promises freedom from authoritative control, that is entirely your prerogative, but also your loss. I hope at least you don't promote this debunked FUD to other people looking for a solution to a massive humanitarian problem - our money is broken.