June 21, 2021

June 21, 2021

Your Source for Free Speech,
Talk Radio, Podcasts, and News.

Cryptocurrencies and Intrinsic Value

by | Apr 20, 2021 |

Print Friendly, PDF & Email

I got blocked by a Facebook friend for answering two questions he’d posted about cryptocurrencies. I don’t remember the questions, but I remember that answering them required making two false assumptions. Rather than answering the questions, I pointed out why no rational answer was possible. It occurred to me that my former Facebook friend may not be the only person holding these false assumptions, so I wanted to talk about cryptocurrencies and intrinsic value here.

I’ll talk about intrinsic value first, as I can then use the concept of intrinsic value to discuss cryptocurrencies. Intrinsic value is a measure of what an asset is worth outside of its use as an investment vehicle. Gold, for example, is used in jewelry, circuitry, dentistry, and various other things. Even if people did not invest in gold, it would still have market value based on its use in those other things.

A stock has intrinsic value based on the net present value of all future earnings.

A dollar can be said to have intrinsic value in that debt is carried in dollars, requiring people to perform labor in order to repay their debt. The value of the labor people need to perform to repay a dollar of debt can be said to be the dollar’s intrinsic value.

Notice that I said, “can be said to have,” in relation to the dollar. Mankind has, as of yet, not found a perfect monetary system. Until or unless we do, the concept of an intrinsic value to a currency is debatable. Many economists say we have a fiat currency. I would point out that we have only $865 billion in paper and coin currency (which is unquestionably fiat). In contrast, we have over $37 trillion in circulation worldwide if we include money deposited in checking and savings accounts (aka ‘M2’ money). If we include what economists call ‘broad money,’ the amount approaches $100 trillion.

M2 is the form of money that drives inflation, so when people talk about the money ‘in circulation,’ they generally mean M2.

Note that the $865 billion in paper currency is a drop in the bucket compared to the $37 trillion in M2 money. Every single dollar in circulation worldwide other than the $865 billion in paper money is offset by an equal dollar in debt, which means that someone will have to perform work to either repay their own debt or to pay taxes to a government, which will, in turn, repay that debt.

I would argue that we have a debt-based monetary supply and that as such, the dollar has an intrinsic value based on the need to perform labor to repay debt, but understand that there are economists who disagree with me and that the question of whether or not currency has intrinsic value has brought forth another economic term: utility. In a nutshell, economists who believe money has no intrinsic value would say that it does have utility. Really this is a semantic argument – both ‘intrinsic value’ and ‘utility’ are used interchangeably.

Another purpose behind the term ‘utility’ is that though clearly some things, like gold, have an intrinsic value, it can be hard to estimate what that intrinsic value is. We know that a stock’s intrinsic value is the net present value of all future earnings, but what will those future earnings be? We have no way of knowing for sure. The term ‘utility’ is often used in place of ‘intrinsic value’ to clarify that whatever number is thrown out is really just an educated guess, usually based on a model of some kind.

Debt is not held in bitcoin, and as a consequence, debt is not repaid in bitcoin. Bitcoin is not, in fact, used as a currency at all. People, rather, sell bitcoin into dollars before buying something with them. Even if someone wants to exchange bitcoin for some other cryptocurrency, they first have to sell bitcoin into dollars before they can purchase the other cryptocurrency in dollars. These transactions may occur behind the scene, but in reality, cryptocurrencies are being used as investment vehicles rather than currencies. The actual exchange of goods and services in cryptocurrencies without first converting to dollars is exceedingly rare. As long as the dollar is used as an intermediary device, cryptocurrencies will not be currencies.

There are those who believe that cryptocurrencies will eventually be used as currencies, and that is possible. Perhaps one day they will be. Unfortunately, however…

The vast majority of people who are buying cryptocurrencies are doing so speculatively, on the assumption that the cryptocurrency will be worth more in the future than it is today. A good currency is stable in value, and bitcoin is not apt to be used as a currency unless it stops growing in value.

I want to stress that it is entirely possible for bitcoin, or some other cryptocurrency, to become an actual currency. I can even tell you when that could happen. Watch the value of bitcoin over time relative to gold. Should bitcoin, or some other cryptocurrency, start to track in value relative to gold more closely than does the dollar, that would indicate that bitcoin is holding value better than is the dollar, and at that point, bitcoin would be a more efficient vehicle of exchange than is the dollar.

But that is not how bitcoin is used today. Today bitcoin is growing in value much faster than is gold, indicating that people are still using it to make, rather than to store (or to transfer) wealth.

Unlike gold, bitcoin is not a raw material in any good or service. Bitcoin has no earnings to estimate the net present value of. Bitcoin has no intrinsic value at all.

Some who dabble in economics and who like cryptocurrencies have begun to claim that ‘intrinsic value’ does not exist. This was the position my friend took. If there is no such thing as ‘intrinsic value,’ then the only measurement we have is ‘utility.’ His second question, in fact, was ‘what is the utility of a cryptocurrency.’

I answered by saying that ‘utility’ is the best guess for something’s intrinsic value and that since cryptocurrencies have no intrinsic value, they also have no utility.

Don’t ask me what his first question was – that one I really did forget…

The actual definition of ‘utility’ in an economics manual is ‘the total usefulness of a good or service.’ Sometimes this is expressed in terms of ‘the total satisfaction received,’ but it is important to note that ‘satisfaction’ is measured based on ‘usefulness.’

And this is where the ‘usefulness’ of cryptocurrencies gets sticky. Cryptocurrencies are undoubtedly growing in value. Does this make them ‘useful’?

I would argue that there is no ‘usefulness’ to a speculative investment, as every speculative investment has both a winner and a loser. Speculation is, by definition, a zero-sum game.

Speculation can affect the market value of something, and speculation has affected the market value of both bitcoin as well as gold. In the case of gold. That leaves 22% that is used for other things, and the second biggest use is an investment, which is, of course, speculative.

What would the market value of gold be, were it not for speculative investors? The best guess is, of course, the present value of gold. Someone who likes bitcoin would argue that the same is true of bitcoin – the best guess of its utility is the current market price.

I’m afraid that this is where the crypto-wheels fall off the crypto-bus. The best guess of gold’s utility is the market price, but we don’t really know that the market price of gold has not been impacted by speculation. People buy and sell gold all the time based on the belief that the current price of gold is too high or too low. The same is true with stocks – if the market value of a stock is said by some model to be too low or too high, people will speculate accordingly.

But both gold and stocks have use outside of speculation, so the market value of gold and stocks should meander somewhere around the true utility over time. This is because gold and stocks both have intrinsic value. The intrinsic value and the utility should be the same over time.

Cryptocurrencies have no intrinsic value. 100% of the market value is speculative.

Should you invest in cryptocurrencies? I can’t answer that. Many people are making a lot of money on cryptocurrencies, and as long as investors continue to speculate the value up, people will continue making money.

What I can tell you is that I, for one, would not want to be holding a lot of cryptocurrencies when the party ends.

Wallace Garneau

Wallace Garneau is a two-service military veteran, with four years in the United States Marine Corps Reserve, and four years in the US Army. He has twenty-three years of experience in process improvement roles, having served as the E-Commerce Manager, IT Manager, and Director of Business Systems for a variety of medium to large manufacturing companies. Wallace holds a Bachelors of Science from the University of Phoenix, and an MBA in Lean Manufacturing from the University of Michigan. Wallace is currently finishing a Masters of Science in Lean Manufacturing, at Kettering University.

Wallace is a published poet and essayist, and recently finished his first book - The Way Forward: Lean Leadership and Systems Thinking for Large and Small Businesses.

Subscribe
Notify of
guest
1 Comment
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Stan Marciniak
Stan Marciniak
1 month ago

Marvelous discussion about cryptocurrencies. It’s a must read for any investor.

Use the code ‘OUTLOUD’ and receive your 20% discount on your first order.

The Reason the Patriot Act No Longer Works

The Reason the Patriot Act No Longer Works

We must realize the power of arrest now basically lies in Marxist hands, and they will use it. Already they have perverted the definition of who is and who is not a “terrorist.” It’s no longer the foreign Islamic Jihadists who killed over 3000 Americans in a single day, who are the terrorist!” To suggest is to be labeled Islamaphobic, but Oath Keepers, former American soldiers, and policemen still willing to keep the oaths they took to Protect and Defend the…

To Secede, or Not To Secede, That is the Question for Oregon and Idaho

To Secede, or Not To Secede, That is the Question for Oregon and Idaho

The Oregon vote shows both the desire of the people to change and their willingness to fight for their land. Is that enough? As of the writing, I don’t know how the legislature of Oregon will respond to this vote. Are the legislators willing to trap people in an unhappy situation to further their political goals? We’ve seen that before in world history, and it doesn’t end well.

John Kerry is a Consequential Internal Security Threat to America

John Kerry is a Consequential Internal Security Threat to America

John Kerry co-chaired the 2020 presidential campaign Biden-Sanders unity climate change task force with the socialist Rep. Alexandria Ocasio-Cortez, D-N.Y., which provided the framework for a “Green New Deal,” since repackaged as the Democrat “infrastructure” plan. Kerry has a habit of being in the center of many of the worst policies that pose major security risks for America…

Biden, G7 & the China Conundrum

Biden, G7 & the China Conundrum

The only way to confront the Chinese colossus is by combining the populations, economic and military powers of the USA, Europe, Russia, and India. Excluding Biden’s mental lapses and gaffes, the G7 leaders had a good time amongst themselves at enormous taxpayers’ expenses and returned home, not only empty-handed but empty-minded for completely ignoring all the following items…

5 Tools That Will Help You Tame Anxiety

5 Tools That Will Help You Tame Anxiety

Emotions are actually intelligent indicators meant to get your attention and provide energy and information. Anxiety as an emotional symptom is a sign you are not present. Ultimately, you can retrain your mind with consistent self-care tools and by prioritizing yourself to take the time to reset when your emotions are getting overly amped up…

COVID-19 Vaccines Not Safe for Human Use on Either Side of the Atlantic

COVID-19 Vaccines Not Safe for Human Use on Either Side of the Atlantic

Since the majority of the deaths occur within a few days of the vaccine administration, if the vaccine did not directly “cause” the death, it was undoubtedly in the causal pathway of these temporally related fatalities. Common narratives include vaccine-induced fatal heart attacks, strokes, blood clots, and blood disorders. 5,888 Americans have died and confirmed by the CDC, and possibly tens of thousands not reported or still backlogged at the CDC…

Sadly, Biden Was the Laugh of the G7 Party

Sadly, Biden Was the Laugh of the G7 Party

The President’s behavior throughout the G7 meeting and the meeting with Putin that followed did nothing to alleviate the suspicions that many Americans have that the President’s cognitive ability is fading rapidly. This, of course, leads to another question: Is Joe Biden really able to carry out his duties as President of the United States and leader of the free world?

#BidenBlunders Are Top Greatest US Threats – Not White Supremacists or Global Warming

#BidenBlunders Are Top Greatest US Threats – Not White Supremacists or Global Warming

How does terminating American petroleum and pipelines — while at the same time placating Putin’s — benefit all those drowning Arctic polar bears Al Gore warned us about? I’m betting that lots of recently unemployed coal miners and oil patch roughnecks are among a great many who are questioning these same contradictions regarding America’s truly urgent problems…

Coincidence or Conspiracy to Take Down a Nation

Coincidence or Conspiracy to Take Down a Nation

Now with a clearer vision of the past year and a half, could this nightmare we’ve been living have all been simply happenstance? Or is there something more sinister behind it? When we consider some parallels between the CCP-virus, the now-obvious hanky-panky that surrounded our Nov. 3rd elections, and the false flags unfolding around the January 6th Capitol event, we could almost have a conspiracy!

Your Source for Free Speech, Talk Radio, Podcasts, and News.

 

Here we take on the challenges of our generation so that we can preserve future generations.

iHeartRadio

The APPS are free; the mission is priceless!

Free APP

Podcast Networks

Apple Podcasts
Google Podcasts
Spotify
Pandora
Tunein
iHeart
Stitcher

Subscribe and Listen on Your Favorite APP

Our Columnists and Show Hosts

Support wounded and fallen police officers. The Wounded Blue.

Apple Podcasts

Fighting corporate censorship and ensuring voter integrity...

Apple Podcasts
Share via
Copy link
Powered by Social Snap