Crypto doesn’t have intrinsic value; neither does paper money and neither does gold.
A friend who regularly reads both the Financial Times and my posts on EconLog and on my Substack sent me the following email:
I was talking with a friend who is a wealth manager at JP Morgan, and he is advising some clients who have the appetite for more risk and volatility to consider investing in “Crypto Plays.” Perhaps something like a crypto ETC to start.
Traditional economists seem to be evaluating the crypto economy from their rear-view mirror. A recent FT article repeated common assumptions as accepted reality. That crypto, “has no inherent value” and if there is a “liquidity crisis in crypto there is no lender of last resort.”
I bought and sold Bitcoin years ago when it was still below $100. I actually think certain investors should consider investments in the crypto area. We plan on doing so in 2025.
What do you think about the future of crypto in the world economy?
Here’s my answer:
I don’t know the future of crypto. No one does. I especially don’t because I don’t follow it enough. But when I talk to friends who buy and hold crypto, I typically hear one or more of three reasons for doing so. Here are the reasons, along with my comments on each.
(1) It’s a hedge against inflation.
It is. It’s volatile, but it is a hedge against inflation.
(2) It’s a way of keeping assets away from the intrusive prying eyes of government.
I don’t know enough about this, but my impression is that that’s not as true as it was, that government has several ways of piercing the veil.
Commenters on this site, many of whom probably know more than I, might want to comment.
(3) It’s a reasonable asset to hold as part of a diversification strategy.
This makes sense. That raises (not begs) the question why I don’t invest in crypto. The basic answer is that I don’t need to. My wife’s and my wealth is substantial and we are well diversified, with a market index stock fund, a much smaller (by value) bond fund, a huge inflation-indexed bond in the form of our Social Security benefits and my federal employee pension, and property (mainly our house, but also a small percent of a large apartment complex.) So I don’t want to buy yet another asset that I would need to pay attention to.
I do want to point out the problem with the criticism that crypto “has no inherent value.” Of course it doesn’t. But nothing does. Value, as we learned from the 1870 marginal revolution in economics, is subjective. It’s in the eyes of the beholder. Indeed, that’s Pillar #7 of my Ten Pillars of Economic Wisdom.
Now what the critics might have been getting at is that crypto is not like gold because gold has a non-monetary use. That’s true. Crypto, certainly Bitcoin, which is what I know best, is more like paper dollars. Paper dollars have no non-monetary use. (Well, not quite. In one of my drawers, I have a Canadian $1 bill because when the Canadian government introduced the Loonie, I knew the paper dollar would disappear. I have the bill as a collector’s item, a trivial exception.) But paper dollars have value.
READER COMMENTS
Dylan
Dec 11 2024 at 5:50pm
There was a Planet Money podcast years ago about gold and why it was good as money for a long time. I’m going off of memory here, but here are a few of the things I remember:
It needs to be rare, but not too rare
It should be reasonably geographically distributed, otherwise what you use as money in one place won’t be accepted as money somewhere else
It should be durable yet still easily portable
Ideally, you don‘t want it to be inherently valuable, that means that other use is going to compete with using it as money. It’s why all those people that talk about bullets being currency in some apocalyptic future are wrong, no…I want to save the bullets to shoot things with, not use them to trade.
Bitcoin meets these criteria pretty well…of course the modern world has other demands of money that bitcoin doesn’t do as well on, like ease of use and transaction speed, but no inherent value should be seen as a positive not a negative.
David Henderson
Dec 12 2024 at 9:11am
Those are all good, except the part about “inherently valuable.” Nothing is inherently valuable. Pillar #7.
Dylan
Dec 12 2024 at 12:04pm
Wrong word choice, but I think the idea that you don’t want it to have a more valuable competing use other than currency is sound. It distinguishes currency from barter.
Henri Hein
Dec 12 2024 at 3:49pm
In one of his books, Tim Harford wrote about this people in the Pacific that used large stones as currency. I remember them as being sculpted, but the important thing is that the value was proportional to the size of the stone. The bigger ones were the size of cars, or even bigger. Not portable at all. In fact, that was kind of the point. Theft was pretty much a non-starter.
One time, an islander were shipping a particularly large currency stone on a canoe to settle a debt on a neighboring island, when the canoe capsized and the stone fell into the ocean. It was impossible for them to retrieve it. Then they decided that it didn’t really matter where the stone was, since they all knew who it belonged to.
David Henderson
Dec 12 2024 at 4:55pm
Thanks, Henri.
I’m pretty sure that Milton Friedman tells that story in his delightful short book titled Money Mischief. I think, after making the point you made about the rock sitting at the bottom of the ocean, Milton said that that’s not much different from (before August 15, 1971), people at the Fed in New York moving gold around from a place at the Fed claimed by, say, the French government, to a different place at the Fed claimed by, say, the U.S. government.
Dylan
Dec 12 2024 at 5:16pm
I think they talked about that in the podcast as well, maybe that same episode or a different one. The distinction was that works fine for a small community, but if you want to enable global trade, you’re going to need something that you can travel to China with, and something they will accept as valuable.
Craig
Dec 11 2024 at 8:09pm
” It’s a way of keeping assets away from the intrusive prying eyes of government.”
Here’s the thing, the bitcoin blockchain is PUBLIC. so it can be read by anybody. If they have your bitcoin address anyone can see those transactions relating to that address. Beyond that let’s say you do something like etoro. Forget it at the end of the year they’re going to file the crypto equivalent of a consolidated 1099. Right off the bat the government can attack the US based on/off ramps.
David Henderson
Dec 12 2024 at 9:12am
I knew someone would know. Thanks, Craig.
Alan Goldhammer
Dec 12 2024 at 10:01am
A very good and readable book on the topic is “Tracers in the Dark” by Andy Greenberg. It documents how criminals were identified and apprehended despite their belief that Crypto transactions protected them.
john hare
Dec 12 2024 at 4:36am
I tend to see diamonds the same way. They are worth what someone will pay and no more. Local radio advertising is increasingly hammering the manufactured diamonds as decreasing value imitations due to increased production. How long before people become more interested in the rock itself than if it came from the ground?
Alan Goldhammer
Dec 12 2024 at 9:57am
Production of man made diamonds has improved markedly such that mined diamonds for most jewelry uses are being displaced. Only diamonds of interest IMO are those in collections such as the Smithsonian.
Jose Pablo
Dec 12 2024 at 8:18pm
(3) It’s a reasonable asset to hold as part of a diversification strategy.
This makes sense.
No. It doesn’t. Well, it makes, if any, the same sense as holding Euros or Japanese Yens as part of a diversification strategy. So, it’s like considering “no investing” as part of an investment diversification strategy (Newspeak?)
It makes the same sense as holding tulip bulbs in the Dutch Republic in the 17th century as a “diversification strategy”. It is far from clear that you can buy real productive assets with bitcoins when the right time comes (the only real good reason to keep unproductive cash as part of your portfolio).
Holding currency is not “investing” (if words are meant to have a distinctive meaning). You “invest” in “productive assets”.
The “magic” of productive assets is that a transfer of asset ownership is not needed, for the owners to materialize their value. They can just hold the asset and wait for the cash flows to come to them.
You can’t do that with Bitcoin (or gold) since it doesn’t generate any cash flow. It needs a “transaction” (aka a bigger fool than you) for you to materialize its value. Bitcoin is a currency. And a pretty useless one when evaluated as such.
Jose Pablo
Dec 12 2024 at 8:25pm
Paper dollars have no non-monetary use
Yes, they do. They have the very relevant (indeed!) non-monetary use of allowing you to avoid being sent to prison for not honoring your tax receipts. Arguably the true (and only) cause of the US$ “value”.
You can’t use Bitcoin to avoid that imprisonment. The day you can (if ever) it will be a whole new world for Bitcoin
Dylan
Dec 13 2024 at 6:54am
https://www.cnbc.com/2024/12/12/texas-house-introduces-bill-to-establish-a-strategic-bitcoin-reserve.html
Steve Hardy
Dec 13 2024 at 11:13am
I believe the best use of crypto today is for people living in countries with massive inflation and where they don’t trust the banks such as Argentina.
David Seltzer
Dec 13 2024 at 6:40pm
The famous exchange in Trading Places between Louis Winthorpe III and the pawnbroker. Both have different ideas about “intrinsic value” and subjective valuation. To wit. The subjective theory of value maintains that the value of an object is not fixed by the amount of resources and the hours of labor that went into creating it but is variable according to its context and the perspective of its users. In fact, the theory argues, the value of any object is determined by the individual who buys or sells it.
The pawnbroker offers Winthorpe III fifty bucks for his Rouchefoucauld watch. Louis takes umbrage and argues;
Louis Winthorpe III:
Fifty bucks? No, no, no. This is a Rouchefoucauld. The finest water-resistant watch in the world. Singularly unique, sculptured in design, hand-crafted in Switzerland and water resistant to three atmospheres. This is *the* sports watch of the ’80s. Six thousand, nine hundred and fifty five dollars retail! It tells time simultaneously in Monte Carlo, Beverley Hills, London, Paris, Rome and Gstaad.
Pawnbroker:
In Philadelphia it’s worth 50 bucks.
Jim Glass
Dec 13 2024 at 6:58pm
If something exists in a finite amount and there is significant (enough) demand for it, it will have a price.
The Trabant was one of the worst cars in history. I had friends in East Germany before The Wall came down, and when I visited they drove me around in theirs. They called it their “washing machine” because riding in one was like, you know. Reputedly, on the very day The Wall came down a million of them were junked.
But nostalgia is a thing.
David Henderson
Dec 13 2024 at 7:28pm
Great example of subjective value, Jim. Thanks.
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