The source of Bitcoin’s value is a contentious issue of debate, which remains largely undecided, among intellectual circles of economists. It is also a widely used point of argument used by the layman; we all know of this tired argument: Bitcoin value is not intrinsic, its value is imaginary, the Bitcoin price is a ‘bubble’, and therefore it cannot ever become money. Your dreams of replacing the government-controlled monetary system with a cryptocurrency are doomed for failure, your bitcoins are no more valuable than Monopoly money. But we know that can’t be true because Bitcoin can buy very real products, and it is exchangeable for fiat currency, which is unanimously accepted as real money.

A person with any amount of economic understanding can clearly see that Bitcoin value is indeed real. Those who claim that money needs “intrinsic” value fail to realize that there is no intrinsic value, it is created in the minds of individuals. So by saying that Bitcoin value is imaginary is merely to confirm subjective value theory. All value that exists in objects of human interaction and exchange is “imaginary.” There is no value that exists independently of the minds of human beings. Therefore, the value of Bitcoin, and the reason for the Bitcoin price rising to it’s current state, stems from the simple fact that individuals attach a definite value to Bitcoin.

Bitcoin Value and The Regression Theorem

The real difficulty in explaining Bitcoin’s value, and the Bitcoin price, is not whether or not its value is real or intrinsic, but where the value originated. Those who are doubtful of Bitcoin’s viability as money derive their skepticism from this difficulty. On the surface, these doubts seem justified as it appears that Bitcoin deviates from the Misesian regression theorem. This theorem explains how money arises in a society and how it attains value. An object must have a direct use value, as a consumption good, before it can attain exchange value and become a medium of exchange.

For example, various beads can potentially become media of exchange in a society of jewelry makers because there is a common value for beads in that society. Since everyone in that community needs beads to make jewelry, people will accept the beads as payment for other goods, such as food and clothing. The prices negotiated in terms of beads will decide the exchange value of the beads. Once this exchange value has been established in the community, the beads that end up being the most valuable will be used for more expensive exchanges, while the less valuable beads will be relegated to the role of fractional payments for smaller purchases. Some beads will become worthless as a medium of exchange altogether. This competition amongst the various beads closely resembles the process of competition between gold, silver, and other precious metals, which ended with gold as the primary money and silver as a secondary money.

Once the exchange value of the beads has been established, and the most valuable beads have become the main media of exchange in this society of jewelers, these beads will likely lose their demand as an object of jewelry making because they will tend to be saved so that they can be used in trade. At this point, the beads have lost their direct use value while maintaining their exchange value. They are no longer the object of consumption; their sole purpose in this society is to facilitate trade and the division of labor. That isn’t to say that a loss in direct use value equates to a 50% loss in the total value of a good, however. In actuality, a decrease in an object’s use value is usually mirrored by an increase in the exchange value. As an object becomes more valuable as a currency, it becomes less valuable as a consumption good.

The problem with the Bitcoin value is that it appears that the digital currency never had such a direct use value as that of the beads used in the scenario above. From a cursory glance at the history of Bitcoin, it looks like Bitcoin was created, and the Bitcoin price laid dormant for a while, then spontaneously established a conversion rate with fiat currencies. Also, a fact about Bitcoin– which makes the claims that it had no direct use value before attaining exchange value seem more justifiable– is that Bitcoin was designed for the sole purpose of being an alternative monetary system. Bitcoin was deliberately designed as a payment system that uses encrypted bits of information– bitcoins– to facilitate the exchange of property between two or more parties anonymously and without having to trust a third party with handling the money. So, there’s no way that Bitcoin could have been used for anything else other than money, right?

The Origin of Bitcoin’s Value and Bitcoin’s Price

The reason for Bitcoin’s perceived lack of direct use vale is that it was likely not a physical use value, such as aiding in producing a physical good, and this use value was extremely short lived; almost immediately after Bitcoin gained exchange value, and a Bitcoin price was established, this use value was moved to an ancillary role at best. Generally, when ascribing a use value to a certain good, we tend to look for methods by which that good can facilitate the advancement of material well being. The direct use value of an ear of corn is that it can alleviate hunger; gold and silver can be used for construction or ornamental purposes; and drugs can alter the operation of the body’s physical systems. Bitcoin cannot, and has never been able to, provide such uses to consumers. The use value provided by Bitcoin, which sparked the initial Bitcoin price, was– or is– exclusively a mental one.

The mental Bitcoin value, before it gained exchanged value, was derived solely from the subjective valuations of those individuals who mined bitcoins before they had any monetary value whatsoever. This explanation seems laughably simple to those who have a thorough understanding of the subjective value theory in economics, but it seems as though this concept couldn’t be grasped by the Bitcoin community until Konrad S. Graf wrote on it and explained it in detail. By looking at the history of the Bitcoin price, we can see that the digital currency did not gain exchange value until sometime in the 170th block. Thus, in the eyes of the layman, Bitcoin was completely worthless for 170 blocks. But there must have been some use value, or else that first monetary transaction would not have taken place. The miners who, in those initial 170 blocks, mined bitcoins at their own expense reaped some kind of psychic profit from doing so. Otherwise, they would not have mined those first bitcoins and the currency would never have established a monetary value.

We as economists cannot say what that psychic value was that impelled those individuals to mine the first bitcoins. Maybe the concept was interesting to them, or it seemed useful for research into peer-to-peer networking. Maybe they wanted Bitcoin to be successful, thus gave it value by force of will. Maybe it was something that we will never know. The content of valuations does not concern the field of praxeology, only the fact that valuation took place, and action came from that valuation. Someone outside of the field of economics may hypothesize that the miners created those bitcoins because it was “fun” to them, and that’s the source of Bitcoin’s short-lived direct use value.

Regardless of the content of those first valuations of the “worthless” bitcoins, it remains true that those valuations were necessarily subjective, stemming from the minds of those individuals engaged in hashing out the first 170 blocks. All that was required to uncover this possible source for Bitcoin’s use value was a brief look into the history of Bitcoin and an application of basic economic theory to that history. There are many other possible sources of Bitcoin’s original value that cannot be covered in this article. The theory advanced by Graf is merely the most popular one; it serves as one example of the many potential use values present in Bitcoin. The naysayers need only to dig a little bit further, and many of their arguments will vanish.