Where does bitcoin derive its worth? What is intrinsic value – and does it even matter?
With Bitcoin’s meteoric rises and catastrophic falls, the volatile cryptocurrency is the subject of great debate and curiosity. However, does bitcoin have intrinsic value? What is Bitcoin? How do we define intrinsic value?
We will get to the bottom of all of these questions, and to wrap our heads around this fascinating topic, we will also explore the very nature of currency itself. Read on so you can make a fully formed opinion on Bitcoin and, perhaps, even a financially rewarding investment.
Bitcoin is famously volatile and has endured many prince swings since its inception, a little over a decade ago. The popular cryptocurrency reached an all-time high in November 2020 of almost $20,000, and once again drew attention from all areas of the media. It then subsequently fell, before quickly recovering. Leaving traders, investors and laymen alike asking themselves the same question – ‘Will the bull run continue, or will it crash spectacularly?’.
With Bitcoin’s previous sensational rise at the end of 2017, the words “If you bought Bitcoin then, you would have ‘X’ now” populated conversations across the globe. Doubters were secretly filled with regret for not investing, and those that made money gloated with the usual “I told you so’s”. Inevitably, the sensational fall quickly followed. The cryptocurrency plunged dramatically and lost a quarter of its value in just one day.
The strange thing is, many people who lost, and even those who made money, don’t exactly know what Bitcoin is or how it works. So, what is it? Does Bitcoin actually have intrinsic value? What gives it value? Here we’ll look at these questions in more detail.
What Is Bitcoin?
Bitcoin is a decentralized digital currency which uses peer-to-peer technology, enabling instant local or international payments. It was created in late 2008 and follows the ideas set out in a whitepaper by Satoshi Nakamoto, whose true identity, despite a lot of speculation, is still a mystery today.
Unlike traditional currencies, there are no physical bitcoins, but just balances kept in a public ledger, called a blockchain, which everyone can access and is verified by a massive amount of computing power.
However, we’ve already hit our first stumbling block. Technically, Bitcoin is not a currency in the truest sense of the word. There are three criteria that should be met to be considered a currency; being a store of value, serving as a unit of account and being a medium of exchange. Bitcoin ticks none of these boxes. So when debating whether or not Bitcoin has intrinsic value, this must be taken into account.
Bitcoins are not issued or backed by banks or governments and are operated by a decentralized authority, one of Bitcoin’s key selling points. This immediately distinguishes Bitcoin from other ‘currencies’, and speaks to the demographic of people who have grown weary and sceptical of byzantine banking systems and governmental uncertainty.
There is growing global recognition that traditional government-backed fiat currencies with money issued by a central bank, are no longer necessarily positive. On the contrary, a statement recently issued by the bank of Italy highlights how faith is being eroded in traditional currencies, which are exposed to counterparty risk and cannot guarantee their value, as opposed to gold:
Gold is an excellent hedge against adversity and high inflation. Gold cannot depreciate or be devalued. Gold … is not an asset ‘issued’ by a government or a central bank and so does not depend on the issuer’s solvency.– Central bank of Italy
Bitcoin, just like gold, cannot be printed by central banks and Governments. One of the biggest benefits of Bitcoin is its promise of user autonomy. Therefore, in theory, users can control how they spend their money without any interference from a bank or government. It also cuts banking fees and promises far lower transaction fees than normal methods of payment – but, more on this later.
What Is Intrinsic Value?
To figure out if Bitcoin has intrinsic value, we’ll have to look at what intrinsic value actually means. In simple terms, intrinsic value is a measure of what something is worth innately, as opposed to its market-driven value. In more formal terms, it’s a concept wherein the worth of an object is derived in and of itself independent of any outside factors. For instance, because metals can be used in manufacturing anything from jewellery to cars, it has intrinsic value.
Now, there is some debate on what intrinsic value is and whether anything has intrinsic value, with some saying that value is always subjective. In other words, that value is derived from what something is worth to a person or what a person would be willing to pay. By this reasoning, if there is great demand for something its value goes up. In contrast, if demand dwindles, so does value.
Be that as it may, when we accept the formal definition of intrinsic value, it means that bitcoin has none. However, if we use the same definition, fiat currencies do not have any intrinsic value either.
What is Fiat currency and why does it have Value?
The world started to transition to fiat currencies in the late ’60s. Before then, money had always had intrinsic value as it was redeemable for gold and silver. Modern fiat currencies are inconvertible, and hence are susceptible to inflation. Throughout history, fiat currencies have come and gone. Until recently though, they have been effective and largely unquestioned. Fiat currency has allowed us to buy things we like, pay our expenses, and receive our salaries. So, if fiat currencies don’t have any intrinsic value, why do they have value at all?
Currency is valuable if it is a store of value that can be reliably counted on not to depreciate and maintain its value over time. Long ago, many societies used precious metals and other commodities as forms of payment because they have a relatively stable value. However, that presented a problem in that people had to carry physical metals with them. To solve this problem, they turned to minted currencies which were still usable because they were made out of metals that had intrinsic value and little risk of depreciation.
Today’s currencies take the form of paper notes, or more commonly, electronic payments. They’re not backed by gold or other commodities, but rather by the faith that people and governments have that it will be accepted as a form of payment. In other words, the value of a currency derives from the backing of the state that issues it and the trust that people have in that government.
This means that, ultimately, fiat currencies have value because people trust it to be the most durable and least likely to depreciate over time. So, what about Bitcoin?
Why Does Bitcoin Have Value?
Bitcoin has value for the same reason fiat currencies do. It’s useful as a form of money that’s accepted by people for payment. In other words, it’s used to transfer value, buy, and sell things. In this sense, Bitcoin has all the characteristics of money, but where some of its biggest advantages lie is where it differs from traditional currencies.
With this in mind, let’s look at some of Bitcoin’s valuable properties.
- Scarcity. There is only going to be 21 million Bitcoins. No more and no less. In fact, there will be less than that because of lost coins. This means that, unlike fiat currencies, more can’t be created, and its inflation is limited.
- Durability. Any Bitcoin can be used and reused countless times without any degradation.
- Portability. Bitcoins can be transferred between people through the internet, satellites, or even radio waves.
- Fungibility. Every Bitcoin has the same value as every other Bitcoin, just like one ounce of gold has the same value as another ounce of gold.
- Divisibility. The smallest unit of Bitcoin is one Satoshi which equals 0.00000001 Bitcoin. If the need ever arises to divide it even further, the level of division can be changed into 16 or more decimals, making Bitcoin infinitely divisible.
- Recognizability. More people are starting to use and accept Bitcoin as a form of payment. Although it’s not at the level of fiat currencies yet, its popularity is growing and a greater number of merchants now accept it.
- Decentralization. Unlike fiat currencies that fall under the control of governments, no single entity oversees Bitcoin. It can’t, therefore, be censored or controlled and its network or transactions can’t be changed.
- Accessibility. Anyone can have access to Bitcoin. They don’t need a bank account to own or use Bitcoins and they only need basic computer knowledge and an internet connection. This means it’s an excellent idea for underbanked areas of the world.
- Inability to counterfeit. Every Bitcoin transaction is recorded in the blockchain and is secured by the computation work of nodes. This system is designed to solve double-spending, a problem that was prevalent with earlier cryptocurrencies. As a result of this, every transaction can be verified, is traceable, can’t be counterfeited, and is irrevocable.
- Programmability. Unlike traditional currencies, Bitcoin has the ability to be programmed. With this capability, in future, it can be updated and other features like smart contracts can be added.
- Stability. Here it doesn’t compare favourably to fiat currencies as it is fairly volatile. For speculators this is good news, but for those seeking price stability not so much. This is likely to change, though, as Bitcoin adoption increases and fewer incentives exist to speculate with it.
Add to these the fact that Bitcoin brings with it far lower transaction fees and faster payments and it’s easy to see why many people are gravitating towards it. The cost of a Bitcoin transaction is near minimal as there are only two parties involved. It’s almost like a basic cash transaction, only done digitally. And like a cash transaction, transaction time is also almost instant.
However, despite these features, ultimately, what Bitcoin needs is to hold value and gain wider adoption.
So, Bitcoin doesn’t have intrinsic value, and isn’t even technically a currency, but does it really matter? Traditional fiat currencies don’t have any intrinsic value either. The scarcity of bitcoin and the fact that it does not fall under governmental control, will always make it highly preferable to fiat in the eyes of many. However, its inherent volatility will continue to hold it back as a genuine alternative to fiat, and there is good reason to believe that its volatility is in part explained by the fact that, well, Bitcoin has no intrinsic value.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.