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Have you been hearing a lot about *intrinsic* value lately? This concept refers to a "fair valuation" framework, which is an attempt to "price" an asset based on qualities like its direct utility (in the case of a commodity) or income flows (eg. an equity or debt share). But [1]
"Fair value" does not easily apply to *money* because money is a numeraire. Money is self-referencing and acts as a store of value, to aid what economists call "consumption smoothing". This is why there are so many debates on how to make a fair valuation for gold, [2]
which has been used as money for thousands of years, albeit less so in the past 80 years. However, gold is also an industrial commodity, so people are generally comfortable with the idea that its "intrinsic value" can be calculated based on its irreplaceability in [3]
particular commercial applications, along with retail usage, and taking supply dynamics into account. So let's undertake a thought experiment where we change different properties of gold and see how they affect its "fair" valuation. We'll start with an easy scenario. [4]
Imagine that gold was easily mined, easily forged, abundant in supply, hard to store or track or protect, and estimates of the total gold stock were continually being revised due to this uncertainty. In this case, gold would be a poor store of value, and its fair value is [5]
roughly equal to its essential industrial usage with no additional monetary premium. Users of gold would be incentivised to store little of it, and to use it quickly when it is on hand (to mitigate for its risks and uncertainties, and high cost of carry). Open and shut case. [6]
Next, imagine that gold's commercial value is entirely superceded by some other metal. Industrial demand falls to nil - gold has no utility in the tangible world, and is no longer even used for jewellery. Maybe it just hangs around as a niche nostalgic collectors item. But... [7]
Imagine if this gold was also: impossible to fake; highly divisible; had v low cost of carry; a fixed total supply and a perfectly transparent trajectory of issuance (ie. its supply schedule is known in advance) that was cheap to audit; could be stored digitally if desired; [8]
could be wired to any person or business over Internet, or satellite (even on bank holidays); was always operational; and its users could easily verify themselves as the rightful owners without contest at any time. Who would want to hold this gold? How would it be "valued"? [9]
Its very likely that, were this hypothetical digital gold ever to appear, its value would be highly contested and uncertain due to its strange blend of properties. It would probably be very volatile when measured against other forms of money, until a critical mass of users [10]
created sufficient consistent demand such that a natural 'price floor' emerged (say, a 200-week moving average), supported by early adopters, then companies. This would only occur if it worked very reliably and predictably, and if users were confident that it would continue [11]
to do so into the foreseeable future. Even still, it would only take off if it could outperform existing monetary competitors with respect to the myriad properties of money that people and businesses need and expect (retain purchasing power, easy to pay bills with, etc). [12]
It seems unlikely that this weird digital gold will ever exist, as it would require a computer scientist of untold genius to solve the well-known "double spend" problem, and it would need to be heavily audited for anyone to trust it, spanning hundreds or even thousands of [13]
independent auditors to constantly check that no one is lying about their balances - who would volunteer to do that?!
Even then, to onboard many users, a whole industry of software and hardware developers would need to emerge to build it out. Unlikely given the risks. [14]
Even then, to onboard many users, a whole industry of software and hardware developers would need to emerge to build it out. Unlikely given the risks. [14]
But, hypothetically speaking, it might turn out to have high utility for groups that place a premium on qualities like transparency, immutability and portability.
Best case? Within a decade or two, its market cap could even overtake that of Visa, Mastercard and PayPal! [15]
Best case? Within a decade or two, its market cap could even overtake that of Visa, Mastercard and PayPal! [15]
Anyway, we can observe that concepts like "intrinsic value" probably don't generate useful results when trying to judge a monetary commodity like gold, or in valuing one unit of account against another. Measures such as "purchasing power parity" might be more worthwhile? [16]
And, although just a thought experiment, it can maybe teach us something about our collective understanding of what makes good money. This is really worth reflecting on - after all, money is the "base layer" on which our entire society functions 
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