A Note On the Intrinsic Value of Gold versus the Lack of Such for Bitcoin

Bob Murphy has a post up discussing  Bitcoin and opposing views. He doesn't name names, so it is not clear if he is referring to me at all. Some of it appears to reference Gary North arguments, but the intrinsic value part of his post could be referring to my discussion on the intrinsic value of gold versus the lack of such for Bitcoin. If he is referring to my comments, he is greatly misunderstading them.

Here's what he writes:

 I am hearing a lot of self-described Misesians make argumentsagainst Bitcoin that prove far too much. So in this post, I’m going to go over the following representative version of a very popular example of what I mean:

TYPICAL ARGUMENT AGAINST BITCOIN: Bitcoin is just a giant bubble; it’s tulip mania all over again. Since it’s essentially a private fiat currency, it has no fundamental value at all; any value it has is due to the speculative motive. People are only accepting it because they think they can unload it down the road to the bigger fool, for more money. This might last for a while, even years, but it’s built on sand and can collapse at any moment. In contrast, a commodity money like gold or silver is based on the fact that it’s genuinely useful in non-monetary outlets. So there is a floor holding up its exchange value.

OK, so the wording might vary from person to person, but during the last two years, I have definitely seen plenty of arguments similar to the above. Here’s my problem with it: This argument comes dangerously close to saying thatall money, even commodity money, is always in a bubble, unless it ceases to be money.

It is standard Misesian monetary theory to say that a commodity (such as gold) gains in exchange value as it turns from a mere commodity into a medium of exchange and finally into money. This should be obvious: Originally, in a state of direct exchange, gold had a certain exchange value against other goods and services because of its direct uses (jewelry etc.). But then if people wanted to start holding it as a medium of exchange, this would increase the demand for gold, and hence drive up its “price” (i.e. how much it could fetch in the market in terms of other goods). Therefore, if a goldbug is arguing that having an exchange value above the “commodity value” (which in the case of Bitcoin is zero) makes something a bubble, then all money–including gold money–isalways in a bubble.

Let me restate the argument like this: There are people claiming that Bitcoin’s non-monetary price is zero, and hence if it’s trading for anything at all, it is in a bubble. But by that logic, gold’s non-monetary price might be (say) $250, and so if it’s trading right now for $1,250, then $1,000 of that is clearly just due to a self-fulfilling prophecy, where people are willing to pay $1,250 for gold because they think that’s how much (at least) it will be worth in the future. If something were to shatter that expectation, then the price of gold would plummet back down to its fundamental value of $250. Thus, if we accept this line of reasoning, the only real difference between Bitcoin and gold is that Bitcoin has a floor of $0 while gold has a floor of (say) $250.

Last thing: One way out of this apparent bog is to make a distinction between holding commodity money for speculative purposes, versus holding it for exchange purposes. In other words, someone could accept a gold coin today not because he expects to unload it off on a “greater fool” tomorrow, but because he wants a more liquid form of wealth to make his purchases easier. (Indeed, we see that people hold paper money even knowing it willfall in purchasing power.) But if that’s the route one takes, then why can’t we say the same thing for Bitcoin? Sure, when it’s zooming up in price daily, people might be jumping on board primarily for speculative reasons, but in general how can we rule out a priori the possibility of a long-run equilibrium, in which Bitcoin is valuable preciselybecause it is a good medium of exchange that has an established purchasing power?

Again, it is difficult to know who Murphy is arguing is making these points, if he has me in mind with regard to intrinsic value, he is dead wrong. The only point I have made with regard to intrinsic value is that gold has intrinsic value (that is, it has value outside of being an alternative medium of exchange) and that Bitcoin has no use value outside being a medium of exchange. I have personally never made the argument that because Bitcoin has no intrinsic value, it can not become a medium of exchange. And I have never argued that any value above intrinsic value in a medium of exchange means a bubble exists. However, if Bitcoin is no longer viewed as a medium of exchange is does have the potential to drop to zero, because it has no other use. This, however, is not my argument against Bitcoin. My argument has nothing to do with intrinsic value. I only commented on intrinsic value because I wanted to explore what Peter Schiff  might have had in mind when he brought up intrinsic value.

My argument against Bitcoin is based on the fact that it brings noting to the table. Despite continued commentary that it is an anonymous currency, it is not. It is more trackable than paper money or gold. I expect the tumblers which  purport to make bitcoins anonymous eventually banned by the USG as money laundering operations. I also expect third party Bitcoin payment operators to eventually be required by USG to accept chargebacks, This will eliminate any edge they currently have as far as charging nearly zero to retailers in fees for transactions processed.

In short, Bitcoin has no sustainable edge and will collapse because of this.

As far as Bitcoin being in a bubble, my view is entirely based on the fact that I see no edge for Bitcoin and thus no reason for it to be in demand. I expect this to become more obvious over time to all, which I expect will then cause the price of Bitcoin to collapse.

I have further made the charge that Bitcoin is somewhat of a pump and dump scheme. This is based on some of the Wall Street operators that I have noticed that are involved with Bitcoin. A lot of the classic things you see in pump and dump schemes (Read: Street Fighting at Wall and Broad: An Insider's Tale of Stock Manipulation) are occurring with Bitcoin.

Whether there is a pump and dump scheme going on, I expect Bitcoin to collapse because I expect the USG to crush any edge Bitcoin has and I fully believe that they have the capability to do such.