While crypto is not in the news as much as it was a year ago,[2] much of the news now centers around the pending fraud trial in the aftermath of the collapse of FTX. The New York Times,[3] CNBC[4] and Reuters,[5] among others, have all announced some version of the theme “crypto is dead,” but an interesting fact remains:
The total market capitalization of crypto still exceeds a trillion dollars.[6]
For comparison, that’s more than the market cap of each of the stock markets of Brazil, Sweden, Spain, Italy, Denmark, and Singapore. It’s about the same as the estimated value of all the world’s silver.[7]
One crypto “currency”, Bitcoin, accounts for about half of the market cap of all cryptos combined. For the remainder of this article, unless otherwise noted, we will talk about Bitcoin rather than crypto as a generic concept.
Opinions about Bitcoin, from people who probably have a lot more investment success than you or I, range across about as wide a spectrum as possible.
Billionaire investor Bill Miller –who became famous for beating the S&P 500 for 15 years in a row when he ran the Legg Mason Value Trust, and whose current fund, the Miller Opportunity Trust, is in the top 1% of funds in its class — is a big Bitcoin bull. He says Bitcoin is “an insurance policy against financial disaster.”[8] He also has made, personally, over a billion dollars by owning Bitcoin.
Warren Buffett, on the other hand, has called Bitcoin “rat poison.”[9]
Buffet Doesn’t Understand Money
Buffet obviously knows how to make money. He has a net worth of $120 billion, he’s the Oracle of Omaha, and he’s the White Knight of Wall Street. I don’t dispute that Warren Buffett is to investing about what Mozart is to composing: probably the best ever.
But when Buffett says, as he does, of Bitcoin that “it is a gambling token and it doesn’t have any intrinsic value,”[10] or “It doesn’t produce anything. You can stare at it all day and no little Bitcoins come out or anything like that. It’s a delusion, basically,”[11] he’s not strictly wrong, but he’s not really understanding two important fundamental economic truths.
These truths are first, that all value is subjective, so nothing has “intrinsic” value, and second, that money is a special good which while not producing “anything” that Buffett can see (so he says), money in fact produces one of the most valuable resources in any modern economy: liquidity.
No Intrinsic Value
When Buffett says that Bitcoin has no intrinsic value, he isn’t wrong, but he’s saying something that could have two quite different meanings.
When Buffett talks about intrinsic value what he usually means is the discounted value of the cash flows. He says, “Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.”[12]
Bitcoin, like cash, produces no cash flows. If we interpret Buffet’s use of the term intrinsic as above, then Buffett is correct that Bitcoin has no intrinsic value.
Cash produces no cash flows either, but Buffett does not disparage cash by observing that it has no intrinsic value.
Nothing Has Intrinsic Value
The Oxford English Dictionary defines intrinsic thus: “Belonging to the thing in itself, or by its very nature; inherent.”
In the proper economic theory of value, nothing has intrinsic value. That’s because value is not inherent in any object nor in any intangible asset. Here’s a demonstration of that claim:
In 1937, a painting by the famous Dutch artist Vermeer called Christ and the Disciples at Emmaus sold for the equivalent of $4 million in today’s money. Ten years later, a painter named Hans van Meegeren confessed that he, not Vermeer, had painted it. The market value of the painting plummeted to just a few thousand dollars overnight.
Why? The painting itself was identical both before and after the forgery was revealed. Try to answer before you keep reading.
The answer is that value is not in objects. Value is in people’s minds.
Even goods that are necessary to life, such as food and clean water, do not have value in-and-of-themselves. What makes them valuable is precisely the fact that people put value on them. And even this statement is misleading. People do not value “water” or “food.” Individuals value (or don’t value) a specific item of food or water at a specific time and place. That key insight, discovered in 1871 independently by the Austrian Carl Menger, the Frenchman Leon Walras and the Englishman William Stanley Jevons, is termed “marginalism” or “marginal analysis.” The discovery is called the Marginal Revolution.
But too many economists, and others, forget the fundamental insight that anything is valuable only to the extent that people are willing to give something up to obtain that thing. The value is not in the thing. The value is in the mind of the valuer.
A dollar has no intrinsic value. Nor does it have any use value other than as money. A dollar has market value only because it is useful as money. But dollars are very useful as money, because they are so widely accepted.
However, it is also the case that the dollar is a fiat, or paper, currency. As we have seen in the last several years, paper currencies like the dollar, that can be (and are) printed at will by governments, lose purchasing power over time. Every fiat currency sponsored by a government has lost purchasing power over time. Most of them have disappeared. The US dollar has lost approximately 97% of its purchasing power, according to official statistics,[13] since the institution of the Federal Reserve System in 1913.
Money
Fiat money, i.e. non-commodity money, has purchasing power because, and only because, people want to use it for exchange, or to hold.
Buffett, and others, are correct that Bitcoin is not money. Bitcoin, today, has few or none of the characteristics of money.
But, say advocates of Bitcoin, that is likely to change in the future.
The argument, in short, is that Bitcoin can become money in the future because a) it has a fixed supply, b) it can be transferred privately, securely, and relatively cost-effectively and c) it is not controlled by any government or any single organization or small group.
Speculative Vehicle
Today, Bitcoin is not money. Probably the reason most people today own Bitcoin is for trading purposes. That is, they treat Bitcoin like a speculative asset (which currently it is) hoping that it will go up and they can sell it.
But, unlike pure speculative bubble assets, there is at least an argument that Bitcoin could achieve a stable market value far higher than today’s price of approximately $27,000.
That argument rests on the belief that Bitcoin could become not only money, but the common currency of the world. The idea is that Bitcoin is “digital gold,” and plays off the fact that gold was the common currency of the world during the era of the gold standard. (Different national currencies were defined as, and convertible into, defined quantities of gold.)
If Bitcoin did become the common currency of the world, displacing the dollar, the Euro, the Yen and all the others, we can ask the question regarding what its market value would have to be.
M1
M1 is the term economists use to describe currency (i.e. banknotes such as green paper dollars) plus demand deposits in banks (e.g. checking accounts). Another term for this is base money. In 2022, global total M1 or base money was somewhere in the neighborhood of 49 trillion US dollars equivalent.[14]
If we make the (heroic) assumption that the 21 million Bitcoins are to equal that amount of market value, the market value of a single Bitcoin would have to be about $2,333,333. Unlike most purely speculative vehicles, with Bitcoin it is at least possible to tell a story which, while improbable, is neither impossible nor completely implausible.
Another way of interpreting the above is that, assuming the market price of a Bitcoin today of $27,000 is a rational price (in the sense of accurately representing the probability that the price in the future will be about $2.3 million), the market is telling us that there is about a 1% chance that Bitcoin will become the global currency. Or, a 99% chance that it will not.
What If You Have Big Bitcoin Profits
If a client has big Bitcoin, or other crypto profits, and wants to realize them without taking the tax hit, consider a Crypto Shelter Trust. This is a tax-exempt trust that can allow a client to sell crypto, while deferring the tax on the gain until income is withdrawn from the trust. To learn more, please click here, or call us at (703) 437-9720 and ask for Connor or Katherine. Or email [email protected] and ask.
[1] We are making no recommendation one way or another about the investment value, or lack thereof, of Bitcoin or any other crypto.
[2] Google searches for “bitcoin” peaked in November, 2022 and have been in a general downtrend since then. https://www.theblock.co/data/alternative-crypto-metrics/web-traffic/google-search-volume-bitcoin
[3] https://www.nytimes.com/interactive/2023/08/25/business/shoptalk-fud-fear-uncertainty-doubt.html
[6] https://coinmarketcap.com/
[7] https://cpmgroup.com/how-much-silver-is-above-ground/ estimates that the above ground stocks of silver are about 1.6 million metric tons, which equates to about 51.4 billion ounces.
[9] https://www.cnbc.com/2018/05/05/warren-buffett-says-bitcoin-is-probably-rat-poison-squared.html
[11] https://www.fool.com/investing/2021/05/04/two-famous-value-investors-have-diametrically-oppo/
[12] https://www.berkshirehathaway.com/owners.html
[13] https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=1%2C000.00&year1=191301&year2=202308
[14] https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization-2022/
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