Is Bitcoin Intrinsically Worthless?

Author:Luther, William J.
 
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  1. Introduction

    Monies are typically categorized as commodity or fiat. In the case of bitcoin, its category is not so clear. Some maintain that bitcoin is a commodity money (e.g., Graf 2013a, 2013b; Surda 2014). (1) Others claim it is a (private) fiat money (e.g., Velde 2013; Sieron 2013). Selgin (2015) goes so far as to construct a new classification scheme altogether, wherein bitcoin is described as a synthetic commodity money. (2)

    Sorting bitcoin into any of these categories requires answering one seemingly simple question: is bitcoin intrinsically worthless? Widespread disagreement remains. (3) One argument maintains that since all value is subjective, it is meaningless to consider whether bitcoin is intrinsically worthless. Another posits that bitcoin's intrinsic worth can be found in its distributed ledger technology, which permits lower-cost payments. I dismiss both of these views and offer two reasonable alternatives. On the one hand, bitcoin can be thought of as an intrinsically worthless item, in which case its positive exchange value depends on foresight and coordination. On the other hand, bitcoin can be thought of as having some intrinsic worth to individuals with peculiar preferences. In either case, bitcoin's existence calls into question the practical relevance of the regression theorem.

    Two items are worth clarifying at the outset. First, some would object to classifying bitcoin as any type of money. Money is defined as a commonly accepted medium of exchange. Bitcoin certainly functions as a medium of exchange. Whether it is commonly accepted depends on how one defines the word "common." White (2015) notes that, at $4.05 billion, bitcoin's market capitalization already exceeded that of many national currencies by March 2015. At the time of this writing, in August 2017, bitcoin's market capitalization stands at $70.84 billion. Either valuation suggests high demand for bitcoin. However, bitcoin circulates over a much larger region than do national currencies with comparable market capitalizations, and the demand for bitcoin might reflect more than just the demand to use bitcoin as a medium of exchange. Reasonable people might disagree as to whether bitcoin should be considered a money or merely a potential money. (4) Either way, the question regarding bitcoin's intrinsic worth remains.

    Second, if bitcoin does not constitute a genuine money on the grounds that it is not commonly accepted, one might wonder whether the recent experience of bitcoin can shed any light on the regression theorem. As discussed below, Mises is quite clear that the regression theorem applies to any medium of exchange, not merely those earning the label "money." To gain circulation--that is, to function as a medium of exchange--he claims an item must have some nonmonetary use. For Mises, the attention is on the launch. Once an item gains circulation, the trick is done. There is no denying that an item must have value to be employed as a medium of exchange. The question is whether that value must result from some nonmonetary use, as Mises claims, or whether that value might also stem from shared beliefs that an item will function as a medium of exchange in the future. In answering this question, the distinction as to whether bitcoin should be properly thought of as a money or merely a potential money is irrelevant. It functions as a medium of exchange and, as such, might shed some light on our understanding of the regression theorem.

  2. The Superficial Subjective Value Argument

    Despite its importance for classifying bitcoin, some dismiss the question of whether bitcoin is intrinsically worthless on the grounds that value is subjective. Faggart (2014) provides a representative statement:

    Those who claim that money needs "intrinsic" value fail to realize that there is no intrinsic value, it is created in the minds of individuals.... All value that exists in objects of human interaction and exchange is "imaginary." There is no value that exists independently of the minds of human beings. If all value is subjective, the argument goes, then it is pointless to ask whether bitcoin is intrinsically worthless. Everything is intrinsically worthless because there is no intrinsic worth.

    The problem with this view, which I refer to as the superficial subjective value argument, is that it misunderstands what monetary economists mean by "intrinsic." Monetary economists do not deny that all value is subjective. By "intrinsic worth," they mean nonmonetary value--or, value apart from any role the item might play as a medium of exchange. All value is subjective. But there is one's subjective valuation of an item's usefulness as a medium of exchange and one's subjective valuation of an item's usefulness apart from that role. One need not reject the fundamental principle of subjective value to distinguish between monetary and nonmonetary uses. Indeed, valuations of both uses are typically presumed to be entirely subjective.

    To see the issue more clearly, consider a simple value function for an item that might be employed as a medium of exchange. Let there be a world populated by N infinitely lived money-using agents. The utility a representative agent derives from using a particular item as money from time T onward can be written as u(T) = (an + b) [[integral].sup.[infinity].sub.T] [e.sup.-r(t-T)]dt = (an + b)/r, where a and b are fixed parameters, r is the discount rate, n [equivalent to] ln([theta]N), and [theta] is the fraction of agents using the item as money. (5)

    The item's monetary value is captured by the first term in the value function, an/r. The benefit a representative agent enjoys from using the item as a medium of exchange depends, in part, on its acceptability--that is, the number of other agents using the item. Specifically, we assume that the representative agent derives no benefit from employing the item as a medium of exchange if no one else accepts it. Hence, an = 0 when [theta]N = 1. Moreover, we assume that the benefit to the representative agent of employing an item as a medium of exchange increases at a diminishing rate as more and more agents accept the item. Hence, [partial derivative]n/[partial derivative][theta]N > 0 and [[partial derivative].sup.2]n/ [partial derivative][theta][N.sup.2]

    The item's nonmonetary value is captured by the second term in the value function, b/r. Unlike the monetary value, the nonmonetary value does not depend on the number of users. As such, it reflects any benefit the representative agent derives from the item other than those associated with its use as a medium of exchange.

    Monetary economists denote an item as possessing intrinsic worth if and only if b/r > 0. The expression need not imply that b/r is derived from nature or some fundamental feature of the item itself. It is entirely consistent with the principle of subjective value. If the representative agent would be willing to exchange some valuable good or service for an item when an/r = 0, we say that item has some nonmonetary value, or intrinsic worth, to the representative agent. As such, the superficial subjective value argument, which maintains that no item has intrinsic worth because all value is subjective, completely misses the point.

  3. The Payment System Technology Argument

    Another no-less-problematic approach to considering whether bitcoin is intrinsically worthless focuses on the usefulness of its distributed ledger payment system technology. As Tucker (2014) explains,

    Bitcoin is both a payment system and a money...

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