Intrinsic value is independent of the market value of an asset. Market value is based largely on perception of the market, intrinsic value on the other hand calculates the true value of an underlying asset. Most commodities derive their value from market fundamentals of demand and supply. Bitcoin and Gold are both scarce and useful in various forms; although some dispute the usefulness of Bitcoin. Alan Greenspan’s words on Bitcoin – “It has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it.” sparked a debate in the Bitcoin community.
Greenspan said repaying capability of a currency comes from:
a) either the intrinsic value of the currency
b) or the trust of individual/organisation issuing the currency.
Historically, gold and other commodities were used to mint coins; and paper money was backed by a set amount of that commodity. Fiat currencies are no longer backed by commodities and the US dollar has not been redeemable in gold since January 30, 1934. It now costs the US government just 9.2 cents to print a $10 note. With no asset backing, and no intrinsic value of the paper on which it is printed, the dollar derives its intrinsic value from the confidence that the US government will honor its debts. Without that confidence, the entire financial system collapses.
The intrinsic value of Gold
I believe the intrinsic value of gold is, to a large extent, based on perception. Humans have historically seen jewellery made from gold as more valuable than jewellery made from other metals; metals that are just as bright and shiny as gold. Investors have historically seen gold as a store of value, an asset that will continue to rise in value as the demand increases, and use gold to hedge fiat’s inflationary risk. If investors have little confidence in the dollar, then the price of gold rises. Additionally, as the dollar looses its value over time and gold remains scarce, gold is seen as having higher value relative to dollar.
Demand and supply alone can not be used to explain value of gold. Silicon is intrinsically valuable as it is used to produce microchips, yet silicon trades at $0.50 / ounce, and gold trades at $1275 / ounce. Hence, intrinsic value of gold is driven by belief that humans will continue to value gold as a precious shiny metal, that gold is a good store of value and that the price of gold will continue to rise over time.
The intrinsic value of Bitcoin
Bitcoin is not issued by any government and is not backed by a commodity; therefore, when compared to the dollar and gold, Bitcoin has no intrinsic value in the ‘traditional economic sense’. However, Bitcoin is more of a technology than a commodity or a currency, therefore it is not wise to study Bitcoin in the traditional economic sense. Bitcoin is being traded like a commodity and used as a currency, and hence Bitcoin is being compared to gold and currency. But the true value of Bitcoin comes from the de-centralised protocol that powers the Bitcoin network. True potential of that protocol is still un-realised, and trying to determine the intrinsic value of that protocol today is like trying to determine the intrinsic value of the world wide web when the internet was first conceived.
We have seen that the Bitcoin protocol can be used as a payment network to send money to anyone in the world. No other technology or payment network makes it possible to send $150 million over the internet in minutes, at the cost of a few cents. While the payment network has been used to fund illicit activities, studies have shown that considerable effort would be needed to achieve complete anonymity. The blockchain is another element of the protocol that will be used to develop de-centralised products and services. Naval describes how blockchain can be used to verify and automate the ownership of assets, contracts, wills etc. If Bitcoin protocol were developed by a company, would the stock of that company not gain intrinsic value because of this technology? (atleast for a short while before that company would be shut down by regulators for facilitating money laundering). Owning part of a Bitcoin is similar to owning a part of that company, key difference is that Bitcoin runs on a peer-to-peer network, which is very difficult to shut down. Infact, something like Bitcoin can flourish only in a peer-to-peer way. The fact that Bitcoin was developed by an anonymous developer, and that the protocol is de-centralised, does not undermine the intrinsic value of the underlying protocol. Intrinsic value of gold is largely in our perception, whereas Bitcoin protocol is a real technology that has the potential to change the world. Hence, although I do not think it is fair to compare the two, if pushed, I would argue that Bitcoin protocol has more intrinsic value than gold.