Peter Schiff is absolutely one of the smartest guys out there, and I have a lot of respect for him. However, he’s still missing the point about bitcoins and how they have intrinsic value. But first, here’s his most recent video on the topic:
Peter is stuck on how gold has intrinsic value through physical usage where bitcoins have no physical usage and therefore no intrinsic value. He is quite correct if he means that bitcoins have no physical intrinsic value. However, this is not what he means. He means that they have no intrinsic value whatsoever. This is where he misses the point.
Peter’s First Mistake
While you cannot make physical jewellery out of bitcoins, and you cannot use bitcoins to create consumer, commercial or industrial electronics, the intrinsic value of bitcoins are informational.
Information itself has value. For example, imagine that I could tell you with 100% accuracy what will happen over the next week in the bitcoin and stock exchanges. Would that be valuable? Of course it would.
Bitcoin has this kind of value: information.
However, that’s a bit murky. What I had for lunch is information, but not particularly valuable information. So what kind of information is it that bitcoin has?
Bitcoin uses strong cryptography to guarantee its integrity which makes it something that we can trust. We do not need to believe anyone or place any degree of trust in an institution or organisation or in any government. Instead, we can rely on the laws and principles of mathematics and physics.
When you to transfer money to someone through the banks, you are trusting in the banks. This trust is not always well-placed. Anyone who has done a significant amount of banking knows that there are problems. The fact is that you cannot trust banks explicitly. Add to this that many countries have added “bail-in” laws, and there is even less reason to trust the banking system.
Personally, I’ve had quite a few banking screw-ups that were entirely the fault of the bank. Some involve outright fraud on the bank’s part. These have cost me money with no recourse for compensation despite the bank’s errors.
Bitcoins, on the other hand, are guaranteed by the laws of mathematics. They are guaranteed by the physical laws of the universe. The following graphic you can find floating around on the Internet, and it explains some of the math and physics behind bitcoins in terms of how secure they are, which is to say how much trust you can place in them (click for a larger version):
That’s a pretty compelling argument for the security of bitcoins. It is that security that creates trust.
The practical upside is that you suffer no 3rd-party risk.
Peter’s Second Mistake
Peter never mentions regulations or laws. This is critical to understanding in part why bitcoins do have real informational value.
Where fiat currencies and precious metals are heavily regulated, bitcoins have no regulation at the moment, and there can be no enforceable regulations on them. That is to say, more than just having a general lack of regulation, they CANNOT be regulated.
Capital controls are becoming more stringent with a greater stranglehold on people. Governments are more keen than ever to tell you what you can and cannot do with your own money. If you wire more than $10,000, red flags go off, your transactions are marked, and possibly investigated. Who knows? You could be a terrorist! This is of course ridiculous, but it is the reality we now live in.
Bitcoins, on the other hand, can be sent to anyone from anywhere with no limits and with the help of a VPN (virtual private network – see my post “Getting Around Internet Censorship: Internet Freedom” or “How to Get Around ISP Filtering/Censorship“) and TOR (The Onion Router). By using a VPN and TOR, you can anonymize yourself and make your bitcoin transactions truly anonymous.
Now, if you believe that the products of your labours should be ruled and governed by some elite ruling class, and that the fruits of your labours should be subject to scrutiny any time you wish to make a purchase, then the value of bitcoins is likely to be a negative for you.
However, if you believe that how you spend the fruits of your labours is your own business and nobody else’s, then the ability of bitcoins to facilitate unlimited transactions anonymously is most likely a huge positive for you.
This ability of bitcoins is aided again by the powers of mathematics and crytography in a VPN and TOR. Again, we are back to the power of mathematics and cryptography to secure your freedom. This is about information, and not about any physical intrinsic value… or perhaps not quite that fast…
With governments set to arrest you, steal your wealth, and throw you in a cage, bitcoins, VPNs and TOR give you the power to protect yourself from the violence and aggression of the state.
Gold offers no such protection, and is in fact far less secure and far more likely to land you in a cage.
While bitcoins have no physical intrinsic value (other than being able to protect you better from being arrested and thrown in a cage), they have informational value on many fronts, three of which I have walked through above – trust, transferability, and protection. What Peter misses is the intrinsic informational value in bitcoins. He’s got their physical intrinsic value nailed though.