Bitcoin’s Value Is Purely Subjective

While one Bitcoin token is currently approaching 5’000 US$, many people wonder why Bitcoin has «value» in the first place.

The first question that arises: Might those people actually mean «price» instead of «value»? Price and value are entirely different concepts. 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, identity of price and value would bring the economy to a halt.

Secondly and more importantly, the phrasing of the initial question is misled. Value is not something intrinsic 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 that are stored in an electronic wallet and in the distributed network. (That set of digital data confers on its holder the power of control over Bitcoin tokens.)

«Value is not something intrinsic that is part of an object.»

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 might as well not!

Since value is not an «ontological» property of an object, value must be subjective (look up Austrian Economics). Value thus lies in the eye of the beholder. This has major implications: When I value an object dearly, this doesn’t 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’t want to delve into here.

So, we have to ask ourselves what those «properties» are that make Bitcoin tokens valuable to its users. This question cannot be answered conclusively (for the reasons mentioned above). At least let’s try a conceptual approach:

Libertarians probably use the network because they prefer «stateless» cryptocurrencies to legal tender and bank-issued money. They don’t like money that can be created at will and out of thin air.

Techies and academics may engage in it because the underlying distributed ledger technology has become a new interesting research area. It allows for «trustless systems», be it payment systems or «decentralized autonomous organizations» (DAOs).

Criminals may value the Bitcoin network’s capabilities to disguise their transactions. They presumably like that they are not forced to go through the banking system anymore.

Most people (e.g., venture capitalists) probably hold Bitcoins because they can either take part in «initial coin offerings» (ICOs) or they speculate for a rise in prices. This can also be described as Bitcoin’s «bubble economy».

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 it, for different reasons though.

«In their eyes and minds, however, Bitcoins are valuable, for different reasons though.»

Some people argue that Bitcoin derives its «value» from the electricity put to work within the mining procedure. This, however, sounds like a slightly adapted version of the mistaken «labor theory of value». Certainly, electricity is a prerequisite for the decentralized proof of work-approach, which eventually makes the Bitcoin network secure («electricity-turned-trust»). However, the amount of electricity, while undoubtedly contributing to a positive subjective valuation of users, is not the value of the network itself. In fact, current electricity costs are nowhere near the «value», or price, of a Bitcoin token. For the same reason neither does Bitcoin’s value stem from its «trustless» database (the «blockchain») nor from the algorithmic scarcity (∼21 million), which is embedded in the Bitcoin protocol. These features of the Bitcoin network are only reasons why people use the network.

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 gold to be more beneficial than earlier kinds of media of exchange in the first place. «Discovering» value is a purely mental, or psychological, process.

«Discovering value is a purely mental, or psychological, process.»

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

Soaring market prices follow from there…

The War Against Cash in Europe

There are good reasons why the debate on cash is heating up right now.

While European governments and central banks have stepped up capital controls in the last few years, cash has become the major hurdle for conventional monetary policy. Therefore, many economists, as well as a number of high-ranking government officials, have presented and reiterated their arguments in favor of the abolition of cash virtually at every opportunity.

Although most European citizens do not approve further restrictions on cash, the outcome of the political debate is open.

The use of cash in Europe

The political reasoning for a ‘European’ war on cash is based on an ideological mindset that is identical to what is heard across the Atlantic. What is different, however, is the popularity of the use of cash, which also differs from country to country within Europe.

Unlike the Scandinavians, who have largely moved to a cashless society, other countries still prefer to keep their notes and coins. Recent surveys show that over 70% of the German population opposes further restrictions on cash. Switzerland’s National Bank has announced that it will not follow other countries’ example of phasing out what is the world’s highest denominated bill (in terms of exchange rate value), the 1,000 Swiss franc note.

People’s attitude towards cash appears to be influenced by the cultural context of a nation. Germans, for example, have faced at least four monetary reforms in the last 100 years. The great hyperinflation in the 1920s must have left marks in the Germans’ consciousness.

Unlike the German currencies, the Swiss franc has never experienced monetary instability of comparable scale. It is rather the general suspicion toward government power that has led the Swiss to take a conservative stance towards cash.

Today, and especially after 9/11, restrictions on cash have increased exponentially.

Denmark and Sweden are at the complete opposite. These countries have officially passed legislation in order to discontinue cash step-by-step. The largest Scandinavian banks have recently stopped allowing cash withdrawals in most branches. Moreover, the financial industry has actively encouraged regulation limiting cash use in daily transactions in the name of fighting crooks and protecting the environment. Finally, Danish law leaves the decision whether to accept cash or not to the providers of goods and services; as of this year, clothing stores, restaurants, and gas stations are allowed to turn away customers who cannot pay electronically. It is literally a Scandinavian war against cash that has taken place in the last decade.

Internationally, initiatives against cash reflect the current interconnectedness of financial markets.

The emergence of a globalized financial system led to the regulation of cross-border payment transactions and capital flows. The original intent was to make it harder for criminals to channel in money that originated from crime. Regulation of cash deposits and withdrawals at banks was initiated as early as in the 1970s in the USA and in the 1980s and 1990s in Europe.

Today, and especially after 9/11, restrictions on cash have increased exponentially.

Most legislation is supposed to prevent money laundering and terrorist financing. However plausible these reasons are, they have also been blatantly misused in the war on cash. Since the European Union is competent in the field of anti-money laundering regulation, there has been great effort to harmonize national laws. The EU finance ministers have recently called the EU commission “to explore the need for appropriate restrictions on cash payments exceeding certain thresholds” throughout the Union, and, to the same effect, the European Central bank has announced its willingness to “examine the consequences of phasing out” the 500 euro banknote.

Despite this political agenda and its questionable implementation, many countries of the Eurozone have already put in place strict measures: The French government tightened restrictions on cash payments and intensified monitoring of high-value withdrawals after the latest Paris terrorist attacks; the upper payment limit was lowered to 1,000 euros. Italy recently went back to its former limit of 3,000 euros. Payments exceeding these amounts must be executed through a licensed bank.

While extending the scope of the anti-money laundering statute to non-financial intermediaries, even Switzerland now regulates transactions over 100,000 Swiss francs. Yet, it is unlikely that the political intention is to stop discriminating cash users at some point but rather to incrementally reduce the allowed transaction limits, and eventually, to discontinue the use of cash entirely.

The government’s need for cashless finance and its fallacy

Following the meltdown of the financial system in 2008, governments collaborated with the financial industry by bailing out large banks in an unprecedented way. As a consequence, public debt levels have surged. At the same time, interest rates are at the lowest possible, approaching zero.

We have reached a point in the fiat money system where even unorthodox monetary measures, such as ‘quantitative easing’ or ‘helicopter drops’, have missed their official goal of stimulating the economy. Newly printed money has barely been going into real capital production, but it has rather been inflating asset prices; instead of investing in new products and services, many businesses have recapitalized on better terms, performed buybacks or paid out dividends to their shareholders.

This is a good thing for banks because they are relieved from servicing “toxic assets;” however, such a monetary policy is not able to boost the economy in a sustainable manner. This is where cash comes in: Cash has become a real drawback according to mainstream economic theory. It limits the central bank’s ability to reduce short-term (nominal) interest rates below zero.

According to the concept of “zero lower bound”, if interest rates drop into negative, bank account holders are encouraged to withdraw their savings and keep them as cash. Given that cash does not pay any interest, it is still better to hoard cash under the mattress than to leave it in the bank where it is charged negative interest or a fee. If falling rates exceed the costs of holding cash at home or in a safe deposit box, people will withdraw en masse.

It is obvious that banning cash would not build up confidence in the current system, but rather destroy the last bit of it, as recent data on growing cash circulation in the Eurozone, Switzerland and the UK indicate. The problem about this is that the viability of certain fiat currencies genuinely depends on substantial cash restrictions.

If cash were abolished, any fiscal or monetary policy would be enforceable in the short run.

A little bit of tapering might be bearable for the US dollar, if interest rates return to pre-crisis levels. However, it will not be the case for the Eurozone and would provoke the exit of a member country. It is therefore essential to certain European countries (and to the EU itself) to increase the degree of financial repression in order to refinance their debts and deficits at the expense of the public.

If cash were abolished, any fiscal or monetary policy would be enforceable in the short run: Increasing negative interest would force bank account holders to spend their money or to invest it in riskier assets, such as bonds or stocks. Despite the disastrous effects on the economy, such as malinvestment, outright confiscation of wealth would hit account holders even harder: In a system where all money is electronic, bail-ins, capital levies, or seizures could be imposed on bank customers without them having the slightest chance to avoid those controls. It is obvious, though, that such a policy would pervert the original purpose of money, which is above all to securely store value.

Proponents of anti-cash policies too often forget the non-coercive character of money. Describing its emergence, the great Austrian economist Carl Menger points to the fact that “[c]ertain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state” (Principles of Economics, 1871, Auburn [2007], 262). In other words, banning physical cash would simply lead to the emergence of alternative means of payment that would outcompete official tender. A lot of people would start using near-money substitutes, such as gold or silver, or whatever commodity facilitates the exchange of goods and services instead. Ignoring this fact shows us how little mainstream economists know about the origin of money and how much they overestimate the validity of their policy advice.

Cash from the perspective of the individual person

Actually, there are good reasons to oppose fiat currencies. They are inherently flawed due to a lack of competition. However, when it comes to the physical manifestation of fiat money, i.e. cash, there is a need to differentiate. In the existing context, cash truly means freedom, at least in the sense of less state control or more options to choose from.

Let us have a look at recent examples in Europe: Greeks have experienced far-reaching restrictions on cash withdrawals at the peak of the debt crisis, bank customers’ deposits in Cyprus were bailed in up to 50 percent in March 2013, and Italian and Portuguese bondholders have been forced to acquire stocks of insolvent banks for the last two years. These are all too familiar stories in Europe today; financial repression seems to be the political panacea to overcome the consequences of preceding government failure.

The abolition of cash would represent the logical next step in a series of detrimental government interventions. Yet, it would never justify such an extensive infringement of personal liberties.
When it comes to creeping state control, it is no surprise that certain European countries, such as France, are at the forefront. An electronic world would be far easier to both tax and control. Such a narrow view on the issue of tax evasion, however, completely ignores the root causes for tax evasion in the first place. Furthermore, the abolition of cash might reduce the black market economy at first, however it would just be a question of time until black markets would thrive even more.

Cash does not only mean privacy towards state agencies, but also towards data gathering companies. In other words, the end of cash is also the end of privacy. A cashless society would give governments and businesses access to information and power over citizens in an unprecedented manner.

Considering the ubiquity of money in our society, no sphere of life would be left untouched. Physical cash offers a fallback option for the time governments become prohibitive or electronic systems break down; cash literally offers insurance to its owner and thereby protects him or her from the loss of freedom and property. Cash is said to be inefficient and primitive; however, anti-money laundering regulation has artificially increased costs for merchants who prefer cash. In a market economy it is not up to the banks (or the government) to decide on the means of payment, but to the consumer. And let us not forget: Cash is especially valuable to the billions of people who are unbanked or underbanked worldwide.

Cash is no end in itself, but rather the indispensable means to exercise basic rights.

Finally, cash embodies the value of unconditionality. Cash is basically not dependent on a third-person or a private contract. It is not contingent on the solvency of banks or the effectiveness of the financial system. Unlike bank money, cash transactions are immediately cleared and settled. The same is true for bitcoin, which is why the cryptocurrency is called electronic cash. There is one but significant reservation to the principle of unconditionality: Cash remains dependent on the solvency of its issuer, the government.

The idea of an outright ban may seem far-fetched to some of us; however, the longer the interest rates stay low or negative, and the longer the economy does not get off the ground, the sooner unthinkable proposals could be argued as being without any alternative.

Cash is no end in itself, but rather the indispensable means to exercise basic rights. Even if it were possible that hardly anything changed in a cashless society, the abolition of cash would de facto prejudice human behavior.

Cash is not about illicit activities, but enabling a lifestyle that does not harm others. Fyodor Dostoyevsky wrote in 19th century-Russia that “money is coined freedom;” today, we would probably correct him: Cash is coined freedom.

Published in the Cayman Financial Review