Addressing the claim that “Bitcoin has no intrinsic value”

November 24, 2023

“Is Bitcoin truly devoid of intrinsic value, making it forbidden in Islam?” This isn’t just a stray thought floating around social media; it echoes in numerous fatwas, often explicitly stating that “Bitcoin has no value in and of itself”. But this piece isn’t here to debate Bitcoin’s inherent worth. Instead, we’ll delve into the misconceptions that give rise to such claims. By harnessing insights from Austrian Economics, we aim to shed light on the fundamental misunderstanding of ‘intrinsic value’ in the realm of commodities.

Understanding value

Let’s start with understanding what value is. Carl Menger, the founder of the Austrian school of Economics, defines value as:

…the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.

So the value we derive from goods is how much they can satisfy us. However, this doesn’t mean that a good will satisfy the same way or same amount for each person. A good that may satisfy one person might not satisfy another person at all. Also, a good may satisfy the same individual differently based on particular circumstances. Let’s go through a few examples, which will require thinking in hypotheticals, that will demonstrate the subjective nature of value. 

Someone may claim that food has intrinsic value, but sometimes food can have no value to a certain person. For example, one person might value bread very highly, but a gluten intolerant person does not value bread at all because he can’t eat it and derive satisfaction from it. Therefore, bread doesn’t have value “intrinsically”, because if it did, this would mean that it would have value regardless of any person deriving satisfaction from it. But as we can plainly see, bread can only be valuable to a person that actually wants to consume it. 

Another example that illustrates the concept of subjective value is from Saifedean Ammous’s recent book, Principles of Economics, in which he demonstrates how oil went from having a negative value to a positive value:

Up until the nineteenth century, the presence of oil in a plot of land would decrease its value, as it required costly removal before the land could be utilized for agricultural, commercial, or residential use. For as long as human consciousness saw oil as a dirty nuisance, oil had negative economic value. Once humans realized that refined oil could be burned in an internal combustion engine to power machines that satisfy their needs for transportation, electricity, and heat generation, oil went from being a costly nuisance to an enormously valuable and essential commodity, which nobody in the modern world can now live without. Oil in the year 2020 is no different chemically and physically from oil in the year 1620, and yet its value has changed from negative to positive. While our conscious assessment of our needs cannot change the physical and chemical properties of oil, it can change its economic value. Oil went from having a negative to a positive value once human consciousness recognized it as useful

Nothing about the physical or chemical properties of oil changed throughout the years, yet the value of oil drastically changed once humanity discovered how to harness the energy from oil. 

Another point to understand about subjective value is that the valuation is conducted at the margins. What we mean is that the satisfaction an individual derives from a good is always done in relation to the last unit of that good. Per Bylund explains this concept of “marginal utility” in his book, How to Think About the Economy:

We never value things in themselves, but for the satisfaction we think they can provide us. A glass of water in the desert is probably more satisfying than a glass of water while loafing on the couch at home. Why? Because we value things by the satisfaction they can give us in the situation we are in. When loafing on the couch, the greatest satisfaction we can get from a glass of water is not nearly as high as when trying to stay hydrated and alive in a desert. And the more we have of something, the lesser the satisfaction of using another one. In fact, each unit of something is valued at the satisfaction we can get out of the last (marginal) unit. So in any situation, if we have three glasses of water, we value each of them less than if we had only two. But more than if we had had four. Because the value to us of any one glass is the satisfaction it contributes—the lowest and marginal value. That’s why we act differently depending on how many we have of something and how important those things are to us—what satisfactions we expect to get from them.

So when considering the hypothetical examples above, we can conclude that value is indeed subjective, and it depends on the person’s preferences and circumstances that will ultimately influence their valuation. A person does not just value one commodity for itself; the valuation is done in relation to other alternatives and preferences. 

From this, we can also conclude that the value of a commodity is not in itself, because there needs to be a person conducting the valuation. Think about this. How would we ascertain value intrinsically? And how would we even ascertain this value objectively? If we could measure value objectively, would we be able to reproduce the measurement of value consistently? We can’t measure units of value since, as we’ve already mentioned, each person will value every commodity, or more specifically, every unit of every commodity, differently based on particular circumstances. 

Application to gold

Now that we are armed with some knowledge on the nature of value, let’s analyze the claim that some critics use concerning gold, in that it has “intrinsic value”. These critics argue that gold possesses value beyond its function as a medium of exchange because it finds utility in various industrial and ornamental applications like electronics, jewelry, and dentistry.

This line of argument is true; gold does indeed have utility outside of its use as money. However, just because gold serves these diverse non-monetary purposes, doesn’t mean that these purposes bestow inherent value upon the metal itself. Gold’s value as an input into these non-monetary utilities is not a manifestation of “inherent worth” residing within the gold molecule itself. So, the subjective theory of value still applies to gold. Once again, value is contingent upon subjective human valuations.

To give another hypothetical scenario to further illustrate this point, imagine if, overnight, every individual suddenly found themselves in possession of 100 kilograms of gold in their homes. In such a situation, would gold still retain its perceived value? The answer is obviously no, it would not. If everyone were to possess such vast quantities of gold, the supply would overwhelm the demand, inevitably leading to a precipitous decline in its market price or its perceived worth. But herein lies the critical question: did anything intrinsic about the chemical composition of gold change in this scenario? The answer, unequivocally, is no. The intrinsic qualities of every gold bar remained unaltered. It did not gain or lose any “intrinsic” attributes. Yet, people began to appraise differently than they did before based on different circumstances.

The implications of the “intrinsic value” fallacy

So it should be apparent that “intrinsic value” is a fallacious concept, and it should not be used by Muslims scholars because it could lead to other erroneous concepts, like thinking value comes from the cost to produce something, or from the labor put into producing something. When we assert that value is intrinsic, it necessarily means that that value is something that can be measured objectively with units, and that it can be used in economic calculation because it’s the result of certain inputs. In the past, economists used to assert that value is the result of the amount or intensity of labor that is used to produce something. So the more labor that is used to produce something, the more valuable it is. This resulted in the erroneous thinking that since we can measure the amount of energy used in labor, it can therefore be used in equations to calculate the resulting value. Of course this is faulty thinking because there are commodities that require minimal labor to produce, and yet we value it highly. The inverse is also true. There are commodities that require a lot of labor to produce but that won’t be highly valued. 

The erroneous belief in the notion of “intrinsic value” carries broader implications, extending to the misinterpretation of aggregate metrics such as the Consumer Price Index (CPI) and Gross Domestic Product (GDP) as objective measures that can be used in calculations of value. Just because we can measure these economic metrics doesn’t mean that we can now suddenly make calculations on people’s subjective valuations. As Saifedean Ammous also mentions in Principles of Economics: 

… a deeper logical problem with quantitative approaches to economics is that they conflate the factors we can measure with the causative factors that shape the world around us

Misunderstanding the nature of value can also lead to the misguided notion that a government possesses the capability to decree value by fiat, or that fiat currency inherently embodies “intrinsic value” solely by virtue of its acceptance for tax payments. Additionally, it can cultivate support for centrally planned monetary policies aimed at artificially preserving a perceived “stable” value for currency. But due to value’s inherent subjective nature that’s conducted at the individual level, adopting a monetary policy at some arbitrary “stable” value doesn’t make any sense. And yet, we see these types of central planning policies adopted by all Muslims governments worldwide, and it’s even advocated by modern Islamic economic textbooks. For instance, in Umer Chapra’s book, “The Islamic Welfare State and Its Role in the Economy,” one of the proposed functions of the state is to ensure “stability in the value of money.” But of course, as we’ve already learned, it is evident that such a function cannot be effectively realized, as governments and financial institutions cannot prescribe or declare value for commodities, nor can they ensure any constancy in the value of goods since value remains inherently unmeasurable and unquantifiable. 

In the intricate world of economic thought, the idea of ‘intrinsic value’ stands as a persistent misconception, often leading scholars and policymakers down a path of flawed reasoning. Through examples from commodities like bread, oil, and gold, we’ve unveiled that value is a deeply subjective and individualistic concept, and it is ever-shifting based on circumstances and perceptions. The notion that something holds value in and of itself, irrespective of human judgment, is not only flawed but counterproductive, especially when shaping policies or theological perspectives. So when studying economics, whether from an Islamic perspective or not, it’s pivotal to embrace the nuanced understanding that value is inherently tethered to human perception and can never be truly ‘intrinsic’. This understanding not only enriches our economic discourse but also aligns us more authentically with the dynamic and interconnected world we inhabit.

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