Intrinsic Value of Bitcoin compared to Gold

That its price is above zero is a source of constant surprise and ridicule from gold bugs. “Wait, you will see. “This is all a misunderstanding,” they say. “It will be zero soon.” 

After all, what “intrinsic” value does it have? It is all just 0s and 1s and will vanish when someone unplugs the computer (or) turns off the internet. “Clearly,” they say, “those buying it are misled.” But are they?

On the counterpoint, Bitcoiners claim gold has no “intrinsic” value either. It’s all about the utility of it that gives it value. “Bitcoin has utility too and thus has value ^1” they argue. I think the root of the problem is confusion over the meaning of “intrinsic.” Let’s see its origins.

> intrinsic: to come from the inside, immanent (lat: intrinsecus, “within”) 

By that definition, we know gold has many intrinsic qualities: corrosion resistance, high malleability, ductility, low reactivity, and scarcity in our known world.

But the most widely recognised quality that makes it valuable as a “store of value” is its supply scarcity. It is as if people were searching for a rare medium that could also be shaped to be held, counted, and exchanged. It didn’t degrade much with use. Perfect.

Gold is both a commodity and money. Whenever its values are considered, the market evaluates these characteristics to price it.

Industrial demand for gold is only 10-15%; the rest goes to jewelry, investments, and central bank reserves.

https://www.statista.com/statistics/299609/gold-demand-by-industry-sector-share/

And jewellery serves a dual purpose of investment and social status symbol. 

Historically looking, it does make a decent medium for a store of value. There have been few periods of supply shocks in its availability (discovery of new deposits, change in mining costs, etc.). On a longer timescale, its scarcity and slow mining are pluses. 

It also has a plus in its perceived value due to its long history. Longevity is an essential psychological factor when people assess a medium for long-term “store of value” across time—storing wealth for generations.

But for something to act as “money,” does it need to be a commodity as well? Let us see what properties something has to possess to be “money.” From Wikipedia

> Money is any item or verifiable record generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as a medium of exchange, a unit of account, a store of value, and sometimes, a standard of deferred payment. Any item or verifiable record that fulfils these functions can be considered money.

Not necessarily. There is also representative money.

Now, what might be the “intrinsic” properties of Bitcoin?

Here it would help if you were careful in its definition. Loose metaphors like “it is just 0s and 1s” while sounding plausible are incorrect. “Bitcoin” is a protocol, a “social contract.” It runs on computers or uses the internet is what you would call the implementation details. 

If you want to, you could continue the protocol with pen and paper ^2, it might be painfully slow but not impossible. You could also use it without the “internet,” just using radio waves in a peer-to-peer manner ^3 ^4. You could also be pedantic and point out that you could also use horses and messengers. 

So what are the “intrinsic” properties of Bitcoin,

Its design mimics the scarcity of gold using mathematics and cryptography instead of shovels and blasting rocks.

Its design allows the verifiable exchange of value between parties without being in person. Distance does not matter.

By its design, it does not need a trusted intermediary for verification. There is no singular point of failure. 

Verification is more straightforward than verifying a gold payment, though, like anything new, it needs to be understood. 

Its design has an inherent memory of all that has happened (ledger).

Based on these “intrinsic” properties, people have already started utilising them in the following ways.

As a “store of value” both across time and space. Moving value across artificial borders with minimal friction. Censorship resistant. It can be used as a “store of value” due to its scarcity. We can use it as a “medium of exchange” without any censorship.

Going back to the Goldbugs argument of gold vs bitcoin price. 

It is pertinent to recognise that “Price” is the perceived value of something. It is not “intrinsic” to that thing. 

A thing is priced based on its utility associated with its “intrinsic” properties.

And Bitcoin has “intrinsic” properties as shown above and hence utility and a non-zero price. Whether it should be higher or lower than gold or other competing mediums is something for the markets to decide.