How Bitcoin Illustrates the Limitations of Intrinsic Value

What is the intrinsic value of gold? Or copper, lead, zinc, even diamond? 

I’ll save you time. It’s zero. 

Businesses, bonds, real estate even people have intrinsic value in as much as they are or possess assets that will always command a use or will always be in need. Objects don’t have any intrinsic value. All their value is extrinsic: that is, its dependent on what people do with them. 

Which brings me to the question: what is the intrinsic value of a digital piece of code that can be used to transact anonymously in any market across the internet. What is Bitcoin worth? $0 if no individual or countries use it, obviously. Or thousands and potentially millions if it’s used and accepted all over by people and nations. 

Copper is valued because it’s used all over. And it’s used because it can be shaped easily and it conducts electricity better. Based on Bitcoin’s pattern of use and the things it makes possible by virtue of its attributes, it has value. I bought Bitcoin at $450 and I was late to the party because at the time I first knew about it there was no established pattern of use (Outside the dark web) so I had no way to determine if it does what Satoshi claims it does. If you can’t tell, my investing skews towards fundamentals and value. 

Once I understood that Bitcoin’s value is extrinsic: that is derived from its patterns of use, I could estimate demand and therefore price. I placed my bet around $1700 for THIS year. I wrote about it on this blog.

It did climb past that into almost $3,000 fueled by a speculative bubble which I also called. Since that time, it has come back down to $1800, and currently is around $2200, disappointing a lot of speculative buyers even though it’s still a standard deviation or two above the target price I set (which isn’t an exact estimate anyway) and still over 100% higher than its price at the start of the year.

Obviously as countries react to the possibilities Bitcoin presents in differing ways and as security and technology issues affect Bitcoin, the patterns of use will change which will change the demand which will change the price. The thing with extrinsic value is that it doesn’t sit still. 

But saying that because something has no intrinsic value that it cannot be valued at all is lazy. You just have to change your parameters. And then track them constantly. 

And profit from the swings. The 388% and 103% profits Im sitting on in Bitcoin and Ethereum respectively is modest compared to some I’ve seen but it is real money. That I wouldn’t have made if I let a little absence of intrinsic value make me sit this out. 

Flourish

My company can make you returns of around 40-42% on invested capital in a year, terms and conditions apply. If we can be of help to your investing results, reach out to me on Twitter @eldivyn and we can talk about your needs and our products.

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