What is “Intrinsic” Value?

Jamie Dimon, the CEO of JP Morgan Chase, recently said a thing about Bitcoin that was not particularly original: “It's got no intrinsic value!” 

(It made the news anyway because he is Jamie Dimon.)

Of course the Bitcoiners thought this was dumb and the no-coiners thought it was obvious, but I'm interested in what he said because it raises a question that is philosophically intriguing to me:

What is “intrinsic” value?

When people talk about intrinsic value, I think they usually mean something like, ‘what an item is truly worth, regardless of what other people believe.’ They use the word “intrinsic” to highlight the fundamental disconnect between price and value: price is what you pay, value is what you get. I can pick an apple off a tree and try to sell it to you for $100, but physically it’s no different from all the other apples—equally tasty and nutritious. People’s opinions about value can ebb and flow, but the intrinsic value of the apple (calories, vitamins, flavor, etc) is totally disconnected from people’s opinions. It’s intrinsic to the apple.

At least, that’s what I think Jamie Dimon means by it. But, frankly, why is it important? Who cares if I can’t eat a bitcoin? If I buy one and the market price goes up, perhaps it still doesn’t have any intrinsic value, but I can still sell it for a profit and use that money to eat. Just because the value isn’t intrinsic doesn’t mean it’s not real. 

How about THAT, Mr. Dimon?

In an imaginary oak-paneled conference room, Dimon tells me, “Ok, ok. Yes, your bitcoin would be more valuable if the price goes up. The real question is: how certain are you that the price will go up? If you’re going to invest a lot of your net worth in it, you’d better be pretty damned certain. But with assets that have no intrinsic value, you can’t be. This is why intrinsic value matters.”

He fiddles with his cufflink and continues. “Unlike a company, bitcoin has no profits and pays out no dividends to investors. Unlike land, you can’t live on it, farm it, or rent it out. It isn’t a tool; you can’t use it to make things. The only thing you can do with bitcoin is sell it. There’s no backstop preventing a catastrophic collapse of belief in bitcoin.”

“That kind of meltdown would be impossible for an asset with intrinsic value. If you own a business that’s throwing off profits, who cares if nobody else wants to own a piece? You can pocket the cash. If you own land that nobody wants, you can still live on it or farm it! This hard, physical, undeniable value is what keeps the price of an asset stable.”

The points made by the Jamie Dimon of my imagination are interesting to me, because—

“Oh and by the way, the US Dollar does have intrinsic value, despite what bitcoin people say, because the White House, the Fed, and Congress will always step in and do what needs to be done in a crisis to keep the monetary system afloat. Keynes was right and we’re actually getting much better at managing economic cycles. Just look at what could have happened because of COVID-19, it could have been so much worse if we were all using bitcoin and nobody had any power to fix anything.”

Lol thanks Mr. Dimon, you do have a point there!

Anyway, as I was saying, I think the points the Jamie Dimon of my imagination makes are interesting because they’re mostly right but also oversimplifying. 

What percent of the real estate business has anything to do with personal use of the land? Cities evolved where they did for historical reasons, like being on a navigable waterway, but today people flock to them just because that’s where people and opportunities are. One acre in Manhattan costs many orders of magnitude more than one acre 100 miles north, and that extra non-farm value is based purely on a human network effect which has very similar characteristics to bitcoin: people want to be there because people are there. We’ve seen over time that these network effects tend to be pretty damn stable. I’m sure the viscounts and earls of England looked down on New York in the 1700s the same way Jamie Dimon, Duke of the Dollar, speaks about bitcoin today. Confirmation bias is a hell of a drug.

But I digress. Sure, maybe intrinsic value is a relatively small thing compared to speculative value of many types of assets, and maybe speculative value can remain relatively stable. But still, what is intrinsic value? Is there really any such thing?

To answer these questions, it helps to look at a really simple good with seemingly obvious intrinsic value: an apple. What’s the intrinsic value of an apple? You can eat it and it will give you energy. But that’s not very specific. Some apples are bigger than others, so shouldn’t the bigger ones be intrinsically worth more? Perhaps the intrinsic value of an apple is the amount of calories it contains? But then again, some apples are ripe and delicious, others are unripe and sour. Some have worms in them—and not the cute kind found, for some reason, in elementary school classroom posters. All these factors affect the value of the apple, and indeed the larger market for apples, in ways that are difficult to pin down to one “intrinsic” number. 

But we can go further still. What about the value of an apple to someone that is allergic to them? Or to a photographer who needs a prop for an Adam and Eve scene—would a perfect, shiny fake apple have more value in this case? How valuable is an apple to a person with diabetes, or to someone with low blood sugar—does its value change when the apple saves a life?

The thing is, value is always relative. The market finds a price based on the average of what most people are willing to pay, but each individual person’s subjective act of valuing the thing is the origin of value. Nothing about value is intrinsic. It cannot be an objective property of an object. Instead, it is a measure of functionality and performance given a specific goal, and a specific context. It is about getting a job done.

Even purely financial assets that seem like they have obvious objective measures (more money = better) turn out to be less objective than they seem. Why do people in Russia use rubles despite the fact that they’re losing value relative to US dollars? Because all the businesses and services that they want to use primarily accept rubles! Why do some people invest in tech startups, others day trade derivatives, and others buy land in the countryside? To some extent it always comes down to personal preferences and goals! 

So if intrinsic value doesn’t exist, what should we replace the concept with in our heads? Here’s my proposal: personal value and market value.

The personal value of a thing is defined by how well it helps you do the things you want to do. The market value of a thing is defined by how much it helps everyone else do things they want to do.

My grand theory is that everything in finance and economics ends up being more personal than it seems. Because although we want to abstract “value” into a mathematical unit, value is fundamentally non-fungible. It always connects back to individual humans with individual circumstances, knowledge, desires, and dreams.

I think there’s something beautiful about that. And on that issue, I would like to think everyone—from your most ardent coinhead to Jamie Dimon himself—could agree.