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…