In recent days, I’ve watched Bitcoin trade upwards of $140 per Bitcoin. On a lark, I mined 0.146 Bitcoin several months ago. When it started trading this high, I sold what I had mined because Bitcoin is not a store of value and hence not a true money. Let’s analyze Bitcoin using Aristotle’s qualities of a good money:
1) It must be durable, meaning it stands the test of time and elements. To the extent we believe digital data can last forever, Bitcoin passes this test.
2) It must be portable, meaning it holds high value relative to its size and weight. Bitcoins weigh nothing (meaning their value is irrelevant vis-à-vis assessing their portability) and are mobile even in the face of government currency controls. Bitcoin passes this as well.
3) It must be divisible and consistent. Bitcoin is digitally divisible into 100 millionths. Another pass for Bitcoin.
4) It must have intrinsic value. This is where Bitcoin fails. Let’s deal with the two major arguments in favor of Bitcoin’s intrinsic value: (a) it requires effort to acquire in the form of compute cycles and related electrical energy and (b) the number of Bitcoins that can be created is algorithmically limited.
Regarding A: The effort required to acquire a Bitcoin is not useful effort, and the result of the effort does not produce a good that has any intrinsic use. It would be akin to digging a hole and filling it back up again, and getting scraps of paper in return. Those scraps of paper do not have value simply because real effort was expended to obtain them.
Regarding B: Acknowledging that there is a finite number of Bitcoin available does not mean it is scarce. This point is lost on several Austrian economists I have been reading and listening to over the past weeks. Allow me to explain by taking the example of gold, which itself is (1) durable, (2) portable, and (3) divisible and consistent. Gold has (4) intrinsic value because it has inherent usefulness (jewelry, industrial uses, etc.) and also because it is scarce — meaning there is a finite number of gold atoms found on this earth. As such, it is a good money. Imagine for a moment that the technology existed to make another compound, say “gold2” that had the exact same number of protons, neutrons, electrons, the exact same physical properties and appearance, and with the exact same scarcity as regular “gold.” Would we be so keen on gold if gold2 were available? Perhaps gold would lose half its value, but then what is to stop technology from producing gold3, gold4, . . . goldN? How would participants in the marketplace value gold in comparison to gold283? (Initially gold would be preferred to gold283 since gold entered the market first, but this would evaporate once market participants realized they had identical properties). This is why Bitcoin is not scarce. The goodwill accumulated in Bitcoin as the first market-entrant digital currency is all that causes it to be preferred over other digital currencies–not its scarcity. Other digital currencies already exist that have all the same properties of Bitcoin, but are simply waiting to gain market acceptance. (See Litecoin, Namecoin, et al.). “Trust” backed currency is similar to fiat currency, having the additional limitation that Bitcoin and other such currencies do not benefit from legal tender laws mandating their use.
A scenario for Bitcoin’s destruction might be that a large corporation producing goods that people want to buy (e.g. Wal-Mart) begins its own digital currency, accumulates large amounts for itself before making them generally available for mining, accepts them in exchange for their products, and profits from the proliferation and use of the competing currency. In another scenario, a competing digital currency gets a super-cool celebrity endorsement . . . or maybe a whole lot of both happens and people realize what a fad digital currencies are. This is all that separates holders of Bitcoin from complete annihilation because Bitcoins are not scarce (because infinite material having identical properties can be created) and Bitcoins have no intrinsic value (nobody wants a Bitcoin for Bitcoin’s sake).
7 thoughts on “Bitcoin is Not Money”
If the marginal revolution (Menger, Jevons and Walras) in economics taught us anything it is that there is no such thing as “intrinsic value.” Value is not embodied in a thing. It is a subjective phenomena in the mind of the beholder. It can neither be stored nor measured.
Money is not a “store” of value and it is not a “measure” of value.
Below is an excerpt from Gene Callahan’s essay “Carl Menger: The Nature of Value” which you can find at: http://mises.org/daily/1349
“In other words, value is the name of an attitude or disposition that a particular person adopts toward a good: he chooses to value it. Although Menger set economics on the path to a correct theory of value in 1871, ancient errors die hard. We can still find many erroneous conceptions of value in contemporary discussions of economic issues.
For example, it is quite common to refer to money (or gold, or financial assets) as a “store of value.” But an attitude cannot be stored! You cannot pour some of your attitude towards goods into a bar of gold, put it in a vault, and hope it “keeps.” You can, of course, store the gold bar. And you will certainly hope that when you decide to take it from the vault and sell it, that others will choose to value it as well. But only the gold was stored.
Money is also referred to as “a measure of value.” But if, following Menger, we regard valuing as an attitude people take towards things, then money certainly cannot measure value, since money itself is simply another thing that people choose to value (or not). Rather than “measuring” the value of other goods and services, money itself is valued by human actors based on its adequacy as a commonly accepted medium of exchange.”
You got it backwards. Money and media of exchange are empirical, catallactic, phenomena. You cannot use reasoning to refute them. It’s kind of like saying that GPS cannot work because the Earth is flat.
I didn’t touch on the concept of money as a store of value because I think it is sufficient to assess money in terms of its intrinsic value. When I use the words “intrinsic value,” my view is that this captures two concepts: capital value and scarcity. “Capital value” means that there is some purpose to the money that can reduce human labor. In the case of gold, jewelry is not a great example, but certainly its industrial uses are. As such, I don’t think of intrinsic value as something mystical that exists in peoples’ minds. I see it as scientific: the inherent nature of humanity is to reduce the efforts required to achieve fixed results, so objects that accomplish this have value. Nevertheless, the usefulness of a particular money to reduce human labor can fluctuate with time, and therefore it is only one factor to consider in assessing whether something is “good” money. Far more important is scarcity (of which Bitcoin has none) — which is the crux of my argument.
I think in some way you might be right: money is whatever money is. My point (belied by the title of the article) was to assess whether Bitcoin is “good” money — which I conclude it is not and therefore should be avoided like fiat currencies and the like.
HHA you write: “As such, I don’t think of intrinsic value as something mystical that exists in peoples’ minds. I see it as scientific: the inherent nature of humanity is to reduce the efforts required to achieve fixed results, so objects that accomplish this have value.”
Bravo! You have redefined a fundamental economic term to suit your needs. Unfortunately, your redefinition (which is really only a throw back to the old classical notion of value as an objective thing) is entirely outside of modern economics — and has been for 140 years.
Objects do not embody value in any “scientific” sense. It is not a property like mass and form, etc. Acting human beings impute value to objects. Humans place value on object they find useful. They do not find objects useful because they have value.
As to your reference to the mystical. Value as a subjective concept within the mind of the person doing the valuing is no more mystical than the concept of “idea” — the human brain may be a mystery but it is certainly not mystical.
I don’t think you’re really engaging my argument by sarcastically applauding my telling you my view of “intrinsic value,” nor by disparaging the age of the idea.
Turning to your point about value existing in the human mind: give me one person, and I cannot tell you how they will value anything because it is indeed subjective. Give me a statistically large sample, such as the entire human population, and human nature becomes measurable. At this scale, you can reliably (or “scientifically” to the extent that economics is science) estimate that certain types of materials and objects will be valuable–namely those that can reduce human labor. It’s not even necessary in the case of Bitcoin to figure out what relative value Bitcoin may have in terms of its usefulness because it has absolutely zero usefulness (less so even than sand or air). That said, I do believe that value is far less important than scarcity.
I just discovered some of these “Austrian School” critiques of bitcoin and I find them very interesting. Thanks for expressing your thoughts in this blog. My reply:
Consider the definition of value with regard to reducing human labor. I find little to disagree with in your comments, but I think your analysis has left out the consideration of context. Particular assessments of value are done by particular people in a context which establishes relative value. Compared to fiat money or gold, bitcoins reduce the labor involved in storage of economic value. Bitcoins actually are useful for transactions within my peer group compared to other methods. It seems that they can further my welfare by providing a means of insulating myself from the prying State.
I agree that bitcoins are intrinsically useless, whether they are scarce or not. But my livelihood is based on performing services in a fiat money economy, and it is relative to this context that bitcoins acquire a usefulness.
The scarcity of bitcoins is an interesting issue. You point out that other equally plausible virtual currencies exist. But I think this highlights the disequilibrium nature of money value. It is just coincidence that bitcoins happen to be taking the largest share and building their own useful context. In contrast, gold seems to be virtually useless to me in practice. All my daily transactions occur in fiat, very few in bitcoin, and none in gold. Gold is completely useless for the scale of the transactions I participate in.
I guess the conclusion I am working towards is that bitcoin does not need to have “intrinsic value,” meaning a value that exists independently of any particular social context. Just let its value be based on the exigencies of the particular disequilibrium we live in. For people with few fixed assets who need something incrementally more valuable than fiat, it seems very fine.
All the best,
You’ve also mentioned that Bitcoin is incrementally more valuable than fiat, and I have to disagree simply because it does not benefit from legal tender laws. In the case of fiat, we see that printed paper (and in most cases, electronic ledgers) also has very close to zero usefulness–though piles of it could be burned for heat and whatnot. What government has done is attempt to replace inherent value with force: making it law that the money must be accepted. This is an artificial “floor” of value that doesn’t derive from the money’s inherent qualities, but it still provides more protection than Bitcoin, which is completely naked in this regard. Of course fiat money has no intrinsic value (because government force is not immutable, and it does not create scarcity which is far more important) and will be worth nothing at some point in the future.
I also wanted to address your criticism of gold as useless for the particular transactions you deal in. I mentioned that gold can be digitized above, have you heard of eGold? That said, even if gold were convenient, it would still not be used–not because it is a poor money but because it is a good money existing in an environment surrounded by bad money. Bad money drives out good money per Gresham’s law. Fiat money would first need to disappear for gold and silver to take its place in transactional use. In the meantime, if you get your hands on gold and silver, don’t spend it as money, hoard it like everyone else.