Bitcoins can transform value


On Feb. 24, hackers crashed and seemingly bankrupted Mt. Gox, the third largest Bitcoin exchange, sending prices rope-a-doping by $300/BTC. It’s time to look deeply at how the cybercurrency derives its value.

Among “alternative investments,” precious metals are the average Joes, rare art and microloans are the hipsters and Bitcoins are the awkwardly nerdy yet strangely cool new kids on the block. This trendiness can explain the fascination, but cannot justify the $500-1200 price tag. To warrant its lofty valuation, Bitcoin must complete its evolution from experimental curiosity to accepted currency, an achievement that would necessitate overturning societal conceptions of money entrenched by history. To be worth hundreds of dollars, Bitcoins must alter the world’s view of a dollar’s worth — a material feat for figments of cyber-ether.

Debate over monetary value once dichotomized monetary theory. The traditional, currently marginalized Real Bills Doctrine, or backing theory, believes money’s worth is derived from its issuer’s assets, while mainstream quantity theory holds that supply and demand determine monetary value. Though 19th-century bankers, as backing theorists, would balk if claims to ounces of gold were worth anything else than an ounce of gold each, quantity theory is Federal Reserve System Chairman Ben Bernanke’s guiding light. Despite this, typical Americans would likely be uneasy with the idea that the sizes of their nest-eggs depend indirectly upon their neighbors’ demand for dollars.

Even though we might conceptually dislike the idea that dollars in our pockets are worth a dollar each solely because someone will give us a dollar’s worth of something for them, an increasing number of us are willing to bet that Bitcoins are worth hundreds and will soon be worth hundreds more because someone will buy them from us at that higher price. Applied to asset bubbles, this logic is called the “greater fool” fallacy. This decade’s examples include the ill-fated tech companies and mortgage derivatives which enticed investors by possessing the exciting combination of being both uncertain and promising. With their unidentified inventor and freedom from regulation and oversight, Bitcoins have this exact combination of curio value and potential.

Though dollars are governmentally backed legal tender, precious metals are used in electronics and jewelry, and rare art has assumedly immutable cultural significance. Bitcoins, though fixed in supply, are nothing without their purported fiscal functionality.

Money is by definition an instrument to facilitate acquisition and sale. In money’s secondary purpose, however, being a store of value, paradox lies. Currencies must serve as stable bases to denominate value despite having little value without the presence of the things whose worth they denominate. A dollar’s worth of food must remain a relatively consistent quantity for dollars to be useful. Consequently, Bitcoin cannot be a conventional currency if it continues to fluctuate in value.

Perhaps conflation of this stability with true intrinsic worthiness leads people to view money as inherently valuable. Relatedly, a 1983 study found a 10-year period of inflation resulted in British citizens perceiving 10-year-old pound notes as physically larger than same-sized new ones. The degree to which our attempted logical assessment of money’s value is subject to subconscious irrationality invites the question of whether monetary value is actually objectively derived. Karl Marx proposed that money is entirely relational and subjective, writing,  “[Money] is now capital even as a mere thing … The movement through which this process has been mediated vanishes in its own result, leaving no trace behind.”

Marx believed abstract economic notions of monetary value are psychologically reified into object physicality, and that this psychological transformation occurs unbeknownst to us, “vanishing in its own result” and hiding from us the true source of this perceived value. Though Marx developed this concept into capitalism denouncing “commodity fetishism,” his ideas about money stand separate from his communist ideology.

Bitcoins take Marx’s psychological reification a step further. Rather than imbuing physical objects with abstractly derived value, BTC believers ascribe intrinsic worth to virtual 1’s and 0’s, assigning abstract value to an abstraction. Until Bitcoin, monies have all had links to the real, tangible world that served to imbue them with a measure of intrinsic value, at least in their users’ minds. Whether these physical underliers are of functional importance remains unclear.

If Bitcoins realize their purported transactional superiority, they can then test the importance of tangibility to the societal conception of value. Should they become a mainstream currency, Bitcoins, in lacking backing and government regulation, would free monetary value from institutional determination, transferring this power into the market’s invisible hands of collective judgment. Members of society would then jointly and absolutely control their currency’s value, a democratic notion Marx would likely approve of. Perhaps, however, the regulation of currency values is as essential as representative governance, and Bitcoins will prove as idealistic as pure democracy, their rise and fall standing as another example of the financial tyranny of the crowd that is a market bubble.

Benjamin Diaz

Senior, economics