Peter Schiff Was Not Right

Peter Schiff seems destined to be the last one in the liberty movement to get on board with Bitcoin. Yesterday he put out a video (see below) offering up his criticisms and explaining why he believes gold is still superior. While he is starting to recognize that Bitcoin was designed to mimic the purest form of the gold standard and even improve on it in some ways, he claims that it still lacks the key ingredient that makes money work ― intrinsic value.

Now I’m not a fan of the intrinsic value concept as it seems to imply that value is inherent in certain physical objects. Of course that isn’t true, value is originates in the human mind and nowhere else. Nonetheless, Peter uses the concept of intrinsic value to speak to gold’s use value. That is, the fact that gold is useful in jewelry, ornamentation, chemistry, etc. In contrast, Bitcoin has no use value. The only reason people acquire it is because they hope they can sell it to someone else later for the same or greater amount of money. Hence, Peter concludes that without intrinsic (use) value, Bitcoin can’t be anything other than a bubble.

Here’s where he’s going wrong. While it’s true that gold is demanded for use in jewelry, medical, or industrial applications, that demand doesn’t completely account for the current price of gold. According to Investopedia, in 2010, jewelry accounted for 54% of the demand for gold with another 12% attributed to medical and industrial uses. But what about the other 34 percent? That demand comes from investors who purchase it in hope of selling it to someone else later for the same or greater amount of money. Exactly what Peter criticizes Bitcoin for. If the price of gold were to fall to it’s “intrinsic” value, Peter would loose a lot of money on his gold holdings. It’s precisely the belief that gold can be sold at a later date for equal or greater value that accounts for it trading well above its industrial use value.

Investors (including myself) don’t own gold because we want to melt it down and make a necklace. Most of us aren’t coin collectors. We hold it solely because of it’s reputation as a store of value and a hedge against inflation. If investors were to sour on gold, it would drop by at least 34% in price.

Notice Bitcoin isn’t much different. People purchase it simply because they believe they will be able to sell it for equal or greater value at a later date. Unlike gold, however, this phenomenon accounts for 100% of the value of Bitcoin instead of just 34%. But does that difference really matter? Not really. It just means Bitcoin will drop much further if people sour on it as a store of value. But note that, like gold, there isn’t anything suggesting such an outcome is inevitable.

Finally, I think there is a nuance that many people miss. Because it is both cheaper and faster to send value using Bitcoin compared to the alternatives, it has tremendous potential as a payment system. To use it as a payment system people will need to first acquire bitcoins. Hence, there is a potential use value that will be closely tied to transaction volume. So if Bitcoin evolves down this path, the percentage of it’s value that is derived from a belief that others will accept it in exchange will necessarily be less than 100% … just like gold.

Once, you get your head around this concept, I think you have no choice but to conclude that Bitcoin really is gold 2.0. Time to get on board Peter.

One thought on “Peter Schiff Was Not Right

  1. Great post Chris – there is no such thing as intrinsic value and as a person who draws from Austrian economics, Schiff should really revise on the subjective theory of value.

    Instead of arguing that bitcoin is useless, Schiff should consider bitcoin’s ‘use as a form of money’.

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