This blog is in response to a comment thread here: https://bitcointalk.org/index.php?topic=25482.60
First thought is more of a reaction to studying environmental ethics. There is no such thing as intrinsic value. Value is determined as part of the economic calculation and it is always measured relative to something.
A good read on the subject of denationalized currency is Hayek’s “Denationalization of Money” Available here:
There are lots of different kinds of money, seed is one that the joint mentioned earlier, so are stones, gold, silver, platinum, paper, cloth, wood rings… For kids, at least my age crowing up baseball cards and marbles represented a form of currency.
I look at the economic calculation more from an Austrian perspective, specifically Ludwig von Mises “Human Action”. Action is an interesting thing especially when we look at it from a perspective of physics. It is observable and countable. Because it has a defined measure that means we can apply statistics (in economics this is called Game Theory). With the application of statistics we can aggregate the action of a manifold of individuals acting and low and behold we get the fundamental equation of thermodynamics with utility having the context of measured action the exact same as energy in thermodynamics. I am in the process of translating a series of papers I wrote into html @http://statisticaleconomics.org
For a thermodynamic analogy to economics here you go:
The interesting thing that I find is that in a thermodynamic analogy there is a marginal utility to information, we call this marginal utility temperature and the measure of information (rather lack of knowledge of a state) entropy.
So I still have not answered where the value of a currency comes form. It is the amount of action that can be traded between one individual to another. They agree on the value of the currency at the time of the transaction. For more on this read:
Currency is a means of exchanging action. The size of an economy is its money supply. The size of a physical system is its volume. The marginal utility of money is akin to pressure in physical system.
When we agree to use bitcoin and trade in it, more importantly when we choose to do business in it, we impart some of our action and our own knowledge of value to the currency. This acts to increase the pressure of the system.
So where you might ask did the initial value of the bitcoin come from. It came when Satoshi expended the first electron to decrypt the very first block (not counting his work in developing and testing bitcoin). See that electron just did not appear at his home with some preordained potential of 120 VAC just because. It came to him because he exchanged his action (I’m assuming he’s from US please forgive me if you are not) stored in USD for the infrastructure to produce and deliver that electron to him. The cost of electricity to decrypt the very first block was the value of that first bitcoin.
I find it convenient to measure things next to something I can measure with a ruler. I like converting the value of a currency into the amount of primary energy that it purchases. $/J is the marginal utility of the dollar measured relative to the definition of a joule, the dollar being an american is the one I study the most. Ayers and Warr equate 80% of GDP to exergy (useful work) input to the economy:http://www.amazon.com/Economic-Growth-Engine-Prosperity-International/dp/1849804354
Useful work is the measure of action that can be achieved with that energy. Our action is not what we do with our hands but what we can affect with our knowledge. To change the world around us, it requires exergy. This is a combination of the first and second laws of thermodynamics. So my selection of energy as a measure of utility is not mere heuristics.
So “the joint” please refrain from denigrating bitcoin. You do not have a logically defensible position. If you doubt its value, don’t trade in it. If you are trading in it then you don’t even believe your own gas, because your act of trading is adding value to bitcoin. Go ahead and sell off. Please, I need to buy some BTC for my daughter. My kids keep there allowance money in BTC.
As for measuring the value of something relative to something else, this goes back to how we define Euclidian space and the Lebesgue measure. Everything is relative to something else, Pick a defined measure and reference everything else to it. In thermodynamics, the scale is not necessarily important it is the relative change. The same holds true in economics.