I recently had the opportunity to listen to a talk from an “A-list” entrepreneur in cybersecurity. Given his background and knowledge of cryptography, my hand was the first to shoot up at question time to ask about one of my favorite things — Bitcoin. “It has no intrinsic value,” was the response. Many intelligent people share this belief, which I do not presently find to be supported by logic and truth when considering Bitcoin from an appropriate variety of perspectives.

The concept of “intrinsic value” varies with context. In the traditional financial sense, it means the present value of the future free cash flows an asset will produce over its lifetime. This might be why many finance professionals frown on Bitcoin — it produces no cash flows, and one’s return on investment depends on what someone else thinks it is worth when the owner wants to sell.

However, a lack of cash flow or popularity does not mean something has no intrinsic value.1 Ideas and their physical representations can have immense value, even if to only a small number of people who appreciate that the embodied ideas represent civilization-changing concepts. Assets that improve the world often go up in value over time, as intellectually curious people with excess financial resources learn about them; the natural question then becomes, “What makes Bitcoin uniquely qualified to potentially alter society for the better?”

At their core, fiat currencies are accountability systems backed by localized monopolies on violence.2 They derive their value from the State’s ability to enforce contracts, collect taxes and maintain constituent-sanctioned exclusivity on physical force within a defined territory. Every so often, local monopolies on violence disagree with other monopolies, ultimately culminating in war, money printing and suffering. Indeed, the terminal value of an unchecked monopoly on violence is zero, which might explain why every fiat currency in history has lost its purchasing power over time.3 Societies where control over the currency is most separated from control over the infantry may lose their value more slowly, but history has shown their accounting units lose value nonetheless.

Understanding truly novel technologies and concepts requires internalizing wide contextual nuance. This is especially true for a new paradigm on what constitutes a robust system of capital governance. Money is a complex system that few people understand at a deep level; indeed, more people probably own Bitcoin than could explain how new units of dollars or yen come into existence. Prior to Satoshi’s white paper,4 no viable ledger system existed that combined transparent supply logic with truly decentralized governance and a growing physical energy requirement to create new units. It does now, though few people yet appreciate its potential to change our political systems over the long haul by obviating the most unaccountable actors and systems.

If understanding the potential for society-altering technologies is a time-intensive process, adopting them can be even more so. Consider that it took almost a century for running water to go from “possible” to “ubiquitous,” and the benefits of that system were much more immediately apparent than the benefits of a world opting in to a Bitcoin standard. However, causal ambiguity in network formation has led to some of the most dominant assets of all time, and it looks like Bitcoin is on a similar path after sixteen years of extraordinary returns.

So, what exactly is the intrinsic value of Bitcoin? Putting a precise value on it is more art than science, but in a world with over a quadrillion dollars of capital,5 I believe today’s market value for the network at ~$1.2 trillion6 is far too low. An incomplete starting point would be the market cap for gold, in many ways a functionally inferior substitute as a psychological check on profligate fiat behavior. If the entire world viewed Bitcoin as such, it would trade at ~$1.4 million per coin versus a current value near $60,000.7 Of course, it is much easier to exchange, store and audit Bitcoin than gold, so this fails to capture its total potential. Viewed as a more robust network of capital governance, the potential should be far higher, and education takes time. It’s still early.

Bill Miller IV, CFA CMT
Miller Value Partners
@billfour

Stay connected with us for updates and insights. Subscribe.
Follow us here, here and here.