<p>In general, it is possible to find assets that earn a positive yield. There are still positive-yield low-risk bonds and savings accounts out there, for most currencies.</p>

<p>Therefore, rational people should in general prefer these to a higher-risk asset which has zero yield.</p>

<p>So, your quote is saying that the only way that rational people will choose to hold a zero-yield high-risk asset such as bitcoin, is if there is a significant chance that the asset will increase in value. There's no yield, so the only way to get a return is if the asset increases in value. If bitcoin doesn't do that, then no rational person will hold it.</p>

<p>It's the same principle as with any other ponzi scheme: the only way that existing investors can get any return, is to draw in new investors, and take their money off them.</p>

CC BY-SA 3.0
2016-07-25T10:08:35.797Z
for the sake of argument, let's assume that the "value" (USD) per bitcoin remains static (or fluctuates, but eventually approaches a static value).  Therefore it's a ponzi scheme?  That's quite a leap.  (It may be a ponzi scheme, or at least bubble, for those **holding** bitcoin, but how does that invalidate using it as currency?)
Thufir
CC BY-SA 3.0
2016-07-25T11:32:10.343Z
It seems important to distinguish between Bitcoin's use as an asset and as a currency. EnergyNumbers' answer explains the asset side.
Giskard
CC BY-SA 3.0
2016-07-25T12:58:32.450Z
Well, what is the value of the asset?  If the argument is that because bitcoins have no inherent value then, as they can't "increase" in value, no rational person should hold bitcoin.  Fair enough.  How does that connect with its use as a currency?
Thufir
CC BY-SA 3.0
2016-07-25T13:04:58.990Z
@Thufir: The value is whatever someone is willing to trade for it, just like any other asset, with  "trade" being defined as "providing a tangible good or service."  In that way, it's not all that different from gold, any other currency, or a bond.
Robert Harvey
CC BY-SA 3.0
2016-07-25T13:10:17.520Z
@Thufir: it's true, by almost the same argument rational people won't "hold" physical cash as an investment. The difference is that EnergyNumbers (reasonably) supposes bitcoin to be high-risk, whereas banknotes are very low-risk. They're also zero return, and other very low-risk investments give better than that. So *as an investment* bitcoins don't work unless they increase in value, but their "inherent value" is the capability to exchange them as a currency, not merely their investment potential. People could "own" them for use without "holding" them as an investment.
Steve Jessop
CC BY-SA 3.0
2016-07-26T06:57:52.757Z
@SteveJessop and yet it's implied that because 1.)  they don't appreciate and 2.) you can't pay taxes *therefore* their exchange rate will go towards zero and thus aren't suitable for currency.
Thufir
CC BY-SA 3.0
2016-07-26T09:03:56.537Z
Well, the article says, "That would be fine if Bitcoin were simply a unit of account ... but all the interest in Bitcoin is in the [expectation of] steady appreciation". So the stated problem with its use as a currency is that people are speculating in it. Which is true. Indeed, relative to all useful commodities it is way too volatile at the moment for macro use as a currency anyway. We may never see how it works out as a currency, but there have in the past been effective currencies that have neither practical use nor government fiat. Everyone's favourite is Rai stones.
Steve Jessop
CC BY-SA 3.0
2016-07-25T09:18:40.450Z
2016-07-25T09:18:40.450Z
410 gone
<blockquote>
  <p>What is the reasoning behind the notion that because bitcoin has no intrinsic 
  value therefore it's not suitable as currency? Or, to put another way, if no one 
  "held" US dollars, but simply used them to spend or invest, would that 
  invalidate it as a currency for buying chickens?</p>
</blockquote>

<p>The author addresses the difference between bitcoin and fiat currency (such as greenbacks):</p>

<blockquote>
  <p>Because of their power to tax, governments can make money by fiat, simply by 
  declaring their willingness to accept that money in repayment of tax debts.</p>
</blockquote>

<p>I'll be honest and admit that I hadn't heard that argument before and off the cuff, it makes sense.  Because the government can impose taxes and require they be paid in dollars, the demand for dollars will exist at least as long as the government has the power to tax.</p>

<p>I find this part of the argument to be pretty weak:</p>

<blockquote>
  <p>As with any kind of asset used as currency, from gold to tobacco to U.S. 
  dollars, Bitcoin is valuable as long as people are willing to accept it. But 
  in all of these examples, willingness to hold the asset depends on the fact 
  that it has value independent of that willingness. Tobacco can be smoked or 
  chewed, gold can be used to fill teeth or make jewellery...</p>
</blockquote>

<p>The problem here is that the demand of gold for jewelry and other industrial purposes is minuscule and can't come anywhere close to justifying the price of gold (even in down markets.)  If we believe this argument, the price of gold is going to go down so far that it might as well be zero.</p>

<p>The argument that I find convincing for why gold has been used as money for so long is that it's physical properties make it extremely suitable for that purpose.  It's not consumable (e.g. you don't put it in your pipe and smoke it.)  It is extremely stable: the list of fluids that will dissolve it is extremely short, it doesn't rust or sublimate.  It is easy to smelt.  It's heavy; making small amounts easy to measure.  It's purity is relatively easy to determine.  </p>

<p>It created a universal standard against which the value of other things could be measured so that people didn't have to determine how many chickens was a cow worth.  Even if you were bartering, the relative value of the items could be determined based on their price in gold.  As evidence of this it is said that the discovery of the <a href="https://en.wikipedia.org/wiki/Touchstone_(assaying_tool)" rel="nofollow">touchstone</a> sparked the explosion of trade in the ancient world.  Nowadays very few people accept gold as payment so the demand for gold seems to be mostly fear-driven.  People believe that if fiat currencies falter or fail, gold will return to it's position as the universal measuring stick of value.  Only time will tell whether they are right.</p>

<p>Where does bitcoin fit into this?  It seems to me part the demand for bitcoin comes from illegal activity.  As long as hackers continue to demand ransoms in bitcoin, it's a bit like fiat currency.  It's not a measure of value.  It's value is measured in terms of fiat currencies like dollars.  Bitcoin meets a need: a digital equivalent of cash.  Technically it is traceable but it more or less fits that need.  The biggest concern for bitcoin should be is that there's nothing inherent about it that makes it unique.  Unlike gold, another competing system could be created at any time.  There's been talk of a bitcoin 'fork'.  If someone were to come up with a better system (say something that is impossible to trace) it might very well drop to zero.</p>

CC BY-SA 3.0
2017-12-30T00:21:02.973Z
"*But in all of these examples, willingness to hold the asset depends on the fact that it has value independent of that willingness. Tobacco can be smoked or chewed, gold can be used to fill teeth or make jewellery.*" The author confuses use-value and value here. Tobacco has a use-value that is independent from its use as a currency. Gold's main use-value is as currency; as you point out, its use value as anything else is marginal (nowadays, it seems to be getting important in eletronics). But both, tobacco and gold, have value: they take labour to produce. What labour produces bitcoins?
Luís Henrique
CC BY-SA 3.0
2018-01-02T15:37:11.793Z
@LuísHenrique Well, there is the [high energy consumption of mining](https://arstechnica.com/tech-policy/2017/12/bitcoins-insane-energy-consumption-explained/).  I'm not sure if that is what you mean though.  It does put a lower limit on the required value of bitcoin if it is to be worth mining.  However, the value of something is not defined by the labor it takes to create.  The value of something is based on its usefulness.  For example, I can spend an immense amount of time crafting a crude knife from stone.  But it would be worthless because any cheap mass-produced knife has more utility.
JimmyJames
CC BY-SA 3.0
2016-07-25T14:01:49.317Z
2016-07-25T17:24:01.527Z
2016-07-25T17:24:01.527Z
JimmyJames
<p>What does the author mean with:</p>

<blockquote>
  <p>Since Bitcoins do not generate any actual earnings, they must
  appreciate in value to ensure that people are willing to hold them.</p>
</blockquote>

<p>Why <strong>must</strong> they appreciate in value?  Is the assumption that people <strong>must</strong>  hold bitcoin?  Why is it necessary or required to hold bitcoin?</p>

<p>Or, is the author saying "eh, what goes up must come down."  Instead, the article seems argue that bitcoin will go to a "value" of zero:</p>

<blockquote>
  <p>...Bitcoins are the most demonstrably valueless financial asset ever
  created...</p>
</blockquote>

<p>Isn't one of the criticisms to using gold as a currency that it's then tied up as a currency and not being <strong>used</strong> functionally?  Does the inherent valuelessness of bitcoin, or any other cryptocurrency, make it suitable for transactions?</p>

<p>Sure, bankers hold currency, but few individuals actually hold currency directly.  Generally money is spent or invested in quick order.  Which seems not directly related to adoption of bitcoin (or other cryptocurrency) for <em>transactions</em>.</p>

<p>What is the reasoning behind the notion that <em>because</em> bitcoin has no intrinsic value therefore it's not suitable as currency?  Or, to put another way, if no one "held" US dollars, but simply used them to spend or invest, would that invalidate it as a currency for buying chickens? </p>

<p><a href="http://nationalinterest.org/commentary/the-bitcoin-bubble-bad-hypothesis-8353?page=2" rel="nofollow">http://nationalinterest.org/commentary/the-bitcoin-bubble-bad-hypothesis-8353?page=2</a></p>

<currency><inflation><deflation><bitcoin><economic-bubble>
because bitcoins do not generate earnings, then (it is a ponzi scheme)?
Thufir
# because bitcoins do not generate earnings, then (it is a ponzi scheme)?

(Asked by: username_0 on 2016-07-25)

What does the author mean with:

> Since Bitcoins do not generate any actual earnings, they must
> appreciate in value to ensure that people are willing to hold them.

Why **must** they appreciate in value? Is the assumption that people **must** hold bitcoin? Why is it necessary or required to hold bitcoin?

Or, is the author saying "eh, what goes up must come down." Instead, the article seems argue that bitcoin will go to a "value" of zero:

> ...Bitcoins are the most demonstrably valueless financial asset ever
> created...

Isn't one of the criticisms to using gold as a currency that it's then tied up as a currency and not being **used** functionally? Does the inherent valuelessness of bitcoin, or any other cryptocurrency, make it suitable for transactions?

Sure, bankers hold currency, but few individuals actually hold currency directly. Generally money is spent or invested in quick order. Which seems not directly related to adoption of bitcoin (or other cryptocurrency) for *transactions*.

What is the reasoning behind the notion that *because* bitcoin has no intrinsic value therefore it's not suitable as currency? Or, to put another way, if no one "held" US dollars, but simply used them to spend or invest, would that invalidate it as a currency for buying chickens?

<http://nationalinterest.org/commentary/the-bitcoin-bubble-bad-hypothesis-8353?page=2>

**Tags:** currency, inflation, deflation, bitcoin, economic-bubble

---

## 2 answers

### Answer by username_5 on 2016-07-25. Score: 5 | Accepted answer

> What is the reasoning behind the notion that because bitcoin has no intrinsic
> value therefore it's not suitable as currency? Or, to put another way, if no one
> "held" US dollars, but simply used them to spend or invest, would that
> invalidate it as a currency for buying chickens?

The author addresses the difference between bitcoin and fiat currency (such as greenbacks):

> Because of their power to tax, governments can make money by fiat, simply by
> declaring their willingness to accept that money in repayment of tax debts.

I'll be honest and admit that I hadn't heard that argument before and off the cuff, it makes sense. Because the government can impose taxes and require they be paid in dollars, the demand for dollars will exist at least as long as the government has the power to tax.

I find this part of the argument to be pretty weak:

> As with any kind of asset used as currency, from gold to tobacco to U.S.
> dollars, Bitcoin is valuable as long as people are willing to accept it. But
> in all of these examples, willingness to hold the asset depends on the fact
> that it has value independent of that willingness. Tobacco can be smoked or
> chewed, gold can be used to fill teeth or make jewellery...

The problem here is that the demand of gold for jewelry and other industrial purposes is minuscule and can't come anywhere close to justifying the price of gold (even in down markets.) If we believe this argument, the price of gold is going to go down so far that it might as well be zero.

The argument that I find convincing for why gold has been used as money for so long is that it's physical properties make it extremely suitable for that purpose. It's not consumable (e.g. you don't put it in your pipe and smoke it.) It is extremely stable: the list of fluids that will dissolve it is extremely short, it doesn't rust or sublimate. It is easy to smelt. It's heavy; making small amounts easy to measure. It's purity is relatively easy to determine.

It created a universal standard against which the value of other things could be measured so that people didn't have to determine how many chickens was a cow worth. Even if you were bartering, the relative value of the items could be determined based on their price in gold. As evidence of this it is said that the discovery of the [touchstone](https://en.wikipedia.org/wiki/Touchstone_(assaying_tool)) sparked the explosion of trade in the ancient world. Nowadays very few people accept gold as payment so the demand for gold seems to be mostly fear-driven. People believe that if fiat currencies falter or fail, gold will return to it's position as the universal measuring stick of value. Only time will tell whether they are right.

Where does bitcoin fit into this? It seems to me part the demand for bitcoin comes from illegal activity. As long as hackers continue to demand ransoms in bitcoin, it's a bit like fiat currency. It's not a measure of value. It's value is measured in terms of fiat currencies like dollars. Bitcoin meets a need: a digital equivalent of cash. Technically it is traceable but it more or less fits that need. The biggest concern for bitcoin should be is that there's nothing inherent about it that makes it unique. Unlike gold, another competing system could be created at any time. There's been talk of a bitcoin 'fork'. If someone were to come up with a better system (say something that is impossible to trace) it might very well drop to zero.

> **Comments:**
> **username_6**: "*But in all of these examples, willingness to hold the asset depends on the fact that it has value independent of that willingness. Tobacco can be smoked or chewed, gold can be used to fill teeth or make jewellery.*" The author confuses use-value and value here. Tobacco has a use-value that is independent from its use as a currency. Gold's main use-value is as currency; as you point out, its use value as anything else is marginal (nowadays, it seems to be getting important in eletronics). But both, tobacco and gold, have value: they take labour to produce. What labour produces bitcoins?  
> **username_5**: @LuísHenrique Well, there is the [high energy consumption of mining](https://arstechnica.com/tech-policy/2017/12/bitcoins-insane-energy-consumption-explained/).  I'm not sure if that is what you mean though.  It does put a lower limit on the required value of bitcoin if it is to be worth mining.  However, the value of something is not defined by the labor it takes to create.  The value of something is based on its usefulness.  For example, I can spend an immense amount of time crafting a crude knife from stone.  But it would be worthless because any cheap mass-produced knife has more utility.  

---

### Answer by username_1 on 2016-07-25. Score: 2

In general, it is possible to find assets that earn a positive yield. There are still positive-yield low-risk bonds and savings accounts out there, for most currencies.

Therefore, rational people should in general prefer these to a higher-risk asset which has zero yield.

So, your quote is saying that the only way that rational people will choose to hold a zero-yield high-risk asset such as bitcoin, is if there is a significant chance that the asset will increase in value. There's no yield, so the only way to get a return is if the asset increases in value. If bitcoin doesn't do that, then no rational person will hold it.

It's the same principle as with any other ponzi scheme: the only way that existing investors can get any return, is to draw in new investors, and take their money off them.

> **Comments:**
> **username_0**: for the sake of argument, let's assume that the "value" (USD) per bitcoin remains static (or fluctuates, but eventually approaches a static value).  Therefore it's a ponzi scheme?  That's quite a leap.  (It may be a ponzi scheme, or at least bubble, for those **holding** bitcoin, but how does that invalidate using it as currency?)  
> **username_2**: It seems important to distinguish between Bitcoin's use as an asset and as a currency. EnergyNumbers' answer explains the asset side.  
> **username_0**: Well, what is the value of the asset?  If the argument is that because bitcoins have no inherent value then, as they can't "increase" in value, no rational person should hold bitcoin.  Fair enough.  How does that connect with its use as a currency?  
> **username_3**: @Thufir: The value is whatever someone is willing to trade for it, just like any other asset, with  "trade" being defined as "providing a tangible good or service."  In that way, it's not all that different from gold, any other currency, or a bond.  
> **username_4**: @Thufir: it's true, by almost the same argument rational people won't "hold" physical cash as an investment. The difference is that EnergyNumbers (reasonably) supposes bitcoin to be high-risk, whereas banknotes are very low-risk. They're also zero return, and other very low-risk investments give better than that. So *as an investment* bitcoins don't work unless they increase in value, but their "inherent value" is the capability to exchange them as a currency, not merely their investment potential. People could "own" them for use without "holding" them as an investment.  
> **username_0**: @SteveJessop and yet it's implied that because 1.)  they don't appreciate and 2.) you can't pay taxes *therefore* their exchange rate will go towards zero and thus aren't suitable for currency.  
> **username_4**: Well, the article says, "That would be fine if Bitcoin were simply a unit of account ... but all the interest in Bitcoin is in the [expectation of] steady appreciation". So the stated problem with its use as a currency is that people are speculating in it. Which is true. Indeed, relative to all useful commodities it is way too volatile at the moment for macro use as a currency anyway. We may never see how it works out as a currency, but there have in the past been effective currencies that have neither practical use nor government fiat. Everyone's favourite is Rai stones.  

---

