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On today's show, we depart from the usual format – rather than a market update, Noelle breaks down a common misconception about Bitcoin.
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This episode was hosted by Noelle Acheson. “Markets Daily” is executive produced by Jared Schwartz and produced and edited by Eleanor Pahl. All original music by Doc Blust and Colin Mealey.
Audio Transcript: This transcript has not been edited and may contain errors.
It’s Monday, December 11th, 2023 and this is Markets Daily from CoinDesk. My name is Noelle Acheson, CoinDesk collaborator and author of the Crypto is Macro Now newsletter on Substack. On today's show, we're departing from the usual format – Rather than a market update, I’m going to talk about a common misconception about bitcoin. So you don’t miss an episode, be sure to follow the podcast on your platform of choice, and turn on notifications. And just a reminder, CoinDesk is a news source and does not provide investment advice.
Here we go:
JPMorgan CEO Jamie Dimon has said it. Bank of England governor Andrew Bailey has said it. Warren Buffet, Fed Chair Jerome Powell and countless academics, financial experts and politicians have said it: Bitcoin has no intrinsic value. The implication is that, with no intrinsic value, bitcoin should not be worth anything at all, let alone have a market cap of over $850 billion dollars.
Yet, with respect, they are all mistaken. Here I’m going to show that bitcoin does have intrinsic value. And that it doesn’t matter anyway. First of all, what do these illustrious experts mean when they say “intrinsic value”?
Technically, “intrinsic value” is value that can be objectively determined, either by discounting cash flows or by valuing underlying assets. Since bitcoin has no cash flows or underlying assets, it’s not a stretch to assume it has no intrinsic value. But this applies a very narrow and superficial definition to the term.
It assumes that future cash flows are “real”. But usually, that’s not actually true – with bonds, there is a contractual promise to deliver to the holder a series of payments. That can be valued quite easily. But with stocks, the cash flows are expected. They’re not yet real. They may or may not materialize. The valuation is subjective, not objective.
Intrinsic value calculations also often rely on the valuation of underlying assets. A mining company, for example, could be valued by its expected cash flows, or by the amount of gold that lies beneath the owned land, according to geologists’ estimates. Yet this is also subjective – not only could the estimates be wrong, but the gold would be valued at roughly the market price for the metal, which is based on market sentiment. Not objective at all.
Intriguingly, you don’t hear bitcoin critics say that Meta stock (to pick a tech-focused example) has no intrinsic value. It has a projected future cash flow, based on subjective parameters. It no doubt has some servers, real estate and office furniture that could be sold off in the event of the company’s demise. And yet financial analysts get excited about the stock’s potential. Why? Because of its network.
Ok, technically it’s because of the potential advertising revenue, but that depends on the network. A network can be measured via the number of users and then the number of possible connections between those users. It can be argued that a network has intrinsic value.
Bitcoin is also a network. Today, the network consists of over 1 million active addresses that can connect to each other, giving an astronomical amount of potential connections. That has an intrinsic value.
Also, you don’t hear bitcoin critics say a database has no intrinsic value. Earlier this year, JPMorgan had a buy on the stock of Oracle Corporation, which sells database technology. The Bitcoin network is a new type of database. That gives it value.
True, bitcoin critics are usually dismissing the token, not the network, but the analogies with Meta’s stock deriving value from Meta’s network and Oracle’s stock deriving value from database technologies still hold.
And anyway, why does it matter whether bitcoin has intrinsic value or not? The very people that criticize it for not having an objectively calculable valuation are essentially dismissing the worth of the collective market opinion. Strangely, these are often people whose livelihoods stem from markets.
Anyone who works in markets knows that something is “worth” what someone else will pay for it. Except, it seems, bitcoin which is supposedly worthless despite the market assigning each one a price of over $40,000.
So, next time we hear someone criticize bitcoin for not having intrinsic value, we should ask them to clarify what they are talking about. What do they mean by “intrinsic”? And why do they think this should matter?
We could also point out to them that utility itself has intrinsic value. And utility is never tangible, although the thing that provides it may be. For instance, a coffee mug is tangible but a coffee mug is not the utility – the ability to drink hot fluids without burning yourself is. The mug is therefore valuable primarily because of its service, not so much because of the clay and varnish that went into making it.
At least a cup can be pretty and nice to hold – what objective valuation methods can you use to determine the “intrinsic value” of a database, or of Wi-Fi?
This leads us to yet another mind-blowing innovation underpinning Bitcoin’s value. Like databases and wireless connection, it has a clear utility – with Bitcoin, it’s the decentralized storage and transfer of virtual assets.
And yet, unlike databases, wireless connections and most other pure technologies, Bitcoin has a real-time market price that reflects the ultimate arbiter of “value” – what someone else will pay for it. What’s more, it does this at any time of day or night. Even Meta and Oracle stock can’t say that.
Almost uniquely, Bitcoin is a pure technology with an always-up-to-date market price. And yet financial experts still insist it has no intrinsic value. On the one hand, this is alarming – many of those responsible for taking care of our current financial system are showing rigid, outdated thinking on core fundamentals of markets and innovation. On the other hand, it signals that crypto is still “early”.
Many financial experts do “get” it. As well as legions of investors, a few well-known fund managers, bankers and even regulators do understand that Bitcoin has utility beyond speculation. And those who don’t get it will eventually be replaced by those that do, especially as understanding and appreciation of Bitcoin’s singular melding of technology and finance continue to spread.
