On the argument of intrinsic value against Bitcoin
By: Rob Wolfram
Tags: Gold, Intrinsic Value, Scarcity, Bitcoin

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On the argument of intrinsic value against Bitcoin

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I am Rob Wolfram. I am a Linux sysadmin in the Netherlands with quite some interest in security and cryptography and because of that I am a fan and promoter of Bitcoin. I consider myself a Bitcoin maximalist, with which I mean that I think that in the long run other cryptocurrencies will only play a marginal role.

Once again I am threading on a field that is far from my expertise, but I think I can support the argument I’m making based solely on logical thinking through the consequences of the points against it. I am available to be corrected.

I recently listened to an older (dated Jan 2, 2020) “Off the Chain” podcast by Anthony Pompliano with Peter Schiff as a guest. Schiff is known as someone who is trading in gold and who is very bearish on Bitcoin. In the podcast he repeatedly used an argument that I heard before by Gillian Tett in the Intelligence Square debate with Eric Posner against Patrick Byrne and Tim Draper, i.e., contrary to gold, Bitcoin has no intrinsic value. If the monetary value of gold would diminish completely, Gold would still be valuable for jewelry and industrial use, while Bitcoin has none. Hence, Bitcoin is a form of a fiat currency but not real money.

Have Schiff and Tett actually thought through this argument? If the intrinsic value of an asset, in this case jewelry and industrial use, would be the reason it has value, why isn’t iron a lot more valuable than gold? It has a lot more uses, especially in industry. Complete skyscrapers are built using frames of steel. The majority of our modes of transport is built from iron. Why isn’t titanium a lot more valuable than gold? It too has a lot more intrinsic uses than gold, especially in the medical industry but for a large part also in physical security like vaults. So apparently, it’s not the intrinsic value that makes gold more valuable that other metals. Gold is a noble metal which means that it lends itself well to applications like electrical contacts and certain parts of medical instruments, but that use is limited and gold is not the only metal that can be used in those circumstances, at most a better one. As a metal by itself it’s quite worthless. It’s soft and though it can gain strength when mixed with copper, even that attribute is surpassed a lot by other metals. On the other hand, even the softness and malleability of pure gold is surpassed by e.g. lead which is applied in roofs among others.

Regarding jewelry, I think that is a form of store of value. When a rapper walks around with a 3 lbs. gold necklace, it is more showing off his wealth than anything else. Gold lends itself well for this purpose since it can be molten into shape and lasts a long time because of its resistance to oxidizing, but other metals are used for this purpose as well and the price difference with e.g. silver cannot be explained by the ability to melt and cast it into something beautiful.

The reason for its high price is simple. Scarcity. More explicitly, what Nick Szabo called the “unforgeably costliness” of the asset. Mining new gold is hard and costs a lot of money (and has quite an impact on the environment at that). Nobody can “create gold” on a whim. So even though iron and titanium have far greater uses and thus intrinsic values, their abundance is the reason why they are a lot cheaper. As I hope you can imagine, Bitcoin has that attribute as well. Nobody can create new bitcoins on a whim, it takes quite a bit of energy via the Proof of Work algorithm to create new bitcoins and the diminishing rate of this creating is part of the protocol, which again is enforced by Proof of Work. Since the computing power of the participating miners has been growing exponentially in the last decade, so has the unforgeably costliness of Bitcoin as an asset.

Oh, and Bitcoin has an intrinsic value as well. You can store arbitrary data on the blockchain which is immutable via Proof of Work. You could e.g. use it for time stamping documents. There are other ways to accomplish this, but that doesn’t discount the fact that Bitcoin has an intrinsic use apart from its monetary value.

So to answer the other form of this argument: Bitcoin is not based on nothing. It is based on Proof of Work electricity.

Now I’ll be the last one to dispute that gold is a hard asset as well, just as Bitcoin is, but in my opinion Bitcoin is better suited as money than gold is.

Bitcoin is more portable than gold. Because gold is physical and has an actual weight, there’s only so much you can carry around with you. This became painfully clear to an Italian man who wanted to cross the border to Switzerland with gold worth $5.8 million. Someone can cross a border with more that $1 billion in Bitcoin by just memorizing 12 words.

Bitcoin is harder to counterfeit than gold. There are a number of cases known where gold smiths are conned by people who bring them gold bars that contain an inner core of the much cheaper tungsten. Apart from melting or drilling the gold with the seller present, it’s hard to verify that the gold is pure. Bitcoins security is handled by math, which can’t be fooled.

High volumes of gold requires a trusted third party. Unless your home or office carries a vault with more security than a bank vault, it’s not wise to keep more gold with you than four or five figures worth. Owners of large volumes of gold have to leave it in a highly secured vault and must trust that the company running the vault will actually return the gold upon request. This is far from guaranteed. With Bitcoin, you can use math to protect your value and you are not dependent on the policies of some trusted third party.

Unlike gold, Bitcoin is programmable money. If e.g. a board of directors needs approval of more than one member to sell gold that a company owns, you are again dependent on the trusted third party who holds the physical gold to enforce this. If a member of the board happens to hold the gold, the company just has to hope that they will not be conned. With bitcoin you can actually program the requirement into the receiving transaction.

I’m not claiming that using Bitcoin as money is all sunshine and roses. Securing your coins is currently not an easy endeavor to do yourself, but it is possible and many current Bitcoin holders do. I do. And we don’t rely on trusting anyone but ourselves.

So yes, Bitcoin has an intrinsic value and yes, it is a good form of money but not because of it’s intrinsic value. That’s not a monetary attribute.