Crypto, Investment, and Intrinsic Value

Crypto doesn’t have intrinsic value; neither does paper money and neither does gold.

A friend who regularly reads both the Financial Times and my posts on EconLog and on my Substack sent me the following email:

I was talking with a friend who is a wealth manager at JP Morgan, and he is advising some clients who have the appetite for more risk and volatility to consider investing in “Crypto Plays.” Perhaps something like a crypto ETC to start.

Traditional economists seem to be evaluating the crypto economy from their rear-view mirror. A recent FT article repeated common assumptions as accepted reality. That crypto, “has no inherent value” and if there is a “liquidity crisis in crypto there is no lender of last resort.”

I bought and sold Bitcoin years ago when it was still below $100. I actually think certain investors should consider investments in the crypto area. We plan on doing so in 2025.

What do you think about the future of crypto in the world economy?

Here’s my answer:

I don’t know the future of crypto. No one does. I especially don’t because I don’t follow it enough. But when I talk to friends who buy and hold crypto, I typically hear one or more of three reasons for doing so. Here are the reasons, along with my comments on each.

(1) It’s a hedge against inflation.

It is. It’s volatile, but it is a hedge against inflation.

(2) It’s a way of keeping assets away from the intrusive prying eyes of government.

I don’t know enough about this, but my impression is that that’s not as true as it was, that government has several ways of piercing the veil.

Commenters on this site, many of whom probably know more than I, might want to comment.

(3) It’s a reasonable asset to hold as part of a diversification strategy.

This makes sense. That raises (not begs) the question why I don’t invest in crypto. The basic answer is that I don’t need to. My wife’s and my wealth is substantial and we are well diversified, with a market index stock fund, a much smaller (by value) bond fund, a huge inflation-indexed bond in the form of our Social Security benefits and my federal employee pension, and property (mainly our house, but also a small percent of a large apartment complex.) So I don’t want to buy yet another asset that I would need to pay attention to.

I do want to point out the problem with the criticism that crypto “has no inherent value.” Of course it doesn’t. But nothing does. Value, as we learned from the 1870 marginal revolution in economics, is subjective. It’s in the eyes of the beholder. Indeed, that’s Pillar #7 of my Ten Pillars of Economic Wisdom.

Now what the critics might have been getting at is that crypto is not like gold because gold has a non-monetary use. That’s true. Crypto, certainly Bitcoin, which is what I know best, is more like paper dollars. Paper dollars have no non-monetary use. (Well, not quite. In one of my drawers, I have a Canadian $1 bill because when the Canadian government introduced the Loonie, I knew the paper dollar would disappear. I have the bill as a collector’s item, a trivial exception.) But paper dollars have value.