{"id":607,"date":"2017-09-13T14:37:43","date_gmt":"2017-09-13T12:37:43","guid":{"rendered":"http:\/\/flockofideas.com\/?p=607"},"modified":"2017-10-16T12:43:15","modified_gmt":"2017-10-16T10:43:15","slug":"bitcoins-value-is-purely-subjective","status":"publish","type":"post","link":"https:\/\/www.flockofideas.com\/index.php\/2017\/09\/13\/bitcoins-value-is-purely-subjective\/","title":{"rendered":"Bitcoin’s Value Is Purely Subjective"},"content":{"rendered":"

While one Bitcoin token is currently approaching 5’000 US$, many people wonder why Bitcoin has \u00abvalue\u00bb in the first place.<\/p>\n

The first question that arises: Might those people actually mean \u00abprice\u00bb instead of \u00abvalue\u00bb? Well, the concepts of price and value are entirely different. They cannot be the same logically. A person only sells, or buys, a good if the price that she can realize is higher, or lower, than her personal valuation of that specific good. Therefore, any<\/em> identity of price and value would bring the economy to a halt.<\/p>\n

Secondly and more importantly, the phrasing of the initial question is misled. Value is not something intrinsic<\/em> that is part of an object. This becomes obvious when taking a closer look at Bitcoin. A Bitcoin token consists of nothing but digital data<\/em> that are stored in an electronic wallet as well as in the distributed network. (That set of digital data confers on its holder the power of control over Bitcoin tokens.)<\/p>\n

\u00abValue is not something intrinsic that is part of an object.\u00bb<\/p><\/blockquote>\n

Think of bananas: They are beyond doubt highly nutritious. Most people enjoy eating them. However, imagine that humans couldn’t digest bananas. While bananas would still be the same physically, we wouldn’t crave them at all though. There is nothing intrinsic about the value of bananas. Yes, they make sense in our case but they may as well not!<\/p>\n

Since value is not an \u00abontological\u00bb property of an object, value must be subjective <\/em>(look up Austrian Economics<\/a>). Value thus lies in the eye of the beholder. This has major implications: When I value an object dearly, this doesn\u2019t mean that others do as well (or to the same extent). They may even assign a negative value to that object; hence they hate it. Therefore, interpersonal utility comparisons, widely spread in politics and academia nowadays, are literally of no value. This, in turn, means that the positive effects of policies must be limited. Politics, however, is a different topic I don\u2019t want to delve into here.<\/p>\n

So, we have to ask ourselves what those \u00abproperties\u00bb are that make Bitcoin tokens valuable to its users. This question cannot be answered conclusively (for the reasons mentioned above). At least let\u2019s try a conceptual approach:<\/p>\n

Libertarians <\/em>probably use the network because they prefer \u00abstateless\u00bb cryptocurrencies to legal tender and bank-issued money. They don\u2019t like money that can be created at will and out of thin air.<\/p>\n

Techies <\/em>and academics <\/em>may engage in it because the underlying distributed ledger technology has become a new interesting research area. It allows for \u00abtrustless systems\u00bb, be it payment systems or \u00abdecentralized autonomous organizations\u00bb (DAOs).<\/p>\n

Criminals <\/em>may value the Bitcoin network\u2019s capabilities to disguise their transactions. They presumably like that they are not forced to go through the banking system anymore.<\/p>\n

Most people<\/em> (e.g., venture capitalists) probably hold Bitcoins because they can either take part in \u00abinitial coin offerings\u00bb (ICOs) or they speculate for a rise in prices. This can also be described as Bitcoin\u2019s \u00abbubble economy\u00bb.<\/p>\n

Importantly, at the end of the day, the different categories of stakeholders in the Bitcoin network get something in return for their money and time invested in the venture. Obviously, the whole thing is not risk-free. In their eyes and minds, however, Bitcoins are sufficiently valuable to go with the risks associated with the cryptocurrency. To them, there exists a myriad of different <\/em>reasons as laid out above though.<\/p>\n

\u00abIn their eyes and minds, however, Bitcoins are valuable, for different reasons though.\u00bb<\/p><\/blockquote>\n

Some people argue that Bitcoin derives its \u00abvalue\u00bb from the electricity<\/em> put to work within the mining procedure. This, however, sounds like a slightly adapted version of the mistaken \u00ablabor theory of value<\/a>\u00bb in classical and Marxist economics. Certainly, electricity is a prerequisite for the decentralized proof of work-approach, which eventually makes the Bitcoin network secure (\u00abelectricity-turned-trust\u00bb). However, the amount of electricity, while undoubtedly contributing to a positive subjective valuation of users, is not <\/em>the value of the network itself. In fact, current electricity costs are nowhere near the \u00abvalue\u00bb, or price, of a Bitcoin token. For the same reason neither does Bitcoin’s value stem from its \u00abtrustless\u00bb database (the \u00abblockchain\u00bb) nor from the algorithmic scarcity (\u223c21 million), which is embedded in the Bitcoin protocol. These features of the Bitcoin network are \u00abonly\u00bb reasons<\/em> why people use the network.<\/p>\n

Take gold as an example: Its useful properties (relatively scarce, malleable, durable etc.) have contributed to its use as money for thousands of years. However, people had to discover<\/em> gold to be more beneficial than earlier kinds of media of exchange in the first place. \u00abDiscovering\u00bb value is a purely mental, or psychological, process. Once enough people had made this astonishing discovery, network effects unfolded and made gold even more attractive as a means of payment. Demand and supply rose… market prices went up, too.<\/p>\n

\u00abDiscovering value is a purely mental, or psychological, process.\u00bb<\/p><\/blockquote>\n

So, next time when someone asks you whether it is the artificial scarcity, the electricity injected into the network, the \u00abnetwork effects\u00bb, or even the pseudonymity of transactions, you know that these useful network features only act as potential<\/em> reasons why people may assign <\/em>some value to Bitcoin. However, those reasons are not <\/em>the value of Bitcoin. Never! Valuation is always the subjective result of our mind.<\/p>\n

Soaring market prices follow from there…<\/p>\n","protected":false},"excerpt":{"rendered":"

While one Bitcoin token is currently approaching 5’000 US$, many people wonder why Bitcoin has \u00abvalue\u00bb in the first place. The first question that arises: Might those people actually mean \u00abprice\u00bb instead of \u00abvalue\u00bb? Well, the concepts of price and value are entirely different. They cannot be the same logically. A person only sells, or […]<\/p>\n","protected":false},"author":1,"featured_media":613,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[66,68],"tags":[177,178,179,180,181,182],"class_list":["post-607","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-economics","category-money","tag-bitcoin","tag-blockchain","tag-distributed-ledger","tag-subjective-value","tag-valuation","tag-value"],"_links":{"self":[{"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/posts\/607","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/comments?post=607"}],"version-history":[{"count":45,"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/posts\/607\/revisions"}],"predecessor-version":[{"id":737,"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/posts\/607\/revisions\/737"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/media\/613"}],"wp:attachment":[{"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/media?parent=607"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/categories?post=607"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.flockofideas.com\/index.php\/wp-json\/wp\/v2\/tags?post=607"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}