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Source: www.wikiart.org
Being the crypto-fans that we are, have you heard this oft-too-expressed question: "Bitcoin is just a digital currency, what gives it any value?"
In response, how many of you start on an in-depth monologue about what it is, how it works and how it will change the world?
Over the centuries philosophers and economists have been putting a lot of thought into what defines value.
According to Marxist economics, the labour theory of value espouses that value is generated by the amount of labour added to making a good or delivering a service.
Plato's intrinsic value theory states that a thing has value based on its use or potential use. For example, gold is valuable because it can be formed into jewellery.
Unfortunately, both of these are wrong.
The answer is much simpler and it comes directly from the Austrian school of economics which has long ago defined what value is. To wit, value is subjective.
Each person values things according to his own preferences, desires, needs, feelings, and many other factors. Furthermore, each person may change his value scale on any given day. On Monday he may feel that $6 is a fair price for a pint of beer, but by Thursday he thinks that $5.50 is a more reasonable price.
Of course in order to settle a transaction the producer must agree to a price as well. His value scale will also include the costs in producing the good. But, just because something costs a certain amount to produce, does not mean consumers are willing to pay that price. Now multiply that type of thinking by the myriad of people participating in an economy and eventually an equilibrium price is reached and a market can clear. Note that supply factors in here too. Assuming a fixed demand, the less of something that is available the higher the price and vice versa.
Another point to consider is the concept of diminishing marginal benefit. Generally, for every additional unit of a good, a person will typically value that additional unit less. Think about buying popcorn at a movie theatre. You may value that first bag of popcorn to be worth $4, but the second might be only worth $3.50 and perhaps the third, $2.90. After all, one can only consume so much popcorn in one sitting.
So tying this in to bitcoin (or any cryptocurrency for that matter), the answer is simply that bitcoin is worth $X USD because the market participants obey the laws of supply and demand and their own subjective value scales. Why was bitcoin trading in the teens in 2011 and now in the thousands? It seems to me that as more people realise the benefits of using bitcoin, they come to find that they value it more and more.
I'll leave you with one funny story of subjective value. Years ago, the Canadian government purchased a large painting called the Voice of Fire for $1.76 million. It is three stripes. Now, jokes about government waste aside, somebody somewhere thought this was a good price. I'm no artist, but I'm sure I can draw something similar (and I'd only charge $1.2 million :)). Great example of subjective value theory.
So the next time somebody asks what gives bitcoin its value, try giving them a more economic answer rather than a technical one.
