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Thomas Edison, Bitcoin, and Intrinsic Value

February 03
01:05 2013

A Response To Smiling Dave’s Article Named, “Bitcoin and Intrinsic Value”

Smiling Dave is a blogger who has in an interest in Austrian Economics. He has written several articles about the demise of bitcoin. In one of this articles, “Bitcoin and Intrinsic Value,” he describes a hypothetical situation where Robinson Crusoe is isolated on an island where he finds gold:

The first value comes from answering the question, “What could Robinson Crusoe do with [gold]?” Crusoe had nobody on his island to buy from or sell to, so the gold coin had no use as money. But it did have some use. He could use it for jewelry, if he was vain. He could use it as a component of his computer chips, or whatever.

OK, now Crusoe comes off the island back to civilization. He finds that everything has a price pretty much as he valued things on the island, except for one thing. His gold coin, he finds, is worth much more than he thought. “Why are people setting such a high value on something of so limited a use?” he wonders. Then he finds out that gold is the coin of the realm. Aha, that explains it. It has a use in civilization it never had on the island. You can easily buy stuff with it, anything from everyone. That is a useful feature, that increases the usefulness, and thus the price, of gold.

                          - Smiling Dave

In these two paragraphs Smiling Dave is explaining why gold has intrinsic value, and claims that bitcoin has no intrinsic value because it has no use on the island. I am going to describe a situation where bitcoin does indeed have intrinsic value.

Imagine a scenario where instead of Robinson Crusoe another man named Thomas Edison, a prolific inventor, somehow became stranded on an island. Thomas Edison loved to invent new contraptions, but in order to secure his distribution rights he had to file an application with the patent office. Because he was isolated on the island he felt it was futile to invent unless he was able to prove with 100% certainty that he was the first person to conceptualize his ideas. The patent office would only grant rights to Thomas Edison if he submitted his patent application before anyone else did, but maybe they would grant him some leniency since his ship was capsized a day before. He knew that it could be a matter of days that other competitors could reach the patent office. Is there any way for Mr. Edison to prove that he was the first person to think of his new idea?

As he was thinking a bottle was washed ashore with a note and an algorithm explaining how it was possible to timestamp information inside something called a “blockchain“. The note was signed by “Satoshi Nakamoto,” and it contained a special key which had tokens that allowed him to timestamp his latest invention. Mr. Edison followed the instuctions and implemented the algorithm, which he did with pen, paper, and a whole lotta mathematics. Without a doubt he had proof that he was the first to come up with his idea, even though no one was on the island.

OK, the following day a ship picks up Thomas Edison and returns to civilization. He finds that everything has a price pretty much as he valued things on island, except for one thing. His tokens were also known as bitcoins, and he finds that it is worth much more than he thought. “Why are people setting such a high value on something of so limited use?” he wonders. Then he finds out that the bitcoin is the coin of the realm. Aha, that explains it. It has a use in civilization it never had on the island. You can buy stuff with it. That is a useful feature, that increases the usefulness, and thus the price of bitcoin.

Conclusion: Did Thomas Edison just solve a block using pen and paper? My point of the story is that it is feasible to perform bitcoin transactions on the island since it is based on mathematics. One could even change the story slightly and include a mining rig on the island, which would make the story even more believable, or there could be Internet access on the island, which allowed him to broadcast his transactions to the bitcoin network via satellite or whatever. Or, maybe Satoshi included a solved block inside the bottle. Nevertheless, it is still possible, however improbable, that with just pen, paper, and mathematics for someone to utilize the bitcoin protocol. The time-stamping ability of bitcoin is an intrinsic property and that is why bitcoin has intrinsic value using Smiling Dave’s logical foundations to formulate his arguments.

The Sequel: Thomas Edison returns to the island to put a cryptographically signed message in a bottle so anyone in the universe will know he was the one who wrote the original message. Cryptography has intrinsic value…

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Justin Dupre

Justin Dupre

Justin Dupre is the owner of BitcoinBlogger. He is a Bitcoin and cryptocurrency enthusiast and strongly supports the use of alternative currencies in day to day use, not just for exchanges to FIAT. You can read more about Justin at his personal blog http://justindupre.com

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17 Comments

  1. sdavesblog
    sdavesblog February 03, 03:40

    Are you saying that if I buy a bitcoin at mtgox, for example, that I can use my bitcoin to prove when I wrote an article for my blog? And that people have used bitcoins for such a purpose?

    Reply to this comment
    • Rudd-O
      Rudd-O February 03, 10:30

      No, but you can produce a Bitcoin transaction with a custom transaction script to prove pretty much anything like the example you gave. MtGox does not offer that functionality because most people (except the Namecoin people) don’t care about it.

      Srsly, you need to learn how Bitcoin works. And stop putting the words “intrinsic” and “value” in the same sentence. You know full well that value is subjective.

      Reply to this comment
    • Rudd-O
      Rudd-O February 03, 10:32

      Also, people have indeed used Bitcoin for such a purpose. Blockchain.info had for a while a verifiable and non-repudiable peer-to-peer messaging application that would piggyback on the transactions stored in the blockchain… but they took it out because the Bitcoin devs went haywire about the massive traffic and blockchain pollution that this mechanism would have produced.

      Reply to this comment
    • Joel Kaartinen
      Joel Kaartinen February 03, 10:35

      The answer to both of your questions would be yes. Every Bitcoin transaction is timestamped in a way that becomes more and more expensive to modify the older it is.

      Even if someone succeeded in doing that, it’d be globally obvious that it happened and what was changed. You don’t need one bitcoin to do this though, 0.00050001 bitcoins is sufficient. That amount is the antispam transaction fee plus one unit of the base bitcoin unit of account.

      Here’s one tutorial and an example of actually doing it. Probably a bit too infused with technical jargon for most people though.

      https://www.strongcoin.com/blog/using_the_blockchain_as_a_trusted_timestamping_service

      Reply to this comment
    • Joel Kaartinen
      Joel Kaartinen February 03, 10:55

      Other related possibilities on using Bitcoin are also described in these articles:
      https://en.bitcoin.it/wiki/Contracts
      https://en.bitcoin.it/wiki/Smart_Property

      Reply to this comment
    • blogsatoshi
      blogsatoshi February 03, 11:26

      @sdaveblog
      Of course they did.
      Even Satoshi did.
      https://en.bitcoin.it/wiki/Genesis_block

      “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”
      and
      “This was probably intended as proof that the block was created on or after January 3rd, 2009, as well as a comment on the instability caused by fractional-reserve banking.”

      Reply to this comment
  2. sdavesblog
    sdavesblog February 03, 15:10

    Smiling Dave here.

    1. I dunno. The market for using bitcoin for that purpose seems tiny to me, at least so far. One guy did it? That’s not enough. As for those other possibilities, nobody is using bitcoin for those possibilities.

    2. Replies to my using intrinsic value, even though all value is subjective, is that Mises also did, and so did many other Austrians, past and present.

    3. I don’t have to learn how bitcoin works. What counts, according to Mises’ Regression Theorem, is not my knowledge of it’s workings, but what people are actually using it for besides buying and selling. Not what they can do, but they are doing. Short answer: nothing.

    4.Backup for everything I wrote is on my blog sdavesblog.wordpress.com. Look for an article called Bitcoin All in One Place. My apologies for not replying at length. I have written so much about bitcoin already, in my blog and the mises forums, that it’s hard for me to do more than link to an article that talks about the topic in question.

    Reply to this comment
    • Joel Kaartinen
      Joel Kaartinen February 03, 21:56

      About number 3. Does that mean that if the usage of Bitcoin for these non-monetary use cases becomes popular, that it will then be able to satisfy the Regression Theorem or would there still be something missing?

      Reply to this comment
    • Joel Kaartinen
      Joel Kaartinen February 03, 22:24

      One more example that just came to mind. The Bitcoin wiki started using Bitcoin as an anti-spam device recently. You have a to register an account and pay the wiki a small amount of bitcoins to gain the ablity to edit the content. https://en.bitcoin.it/wiki/BitcoinPayment

      It’s conceivable similar systems could be built for email too. For example, asking for a small bitcoin payment that if paid, makes sure to get your message past the spamfilter. I have not seen an implementation of this so far though. Perhaps someone will see this comment and get an inspiration to do some coding :)

      There has also been some talk about decentralized file systems being implemented with Bitcoin as the method of payment between users (for the space provided). The previous attempts at this particular technology failed largely due to users not caring to keep their systems running. Monetary incentive would fix that.

      Another potential application is open wireless networks that let you have internet access for a small bitcoin payment.

      These are just the tip of the iceberg of what is possible. I expect the best ways to use Bitcoin are still to be invented.

      The reason I’m personally betting on Bitcoin growing much bigger than now is that it’s inconceivable to me that all of the potential use cases, that are simply not possible without Bitcoin, would fail to become popular.

      Reply to this comment
  3. Jim
    Jim February 03, 16:24

    @smilingdave, so now you say there needs to be a certain number of people doing it? Sigh.

    To clarify all value is subjective. The article I wrote is based on smilingdaves assumptions.

    Reply to this comment
  4. smilingdavesblog
    smilingdavesblog February 03, 18:10

    Jim,
    Why the sigh? It’s not me saying it, all economists say it. I wrote about it long ago on my website [see previous comment for where to look].

    Yes, all value is subjective, I agree. But in the context of discussions about currency and media of exchange, the phrase intrinsic value is used. See previous comment for link that talk about this at length, with quotes from the greats.

    Reply to this comment
  5. afbitcoins
    afbitcoins February 10, 21:38

    A valiant effort to refute the Robinson Crusoe thought experiment. However I see no reason to argue that bitcoin has any secondary ‘intrinsic’ value on a desert island. Thats a bit like saying what value has a human got in an environment with no oxygen? ie a pointless experiment. I do however think bitcoin will ultimately have value other than just its monetary possibilities.

    Check out my bitcoin trading blog, trying to attract some viewers

    http://afbitcoins.wordpress.com

    Thanks

    Reply to this comment
  6. npcomplete
    npcomplete February 17, 17:30

    Cross-posting a response I posted elsewhere, about how I I think satisfies or will gradually come to satisfy the regression theorem, particularly as the state grows, and it’s inherent value (which is still relative).

    Personally, I will disagree a bit here, since I do not think it would become money in a Robinson Crusoe, free society scenario… it is only until some other forces arise that would create a need for private, censorship-resistant, regulation-resistant, medium of exchange that would give bitcoin value.

    Second, the originating commodity in the regression theorem need not be something that is actually consumed, like classical examples of salt, metals, tobacco, crops, etc. It just has to have some kind of use of its own before becoming money.

    Well, what if you had a tool whose primary utility was to get around or through government barriers? A virtual “hammer” for trade barriers, if you will. What if people started exchanging cash for this special hammer, then traded that hammer for other goods?

    But what if the act of trading that hammer is also the same act of using it to break barriers? That is, its inherent commodity utility is exercised by the very act of its own trading. Imagine swinging it or throwing it to your recipient and smashing through barriers placed in between, metaphorically[1]. That virtual hammer is the commodity with some valued use identified by the regression theorem before becoming money.

    Now it is not yet money per se, because people still store most of their income/capital value in other units (fiat or commodity). So it is still a currency at this point, primarily used as a medium of exchange rather than a store of value. However, as it circulates, and if it gains more confidence to store bitcoin longer term, this virtual commodity–this “hammer”, then shifts from being mere currency to becoming more money-like.

    It doesn’t necessarily have to replace anything. It can just circulate along side other monies or supplement them. Who knows, maybe we’ll have a gold or silver backed bitcoin bank/exchange/fund/instrument.[2] This would also have the advantage of being able to set up some kind of secure proxy ownership of the hard asset that would be as private as you like. So long as you merely have a claim–an electronically secure title with no personal information–on the asset, you can remain anonymous. However it is reduced to being as private as those you trust once you ship it or claim it in person or via another person.

    In my opinion, bitcoin would likely not emerge as money in a free society. Interestingly that itself would also be evidence of bitcoin conforming to the regression theorem since in a free society–free of politically controlled fiat monies, where monies are denationalized and can be privately secure–bitcoin would not have that unique originating commodity utility it has today.

    [1] Technically, a more apt commodity metaphor would be like “oil” rather than a hammer, since bitcoin works around barriers rather than actually breaking them.

    [2] I wrote this a while back, but interestingly Trace Mayer had a similar post about this with regards to GoldMoney:
    http://www.runtogold.com/2013/01/goldmoney-mulls-bitcoin-integration-why-your-gold-is-not-safe-there/

    Reply to this comment
  7. aBaxs
    aBaxs April 11, 14:07

    Bitcoin: first they ignore you, then they laugh at you, then they fight you, then you win

    We are now in stage two progressing into stage three.

    Reply to this comment
  8. Tim
    Tim June 01, 22:15

    Here on my blog are 50+ ways to earn free bitcoins all over the internet.
    Links to bitcoin casinos and services that pay BTC for watching videos.
    Thanks,
    Tim

    Reply to this comment

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