Does Cryptocurrency Really Have Value?

 Skeptics of cryptocurrencies  often say that these digital assets have no real-life value because you  can't hold them in your hand, and they are not "backed by" any material  object either. Others who are more friendly with the technology suggest  that these currencies derive their value from the energy and resources  that miners spend on securing the networks. 

However, both of these  perspectives overlook the fact that assets don't actually need to be  "backed by" anything, aside from the faith and participation of the  people who trade them. In fact, this type of shared interest and belief  is what ultimately gives all assets their value, from gold to Bitcoin,  to real estate. Stockbroker Peter Schiff has been  one of the most vocal critics of Bitcoin and other cryptocurrencies  over the years. 

Although Schiff is also an opponent of fiat currencies,  he doesn't trust digital assets because he believes that they don't have  any "intrinsic value." Speaking in an interview on the Joe Rogan Podcast  earlier this year, Schiff said that in order for cryptocurrencies to  actually have value they would need to represent a material object, like  gold. Schiff said:   

“I don’t think any of these currencies can ever be stable because  there’s no value to stable them. There’s no value to store. The only  cryptocurrencies that would work are cryptocurrencies that are backed by  a real commodity, like gold.”   

Gold & Crypto

Through the rise and fall of many  civilizations over many centuries, gold and other precious metals have  been the only constant store of value and medium of exchange, mostly  because they are essentially indestructible and can be used in the  creation of a variety of different products. The longstanding use of these  materials has created the misconception that all currencies must share  the same traditional physical properties in order to be trusted and  taken seriously. 

However, it is not actually the  physical properties of gold or silver that make it valuable, but rather,  it is the reputation that these materials have as trusted commodities  that give them their value. While it is true that these  materials became trusted commodities because of the aforementioned  properties, it is also true that other currencies can become trusted  commodities for entirely different reasons. In fact, crypto  intentionally serves many of the same functions as gold, but often takes  an entirely different path. 

For example, blockchain  technology can make currency indestructible, but not in the same way  that the physical properties of gold make a currency indestructible. The  design of the distributed ledger allows computer systems and entire  networks to be shut down without any currency being lost or damaged, a  concept that could not even be imagined by the gold bugs of the previous  century. 

This would be the equivalent of a whole chain of banks burning  to the ground without losing any deposits. Likewise, a gold standard is  often proposed as a solution to inflation because the scarcity of the  material ensures a limited amount of money in circulation, and until the  development of Bitcoin, this was the absolute best way to limit the  supply of a currency. 

Now, there are a number of  different cryptocurrencies, each with different approaches to tackling  problems like inflation. Bitcoin, for example, has anti-inflation  properties built into the code of the blockchain, and the transparency  of the network allows users to verify the circulating supply at any  time, to ensure that the reserves have not been manipulated. 

Subjective Theory of Value

Carl Menger, founder of the  Austrian School of Economics, was one of the economists who developed  the Subjective Theory of Value, which suggests that all value comes from  the collective needs, desires, and capabilities of individuals who  interact in the marketplace. Menger writes: 

When I discussed the nature of value, I observed that value is  nothing inherent in goods and that it is not a property of goods. But  neither is value an independent thing. There is no reason why a good may  not have value to one economizing individual but no value to another  individual under different circumstances. The measure of value is  entirely subjective in nature, and for this reason a good can have great  value to one economizing individual, little value to another, and no  value at all to a third, depending upon the differences in their  requirements and available amounts. What one person disdains or values  lightly is appreciated by another, and what one person abandons is often  picked up by another.   

In other words, there is no such  thing as intrinsic value. All value comes from human belief and need.  One man's trash is another's treasure. Even the prices of food, water,  and medicine fluctuate with tides of supply and demand, and these are  items that most people would agree are intrinsically valuable because  all humans need them to survive. 

Given a choice between a bottle of  water and a bag diamonds, a person struggling to survive in the desert  would find no value in the diamonds, while a poor person in an  industrialized society would choose the diamonds without question. In the new age of decentralized  money, people will not be limited to a monopolized currency as they are  under fiat, and there will be plenty of room for gold, crypto and a  variety of other assets to coexist in the same market. The modern  western tradition of having all of your wealth wrapped up into one  currency or commodity is not safe or secure, and will likely become a  thing of the past as a free market in money emerges.