They're most similar to a commodity, like gold, or lumber. There's a supply, a demand, and price. Unlike stocks, there's no underlying asset, you just own the crypto currency and that IS the asset.
But you are right to realize Bitcoin has no intrinsic value. That makes it very similar to something like a dollar bill.
That said, intrinsic value isn’t really what makes currency valuable. It’s a nice feature... if the bottom drops out of the market and your currency is cigarettes... at least you can smoke them! And trade them for some other currency at the price of smokes.
But that’s a very special circumstance. Intrinsic value only matters under one very special circumstance: Total market collapse. Under normal circumstances, what matters is use value.
And Bitcoin has some very unique use value. For example, it is a thing that can be exchanged for gold that can be stored in your head. That’s a very unique use. I think those kinds of uses, if you can add up their utility, are the best way to calculate Bitcoin’s long term value.
"Tulip mania was a period in the Dutch Golden Age during which contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels and then dramatically collapsed in February 1637. It is generally considered the first recorded speculative bubble in history." - Wikipedia
Yes tulips have intrinsic value, but not the value speculators were paying for them during the Dutch tulip bubble leading up to 1637. Cryptocurrencies are very similar to that.
Like gold?
Anything you can use directly has intrinsic value. Intrinsic value is a negligible part of the total value of gold. But it's a significant part of the total value of e.g. cereal grain, which is historically a common monetary commodity.
Other commodities like timber have much more intrinsic value because they are mostly used, not speculated on. If people stopped speculating in the timber market there would be less liquidity but the price wouldn't change much, people still want to build things with it.
Cryptocurrency has no fundamental value, it's a digital good without practical applications and no fundamental demand. if the speculation stopped, the price would go to zero.
The fundamental value for it's technical applications is probably < 1/10 of it's real value.
If people wake up tomorrow and stop using it as reserves/ investment /savings, you would loose virtually all your money, down to a few percent. So yeah, that 5% or whatever of value is secure, but how nuch does that help?
Timber is obviously not a usefull store of value because it does not last, it is not fungiable, is expensive to store - imagine 100 million dollars worth of timber, and you would store that.
My point was that tangible commodities do have at least some intrinsic value, as opposed to digital commodities like cryptocurrencies.
That ability gives it value for people who need that. For some people and use-cases, that ability is comparable to how gold is valuable for its ascetic and chemical properties.
It has an 'intrinsic value' in the context of this discussion if it's useful as something other than a currency, obviously.
I'm not saying Bitcoin is necessarily on that path, but there's also no reason it couldn't be, and whether it is or isn't isn't related to any intrinsic value it might or might not have. And lots of things that do have intrinsic value, like grain, are terrible investments because they're easy to make more of and because they don't store indefinitely. "Intrinsic value" is just an orthogonal concern.
Fiat currency has no intrinsic value itself, but it can be exchanged for things that do. As long as people treat it like it has value, then it does have value.
The same can be sort of be said for crytocurrency. But it's a lot less liquid, mostly the only thing you can do with it is trade it for other cryptocurrencies or sell it. It's on much shakier ground that people will continue to view it as having value.
My advice, for what it's worth, until people find a practical application for it, stay away from it.
Fiat currency emitted by governments has intrinsic value: you can pay taxes to the emitting government with it. That's its ultimate value.
In the same vein, some cryptocurrencies have value: you pay with Ether for distributed computations performed by Ethereum network, you way with Bitcoin for your data being permanently recorded on the Bitcoin chain.
Guess what ... your dollars today are not made out of gold. They have no intrinsic value.
The real question is, is it still early days for Bitcoin, in which case it would make sense to get into it now (albeit still risky)? Or are the early days over and all those gains have already been realized? You'd need a crystal ball to know for sure.
??? Most currencies are backed by something. USD's are backed by TBills, Euros are backed by some kind of asset.
"There's lots of things with fundamentally no intrinsic value " like what?
Gold and Diamonds people wear as jewelry, and they have other uses.
Platinum, were it plentiful, means we might have all shifted to fuel cells 2 decades ago.
Gold probably has an inflated price due to it's historical value as 'money' - but outside of that, there's basically nothing that people put significant amounts of money in without some kind of intrinsic value.
Oh yeah? And what assets are these exactly? It sounds to me like you're just describing things without intrinsic value that are "backed" by other things without intrinsic value. There is no economist that would tell you that government currencies or bonds have "intrinsic value"; they're just paper. Their value can go entirely to zero (and this has happened many times in the past).
> "There's lots of things with fundamentally no intrinsic value " like what?
Anything collectible has no inherent value. Think baseball cards, art, whatever. They're worth money only because they're rare and people are willing to pay big for them. But the actual intrinsic value of the materials in a rare painting worth hundreds of millions of dollars might be a few bucks at best.
And yes, precious metals do have intrinsic value as defined by economists. Currency doesn't.
Ok then, I'll trade you any Government Bonds you might have (aka 'paper') for let's say, $100? I mean, worth more than paper, right?
Why do people have such difficulty grasping the abstraction of credit? And that it has value?
The entire system is based on credit - which is more intangible that 'bushels of wheat' or 'shiny rocks' but frankly it's not that hard to grasp.
The bonds are not 'paper' they are a 'promise to provide some value' - and most people take TBills at at least face value because the US Gov tends to honour the contract.
A currency based on a shiny rock has only one, small possible advantage, in that there is essentially a fixed supply of said rocks, and that it cannot be debased, however, this is in most ways not an advantage i.e. it precludes the possibility of any monetary policy.
Ergo we have systems of credit, currency based on that, and a whole bunch of rules around it.
"But the actual intrinsic value of the materials in a rare painting worth hundreds of millions of dollars might be a few bucks at best."
No, when things are configured in a certain way, they have value more than the constituent parts. A 'Tractor' is worth more than the 'Metal' it is made from. 'Art' is something that people like to look at beyond it's constituent bits of paper and dyes.
Yes, it's abstract, but it's not hard to grasp.
a. you whip out a golden coin (intrinsic value) and they will give you food.
b. you whip out a Government Bond (no intrinsic value) and they will look at you like you are stupid because they have no idea what a Government Bond is
Value is just the measure of the willingness of people to give you something in exchange for something else. It's not in the objects themselves, but in the head of the people.
This is beginning to change. In the DeFi space, the token often provides voting rights and a share in generated revenues.