I often read the argument that some digital assets, in particular cryptocurrencies, do not have “intrinsic value” and are therefore worthless. So is this true and what intrinsic value really mean?

Definition

This definition correlates with my intuitive understanding of intrinsic value:

– Intrinsic value is a measure of what an asset is worth. This measure is arrived at by means of an objective calculation or complex financial model, rather than using the currently trading market price of that asset. Investopedia

So the price, which is determined on the free market, is not the same as the value of an asset. Price and value likely differs and is not fixed due to changing environment and assumptions. This is basically what (value)investors do, finding underpriced assets which they believe have a higher value than the current price reflects. Also, the value may not be just the intrinsic value. Other outside factors may put pressure on the asset to move the value-proposition in a direction, e.g. governmental regulation or speculative instruments (e.g. futures).

Physical vs. Virtual

Up until a few years ago the world and it’s traded assets were backed by physical or legal entities (like commodities or companies) and financial experts knew how to create models trying to find the fair value of an asset (at least they tried - not being an expert in this field I can imagine that there is room for subjective interpretation in creating these models).

As a human, the value of something physical is intuitive to grasp. If it can be touched or contained it must have at least some value. There have been natural ressources spent to produce the thing-and ressources are finite. Something virtual, e.g. a digital copy of a music piece, has for sure a disadvantage here, even if it’s more practical.

It’s the revolutionary idea of the system described in the Bitcoin Whitepaper, that transfers the “finite ressource”-concept in the virtual domain. A virtual asset that can be owned, but is not easily copyable (spendable) by others. Bitcoin gives the holder (knows the private key) of an address the exclusive right to transfer the amount of BTC associated with the address. Things of course can get more powerful and complex with things like multisig-addresses, but that’s not the point here.

Trust

What role does trust have? Is it an important part of the intrinsic value of an asset?

Trust does affect the price of an asset, it may even crash it to near zero if the majority loses it. It may depend on the asset-class how big of a factor trust is in the valuation.

In the stock market the trust in a company and it’s leadership may play a huge role in the valuation. If the CEO changes for a (perceived) weaker one, the valuation of a company might fall, despite all production facilities and sales projections being good.

For a cryptocurrency technological and mathematical aspects are very relevant. A weakness in the code or cryptograpy may erode trust near instantly. The mantra here is in code we trust, which means that there has to be a strong and trustworthy development process in place to ensure quality code.

For Gold we have to trust an institution to produce a high quality, pure product. Also it’s not clear how much Gold really exists, we have to believe what institutions report.

Fiat money is almost fully based on trust. If trust in the state or central banking system is gone, value is gone. Fiat money itself has an instrumental value (we can transact and convert), but a paper note or a bank account itself does not have intrinsic value. Fiat money is backed by government and the trust in it’s monopoly on the use of force and well-intentioned “cooperation” with the central bank. _{Sidenote: This type of money has not worked very well in the past (despite the sensational title I can recommend the book The Big Reset for a history of money).}

So while trust may not be an intrinsic part of the value, without trust - and with it a large enough market - an asset has de facto no real value.

The value of Bitcoin (Scarcity & Network Effect)

Bitcoin has one extremely important characteristic: It’s limited to 21 million BTC. This is not a soft matter, it can be exactly validated on the blockchain. This is also an important advantage over Gold. The inflation schedule for BTC is totally transparent and deterministic. Being programmable, Bitcoin might in future become much more than a scarce asset, but for now this makes it a store of value that in some aspects excels Gold (transferable, dividable, verifyable).

Historically no government could resist to debase their currency over time, so this deflationary characteristic should not be an taken lightly. It’s huge.

This hard limit could in theory be changed in the future (via a hardfork), but such a change would need the support of most participants of the network. Such a consensus would be incredibly hard to achieve. Hard-forks with low support would only lead to the creation of relatively worthless altcoins. Furthermore, the use of physical mining-operations helps to make hostile takeovers hard, even with sheer financial power of rouge actors (think state level). The proof-of-work mining has been proven over the years and is currently a security advantage over proof-of-stake networks (time will tell).

It remains to be seen how much room in Bitcoin is left for substantial changes on the base layer and if additional functionality will built as seperate layers on top of the Bitcoin-network. See Lightning Network. This approach aligns more with how big and long running IT-systems are usually built.

Also these facts give Bitcoin value in comparision to other networks:

• It’s long and relatively faultless history (see Lindy Effect).
• Network effects (usually winner takes it all in the digital space). Bitcoin as first mover has the biggest amount of community/holders/users, miners/node operators, businesses.

So, the verifiable scarcity, the physical backing by miners that convert energy to value and the network effects in the community for the usecase “store of value/future money/decentralized base layer” give Bitcoin intrinsic value.

There are more aspects that might give Bitcoin value, especially it’s openness. In theory everybody has permissionless access to participate in the network (realistically there may be constraints in the environment of an user that make this harder to achieve). Being neutral on it’s users makes it a humane system and this is a huge seperator to centralized digital currencies (e.g. CBDCs).

I think it’s important to consider the usecase of a cryptocurrency. There might be various cryptocurrencies with different value propositions because of different usecases. Ethereum is such an example. It can not directly compete with Bitcoin in the conservative “store of value” usecase, but in the “utility” usecase, which aims for decentralized and trustless execution of logic (smart contracts). This could also be done on a seperate Bitcoin-layer, but it looks like Ethereum has the bigger network-effects for now in this use case. But we’re at very early stages in trustless execution of turing complete programs.

Conclusion

Despite a Bitcoin-address and it’s private key being just a few bytes of data, the Bitcoin-network has some characteristics that give it intrinsic value. Most importantly that it assures scarcity and it’s rules are very hard to change. There are not many (if any?) assets in the world that can compete with this.

I think other cryptocurrencies can also have intrinsic value, if they provide a unique solution to another usecase than “store of value” and have a solid underlying economic model, proven, decentralized technology and the necessary network effects. But this is not an easy task to achieve.