That impish, trillion-dollar asset bitcoin has a way of disconcerting people. Part of the cause is probably the community of early adopters whose social skills are better suited for online roleplaying games than developing a new global currency or asset class. The goal of analysts should always be to set aside personalities and prejudices, though, and focus on what is happening, what is true, and perhaps why.

Washingtonian magazine recently dubbed economist Steve Hanke as one of the 250 most influential people in DC, his authority being in the “economic policy” category. It’s good to know that someone who doggedly tracks inflation around the world has a say in what happens with US monetary and economic policies.

The week before, though, unrelated to Washingtonian’s selection, I was disappointed to see Hanke tweet negatively about bitcoin’s new high price, saying, “Just remember— Bitcoin is no more than a highly speculative asset with a fundamental value of ZERO!” The tweet reprised Hanke’s anchor quote in a Wall Street Journal article by Paul Vigna, “Bitcoin’s Value Is All in the Eye of the ‘Bithodler’.”

What Hanke says is literally true, but overstated, I think,
especially from an inflation monitor. His choice to deride bitcoin as lacking
“fundamental value” steps away from one of the most important insights of
modern economics. He is not the first I have seen do this.

The subjective theory of value holds that the value of a
good is not determined by any inherent property of it — nor the amount of labor
necessary to produce it — but by the importance an individual places on it for
the achievement of his or her ends. There is no fundamental or inherent value to anything. People decide for
themselves what they value based on their own situations and plans. In the
aggregate, they decide what is valuable across society.

When I see people deriding bitcoin for lacking inherent
value, I interpret that as the speaker substituting out the community of actors
that decide prices according to the subjective theory of value and replacing
that community with themselves. It is rarely wrong to do that because values do
not change quickly in general. But hyperinflations have the name for a reason.
A disruptive technology may change how people value things more rapidly than
usual. And bitcoin may reveal (or conjure) a larger public appetite for
inflation-resistant financial assets than we have previously realized.

There are views other than Hanke’s. A superlative recent analysis by Fidelity Director of Global Macro Jurrien Timmer shows how bitcoin may be a part of responsible investors’ asset mix (interestingly, as a bond equivalent). On a recent episode of Coindesk TV’s First Mover, MicroStrategy CEO Michael Saylor made a passionate and, I think, effective case for getting bitcoin onto corporate balance sheets. Assets that some may regard as intrinsically valuable are held at a rather large opportunity cost, he says.

Has new technology upended the subjective theory of value? It
hasn’t. But Bitcoin may be causing some economic sophisticates to step away,
momentarily, from essential economic concepts.

The subjective theory of value is an insight of tremendous
importance not just to economics, but to freedom, progress, and humanity in
general. That is because it takes individuals’ aggregate decisions about what
to buy and sell as the primary source of information about what should be
bought and sold.

In the past, other contestants in economic theory such as the labor theory of value put decision-making about the allocation of goods in the hands of experts, who compiled statistical information about national production and — no, they weren’t experts. They were just at the top of powerful political machines. The result, still in the living memory of many, has been vast human suffering.

As analysts, we should let the actions of people guide our assessment of value. That is the only way to apply the subjective theory of value faithfully. Bitcoin is indeed highly speculative. But it may offer a pretty good risk-reward profile for many investors. It has no fundamental value, as Hanke says, but that’s because nothing does.

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