A common refrain from detractors is crypto isn’t worth anything because it has no “intrinsic value” (IV).
Almost no one applies this term consistently. We use IV arguments to tout the things we already like, and to disparage the things we don’t. It’s an amorphous term that vaguely takes on whatever shape you want that suits your priors.
Let’s dissect what “intrinsic value” really means.
What do people think they mean when they say IV? From what I’ve observed, there are two different definitions:
The real, core meaning of intrinsic value: IV means something has real-life utility, independent of a market price assigned to it. For example: pretend there’s a market for my shoes, and that market offer was $0. Do they have zero value?
No, because they have real utility. They protect my feet, I use them to walk. Their value is not dependent on their market price. The innate, intrinsic value for them is their utility.
My car has IV, it performs tasks I need to exist. The hammer in my toolbox has IV. My home has IV, it shelters me. My computer has IV. Glue and cardboard boxes have IV. Your Playstation has negative IV, it wastes time (ha, kidding. kind of.)
What is their IV amount? That’s subjective. But the point is IV means something has value independent of its financial market price. You could price all these things at $0, and they’re still not worthless.
No one thinks in these terms when they judge the value of something. But almost everyone who criticizes crypto as having no IV implicitly uses it this way. They use a definition they don’t apply to anything else, providing them a post-hoc, smart-sounding justification when really they just don’t like crypto.
We'll call this primary intrinsic value definition the Hammer Method.
The second, more-common definition of IV: is referring to the asset’s discounted cash flows (DCF). When TradFi guys refer to IV, 99% of the time they mean how much cash will the asset return over its lifetime.
Technically, a stock’s IV (and the company’s market cap) is the sum of all the cashflows the business will generate during its existence, discounted back to today. Projecting those cashflows is an approximation at best.
Bonds are valued similarly, though due to their defined duration, coupon, and principal return they have more concrete pricing. Interest rates can make these market prices fluctuate substantially.
However only about 75% of stocks pay a dividend. And the most richly valued ones (tech stocks) almost never do, or it’s very small. No cash will be returned to you from many stocks. The stock in this case really only represents an equity claim on company assets. And in a poetic twist: they almost always have little to no book value (book value is typically composed of hard assets with market value that can be sold off). But God help you if you ever need to exercise that claim; that means bankruptcy happened and the share price was decimated. Stocks are a junior bankruptcy claim that are severely impaired if the business fails.
So what do most tech stocks represent insofar as IV then? Because few tech stocks pay dividends (and the dividend isn’t at all why investors own the stock, either). So you get no cash returned to you, and you absolutely don't buy them hoping to exercise a claim on company assets.
They derive their value entirely from the stock price going up as revenue grows. Their market price loosely follows a DCF methodology, but in no real sense will you ever get cash returned to you by the company. As a shareholder, what exactly are you discounting then?
But no TradFi guy will disparage anything listed on the Nasdaq for having no IV, even though its valuation is essentially operating on the same presuppositions of many crypto governance tokens.
This second IV definition we'll call the DCF Method.
Most use the Hammer Method when disparaging crypto. But they only apply the DCF Method to their stocks, even when DCF assumptions don’t really apply, or when the DCF Method would give some crypto IV as well (eg. stETH pays a dividend).
On fiat currencies: These have unequivocally zero Hammer Method or DCF Method IV. The utility of fiat is predicated on a market consensus they can be used to transact. If the market assigned USD a zero value, it'd have zero use and would cease to be a medium of exchange; fiat’s entire utility is derived from its market value. If something’s utility is dependent on its market price, then it fails the Hammer litmus test. The Hammer Method heuristic is always “if this was priced at zero, would it still be useful?”.
Additionally, USD doesn’t represent a claim on the US economy, and not only does it not pay a dividend, it rapidly depreciates.
It isn’t edgy to describe currencies as having no IV, but it’s important to emphasize the same people who dismiss crypto on IV grounds have no problem that the currencies they store their wealth in have none of it. The point of this logic exercise is to expose inconsistencies and hypocrisy.
On gold: It trades around $1.8k/ounce due to a centuries-old Lindy effect that believes it’s a store of value (SoV). However if the market assigned a $0 price to gold, it would have some Hammer IV as a contact metal for electronics (it’s a good conductor of electricity and heat). I’m also open to giving gold Hammer IV points as a bartering tool, since even with no market value many would still accept it in exchange for goods. Because the SoV bartering transcends the market price, it passes the Hammer test here.
Hammer Method Intrinsic Value: even when priced at $0, things that provide utility have Hammer IV (shoes, homes, cars, water, etc.). Gold has some. Stocks, currencies, and most financial assets have none. Select crypto that achieves Lindy SoV beliefs (BTC, ETH) may eventually have it as a bartering tool.
DCF Method Intrinsic Value: assets that explicitly return cashflows have DCF IV. Bonds have the purest form of it. Many stocks, currencies, and gold have none. Some forms of crypto do where the value explicitly accrues to the token and/or pays a dividend (eg. stETH, xSUSHI).
The only exception to the IV hypocrisy: if you come across someone who thinks stocks, gold, crypto, fiat, etc. all have zero IV by consistently applying the same pure Hammer reasoning, then you’ve met a Hammer Maximalist. Please shake that man’s hand because at least he’s consistent in his viewpoints. You should probably befriend him too, since I’m sure he knows how to hunt, forage, farm, and has a hidden bunker somewhere. Good guy to keep around.
When advocating for DeFi, it’s important to illustrate by way of example how many common crypto criticisms also apply to things people already own and accept as valuable. I encourage you to challenge people to be consistent with their definitions and applications of words. Let’s win over skeptics and bring the next wave of onchain adoption.
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4 thoughts on “Crypto, Tech Stocks, Hammers, and the Misuse of “Intrinsic Value””
Great Content. Great job team