The Concept of ‘Value’ and Cryptocurrencies

What is value? Not how much value that item is, but why is it worth that much? What is the value of gold? What is the value of that house, or car? If we express the value of these things in US dollars, what is the value of a US dollar? Why is the value of one US dollar that much, whatever it is? What is the value of Bitcoin, Ether, or Dogecoin? Not their price, their value. How come cryptocurrencies are valuable, what are they good for?

Who determines value? Supply and demand? Supply and demand determine price, not value. Thus, the concept of ‘consumer surplus’, which is basically the value that consumers create by paying less than they would be willing to.

Sometimes it is better to take a step back and focus on a more basic concept. Determining the ‘value’ of things is as old as trade. Valuation today is still a million-dollar, actually a billion-dollar question but what is value itself at the first place?

This concept, as we understand it today, has been studied by many economists and philosophers for around 200 years now, including Adam Smith, David Ricardo, Jean-Baptiste Say and Karl Marx. Even before, in ancient Greece Aristotle determined two different types of value; exchange and usage values. Value, back then, was studied under the concept of Ethics. This is followed by the emergence of two different theories; objective value theories and subjective value theories. Objective theories are more about the item itself to be exchanged and are more material and substantial. Subjective theories are more about the parties to exchange the item and focuses more on personal mindsets, hedonistic measures and psychological criterium.

Intrinsic and extrinsic values may be seen as similar to above distinction; former is about the asset itself and the latter has to do with the value of the asset relative to other things.

Top: Adam Smith, Karl Marx and David Ricardo, from left to right.

While A. Smith was emphasising more on exchange value, D. Ricardo preferred to define value as the amount of labour spent to produce that good. Well, this sounds more like ‘cost’ to me instead of value but I prefer to stay away from a possible controversy with one of the most influential classical economists, founder of many theories, writer, High Sheriff of Gloucestershire, and Member of Parliament of Great Britain and Ireland David Ricardo. J.B. Say on the other hand, focused on benefit and links value to the benefit that the good will bring to its holder. Finally, K. Marx was thinking closer to Ricardo and according to his doctrine value was about the effort and labour put forward to produce the good.

Today finance literature has plenty of value definitions, which are all quite boring to be honest, except one maybe; ‘investment value’. Investment value is the value of an asset to a particular investor. That investor believes that this asset will bring some specific benefits to them and will not to others. Therefore, they are ready and willing to pay a certain premium for that asset whatsoever.

Distinction between subjective and objective theories of value is quite intuitive. If the value of the same object would be different for different people, then value is subjective, as much as objective. This value may be derived from possible financial benefits like income generation or capital gains as in stocks and bonds, physical benefits like nutrition or accommodation, or convenience yield, such as memorabilia. Also, there is this huge concept of ‘value added’ but it is out of the scope of this writing.

So, value has something to do with a kind of benefit to is acquirer. You do not have to agree, or you may not be subject to the same benefits for any reason but at least you are expected to understand the reasoning of the acquirer behind the value given.

After examining the concept of value and its definitions in different contexts, I am having trouble making the connection between value and cryptocurrencies. They have price certainly, a highly volatile one, but I am talking about value, not price. I am trying to figure out what are they good for, what are they useful for. Apparently, these currencies, if you prefer to call them so, have an exchange value, which could be observed as market price, but a usage value. Without usage value, I am not sure if one asset should have exchange value at the first place. Sounds ironic to me.

I do not want to look down on this very comprehensive concept, I am just trying to understand. I am aware of crypto anarchism and its reasoning, and I sincerely respect it. I am also aware of the reasoning behind decentralised way of thinking and truly believe in the potential of distributed ledger technology. Blockchain is a totally different animal. What I cannot figure out is the valuation of those coins. I cannot answer why the value of that coin is that much, what is the benefit of that coin, other than buying two large pizzas for 410 million US dollars, with today’s exchange rate. Well, yes, it is unfair to make the conversion with today’s rate, for a deal done 12 years ago. At the time of the purchase, total cost of exchanged 10.000 Bitcoins was around 41 US dollars.

I am sure my generation would be familiar with the children’s card game ‘Old Maid’ (Papaz Ka?t? for my Turkish audience). It is a UK origin game that you discard the pairs in your hand and try to avoid being left with the ‘old maid’ card at the end, of which its pair was removed from the deck and left single. I cannot help cryptocurrencies resembling this game to me. There is no problem at having the old maid during the game, while you still can exchange cards. But at the end, when you no longer can pass it to other players, you are in trouble. And this is its only function; passing it to someone else, nothing else. Exchange value, without usage value. This does not resonate with me. At least for now.

Last sentence of above paragraph is a deliberate choice. Time changes and cryptocurrencies may one day have usage values. But for today El Salvador remains as a good reason to believe that these products need more time to be accepted as reasonable storage of value or a medium of exchange, two bare minimum features that are expected from a currency.

I also would agree that you cannot define today’s concepts with yesterday’s way of thinking. We may need new definitions. We may need new mindsets. I would agree. Then let’s do so because I can locate the value of these coins to neither today’s nor yesterday’s way of thinking.

I would like to stress the distinction that I make between platforms and their related currencies. I especially deem Ethereum platform worth following. Not Ether, the currency, but the platform. It can revolutionise the way agreements are made, or big purchases are settled.

History is written by the winners. Yet, the contribution of losers of the past to today’s way of living is undeniable. I do not know which ones of these concepts will remain 5 years from now. No one can, but it is not only about surviving. What is certain is that today’s concepts will be paving the way of tomorrow’s life, independent of if they will survive or not. This is the very reason that I feel obliged to understand the essence of these concepts and understand what they are really about. Seemingly the ‘value’ of cryptocurrencies is something that I need more time to comprehend.