#2 The Economics of Crypto-Currency: Understanding Value and the Blockchain

Let’s see if we can have a quick primer on value and the blockchain. Many within the crypto-sphere are not economists or experts on value. Many of us are the rebels, freaks and geeks of society, from all disciplines and backgrounds academically. A lot of the analysis I read in this space seems to lack a basic understanding of economics. Let us attempt to rectify that at least in terms of value. Economics, however, is a learned discipline, one which in many ways can be counter-intuitive. In order to understand the value of the blockchain innovation, value theory itself must be understood by comparing and contrasting a couple of takes on value and how prices form.

Pre-1870, the predominant school of thought in economics was the Classical School. The likes of Adam Smith, Ricardo and Marx were all Classical economists. Without turning this primer of value into a primer on Economic schools of thought, to the classical economists viewed value of a commodity as stemming from the amount of human labour used in it’s production, an objective theory of value. An objective theory of value suggests that things are inherently valuable. This leads to people making claims about there being no ‘intrinsic value’ in this asset, or that asset. However, in 1871, three separate scholars independently realised a deeper understanding of value, a part of the ‘Marginal Revolution’ in Economics.

For a grasp on the new discovery of value made during the Marginal Revolution, one must look at an enigma related to economic value named the ‘diamond-water paradox.’ This paradox was first posed by Adam Smith, seen as one of the fathers of the Classical School. The question in it’s simplest form is, ‘Water serves a much more useful purpose than diamonds, yet diamonds command a higher price in the market place, why is this?’ The solution found by Carl Menger, founder of the Austrian School of Economics, lay in the understanding that value is subjective. For example, if you are stranded in a desert with a pocket full of diamonds, logically, you’d trade those diamonds for water; because at that point in time the water holds more value to you than the diamonds. In civilization however you’d simply turn on the tap and keep the diamonds in your pocket, reflecting the higher value of diamonds in that situation. In the same way, no asset has intrinsic value since value is literally in the eyes of the beholder.
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Another way of explaining it would be your laptop computer, filled with your personal information and data. The market will value the notebook at a lower rate than what you do. Since you value your data, and others who don’t have use for it would not. This can be seen quite obviously with objects that have sentimental value. Maybe someone you lost in the past had given you a gift, lets say a gold necklace. Now, this gold necklace has a value based upon it’s weight using today’s spot price of gold, there’s the ‘value added’ by the fact that it’s been crafted into a exquisite piece, then there’s the sentimental value of the object.

All three prices would be different. If offered the spot (or market) price, even a normal individual, not attached to the item wouldn’t sell it at that price (unless desperate or ignorant to the price of gold), so clearly neither would you. If offered the value added price you would also reject the offer, as the sentimental value is much higher to you. So the only price you would accept for the necklace would be one that overwhelmed your sentimental desire to keep it. Finding someone to put that kind of value on an item that is sentimental would be extremely difficult. This demonstrates how everyone has a different value for the same item.

As usually happens when new technology arrives, crypto-currency has a fair share of opponents. Of these opponents, some raise valid criticism, whilst others it seems do not understand the technological advancement crypto-currencies and their protocols have provided. It’s clear that a lot of faulty thinking in this space is tied to their misunderstanding of value. ‘Bitcoin has no intrinsic value.’ ‘Crypto-currencies are a bubble.’ ‘Ripple is a scam.’ ‘The value of crypto-currencies are not linked to the underlying blockchain.’ Or lately it’s been, ‘these prices rises aren’t justified by the intrinsic value of the technologies.’ Only problem is, there’s no such thing as intrinsic value, the observer determines worth, it is forever and always a function of human individual consciousness.
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Market prices come about as a result of the participants in the marketplace subjectively and collectively valuing that asset based on their preferences coming from their analysis (however strong or weak) of that market. Many precious metal bugs would question this insight with the statement, ‘Gold has intrinsic value.’ However, it is the collective perception that gold has intrinsic value resulting from it being a monetary metal for thousands of years, which lead to society placing value on gold. Gold has no value without a human being there to value it.

There is no difference with the blockchain and crypto-currencies. The price, at any given time, (whether overvalued or undervalued) is the price the collective market participants put on not only the currency itself, but on it’s underlying blockchain, on other crypto-currencies, on the potential of the technologies into the future. Price changes are actually a reflection of individual preferences changing which in term form objective prices.
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So there you have it. Subjective value, collectivised in the form of people buying and selling, leads to the formation of market prices.

I implore you humbly to resteem for this understanding of value and crypto to have maximum impact.

... and remember,

Anarchy is nature, nature is anarchy.
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