Debunking the Direct-Use Value Narrative of Bitcoin

Why Bitcoin's real value lies in its exchange potential

Bitcoin-skeptics often harp on the fact that bitcoins have no Direct Use Value. That is, you can’t do anything with a bitcoin other than exchange it with someone else. For this reason, many skeptics liken Bitcoin to a sort of scam in which a useless item is acquired only to be pawned off later to someone else.

In 2010, Satoshi Nakamoto wrote to the BitcoinTalk Forum:

As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:

- boring grey in colour

- not a good conductor of electricity

- not particularly strong, but not ductile or easily malleable either

- not useful for any practical or ornamental purpose

and one special, magical property:

- can be transported over a communications channel

If it somehow acquired any value at all for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recipient sell it.

Maybe it could get an initial value… by people foreseeing its potential usefulness for exchange.  (I would definitely want some)

In the above quote Satoshi is presenting an illustration for why even something with no Direct Use Value may nevertheless be valuable. Since bitcoins are scarce digital objects that can be transported over communications channels, they are potentially useful for exchange.

Instead of Direct Use Value bitcoins have Pure Exchange Value.

In the 1870’s, the founder of the Austrian School of Economics, Carl Menger, wrote in his book Principles of Economics:

The value of goods arises from their relationship to our needs, and is not inherent in the goods themselves… To have value, a good must assure the satisfaction of needs that would not be provided for if we did not have it at our command. But whether it does so in a direct or in an indirect manner is quite irrelevant… This difference is nevertheless of sufficient importance to require specific terms for each of the two forms of the one general value phenomenon. Thus we call value in the first case use value, and in the second case we call it exchange value.

A thing has Exchange Value when it can be used to satisfy our needs indirectly, rather than directly. For example, if my need is to travel, a car would have Direct Use Value because it could satisfy that need, and $47,000 would have Exchange Value because it could also satisfy that need, though indirectly.

Most things, like gold, have a mixture of both Direct Use Value and Exchange Value. Some things, like U.S. Dollars and other forms of money, have only Exchange Value. That is, they only have value because they can be exchanged for other things of value.

Ludwig von Mises writes in The Theory of Money and Credit states:

Since there is no direct connection between money as such and any human want, individuals can obtain an idea of its utility and consequently of its value only by assuming a definite purchasing power… To a naive observer, money made out of precious metal was “sound money” because the piece of precious metal was an “intrinsically” valuable object, while paper money was “bad money” because its value was only “artificial.” But even the layman who holds this opinion accepts the money in the course of business transactions, not for the sake of its industrial use-value, but for the sake of its objective exchange value, which depends largely upon its monetary employment. He values gold coin not merely for the sake of its industrial use-value, say because of the possibility of using it as jewelry, but chiefly on account of its monetary utility.

People value money because they expect they can exchange it with someone else in the future for other things they value. People value Bitcoin for the same reason.

For instance: Perhaps someone exchanges their car for Bitcoin because they expect to be able to exchange their Bitcoin for a different car later.

This is a perfectly reasonable expectation, and a perfect example of Exchange Value. But since Bitcoin is in its infancy as a money, a much more common instance is as follows:

Someone exchange some U.S. Dollars for Bitcoin because they expect to be able to exchange their Bitcoin for more U.S. Dollars later.

This is also a perfectly reasonable expectation, and also a perfect example of Exchange Value. Though, this is what most skeptics seem to have a problem with, and why they liken Bitcoin to a scam.

Nevertheless, it remains the case that the reason people are willing to exchange things of value for Bitcoin is purely because they expect to be able to hold Bitcoin for some time and exchange Bitcoin to someone else later for other things of value. That is, Bitcoin has Exchange Value despite having no Direct Use Value.

Exchange Value and Direct Use Value are two forms of the one general value phenomenon.

As Mises writes in Human Action:

Value is the importance that acting man attaches to ultimate ends. Only to ultimate ends is primary and original value assigned. Means are valued derivatively according to their serviceableness in contributing to the attainment of ultimate ends. Their valuation is derived from the valuation of the ultimate ends. They are important for man only as far as they make it possible for him to attain some ends. Value is not intrinsic, it is not in things. It is within us.

And as Menger writes in Principles of Economics:

The value of goods arises from their relationship to our needs, and is not inherent in the goods themselves. With changes in this relationship, value arises and disappears…. Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgement economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.