What makes things valuable?

by | Dec 23, 2021 | Investment, Life Planning | 0 comments

You’ve probably already wondered why we fight so hard to own rectangular pieces of paper with faces on them. Or to own gold. Or real estate. This is my attempt to answer the question: what gives things value? Including my take on bitcoin.

Why do you go to work? Well, maybe you enjoy working and that’s great, but it’s probably not the ultimate reason. The ultimate reason we work is because we need money. But that’s not exactly right. We don’t need money. We need what money lets us have. Like food, shelter, clothing, etc. That’s why we need money, and that why we work.

So, one aspect of value is utility. If something is useful to human existence (and we will see that the term « useful » is generously defined), it is valuable.

But utility is not enough. Air is useful, but it doesn’t have any economic value. Water is useful, but in developed countries, it’s hardly worth anything. Why? Because air and water are everywhere. Water literally falls from the sky. Air is available everywhere, except in high altitudes and in oceans. So the other element of value is scarcity. Or put differently: difficulty to be produced.

Things that are useful and difficult to produce are valuable.

Now, let’s investigate different examples under these criteria:

Why is gold valuable?

Gold is very difficult to produce. You can’t just go for a walk and expect to find gold. It requires heavy machinery and lots of labour to extract one ounce of gold from the ground. And gold is useful. Gold is a wonderful conductor of electricity so semi-conductor manufacturers buy tons of gold everywhere to produce electronic equipment. But first and foremost: gold is pretty. And humans like pretty things. Men and women alike enjoy jewellery and since gold does oxidise or decay, it’s the perfect candidate for rings and necklaces, and has been for millennials. In that sense, gold is useful. Now, that doesn’t tell us how much gold is worth and no one has the answer to that. But it tells us that it has some inherent value.

Why is real estate valuable?

Land is not that scarce. There is lots of land that isn’t used at the moment. Most of Africa and Russia isn’t used. What is scarce and difficult to produce is land relatively close to the networks that make modern life possible (transport, communication, water, electricity, etc.). And land is useful because we need land to build houses. Houses are useful because it gives us shelter and security, two basic human needs. So, real estate is valuable.

Why are stocks valuable?

A stock is part ownership in a company. Companies produce things that people want and sell them for profit (at least, that’s the general idea). As part owner of a company, you’re entitled to part of the profits. Essentially, you own a device that produces money, like a conceptual money printer. And if money is valuable, then a money printer is valuable as well…

Why are Swiss francs valuable?

Now, that’s a tough one. The easy answer is the one I laid out in the first paragraph: because it lets us acquire things that are valuable (or useful and scarce). But that’s not a great answer, is it? What gives the Swiss franc value? Well, it has value because everybody agrees that it has value.

But there is more than that. There is one mechanism in our society that forces us to own some Swiss francs at some point. And that is… taxes. Everybody has to pay taxes. And taxes can only be paid in Swiss francs. Not in gold, not in cows, not in services. In Swiss francs. That means that 4 million households need some Swiss francs on their bank account every year. Anyone who can’t pay taxes because they don’t have Swiss francs, will eventually end up in jail. I would say that not being in jail is pretty useful. If it wasn’t for taxes (and the jail time associated with not paying those taxes), Swiss francs wouldn’t have inherent value. Sure, we would still need a mean of exchange but we could use seashells or pretty rocks for that. Or bitcoin…

Why is bitcoin valuable?

I haven’t talked about bitcoin on this blog so far, but I’ve been reading about bitcoin ever since I’ve heard about it in 2013.

To answer your burning question: no, I don’t own any bitcoin. Because I don’t (yet) fully understand what makes bitcoin inherently valuable.

Bitcoin is scarce (there will only ever be a total of 21 million bitcoins) and notoriously hard to produce (it takes a lot of computing power to produce/mine bitcoins). But that scarcity is completely artificial. Anyone could download the source code of bitcoin and start producing their own bitcoin clone. And lots of people do that: all those « alt-coins » or cryptocurrencies are derivatives of bitcoins. And as soon as they sell one token, they become virtually millionaires (see my method to become a millionaire instantly).

But the main stumbling stone for me is utility. Nobody in the world wants or needs bitcoin. What people want is the dollar value associated with bitcoins. Think about it: what would you do if I gave you 100 bitcoins today? Well, you would probably sell a few and keep the rest hoping that you could sell them later for even more money, right? You don’t need the bitcoin itself. And nobody in the world needs the bitcoin itself.

You can’t buy food with bitcoin. You can’t pay your rent with bitcoin. You can’t pay for daycare with bitcoin. And even in the few instances where you can, the prices are not labelled in bitcoin: they are labelled in dollars or Swiss francs (fiat currencies). So the bitcoins are just a proxy. What would make bitcoin valuable is: something that people want, which can be paid for in bitcoin and only in bitcoin, and whose price is set in bitcoin. For instance, if the vaccine against cancer would cost 1 bitcoin and could not be bought in anything else but bitcoin and that price would be independent of the value of bitcoin in fiat currencies, that would make bitcoin valuable. Because everyone would need to own bitcoin (and only bitcoin) in order to purchase this medication.

By the way, this requirement is met with Ethereum: you need ETH to use the Ethereum Virtual Machine. More here.

There are lots of other issues with cryptocurrencies but I will save that for another article…

A common portfolio allocation mistake

Portfolio allocation means deciding how much money to invest in which asset. And most people do it wrong.  Let’s that you have 1 million francs. How much should be invested in bonds, stocks, real estate, gold, crypto, cash, etc. ? Deciding how much (in %) should...

The case for Ethereum and why it’s valuable

 I believe that the Ethereum is valuable. Here is why...  I first learned about crypto in 2013, roughly 4 years after the first bitcoin was mined. Since then, I’ve always been convinced of one thing: blockchain is an amazing technology that solves important...

The truth about dividends

Have you ever heard that investors should seek dividends? It's free money, right? Right?  This is the second article of the series « Popular but wrong beliefs about investing » Here is part 1: The stock market is like a casino. Today, I would like to explore...

Is it worth it to add to your second pillar?

Some pension funds offer the possiblity to make voluntary contributions to the second pillar. In most cases, it's also possible to "cover the hole". But is it a good idea?  When it comes to retirement planning, there aren’t many levers to pull in Switzerland....

Using retirement money to buy real estate

Is it a good idea to use your second and third pillars to finance the acquisition of your primary residence?  When a foreigner (like I was) learns about swiss real estate, he gets two shocks. The first one is the prices: it’s almost impossible to get anything...

What a loop pedal can teach you about financial life planning

A loop pedal will repeat and repeat and repeat and repeat a recorded sound.  Unless you’re a musician, you’ve probably never heard of a loop pedal. Basically, a loop pedal lets you record a sound and repeat that sound on a loop. But instead of telling you what a...

The biggest financial scam in Switzerland: real estate in Baurecht

Have you ever heard of buying a property in Baurecht (construction right)? It gives you a 20 to 40 % discount but it's also the biggest financial scam in Switzerland.  A lot of people aspire to become homeowners. But real estate is so expensive! So any trick to...

Which insurances should you buy?

An insurance salesman will tell you that you need to be insured for everything. But is that reasonable?  In Switzerland, there are a few mandatory insurances: Liability insurance if you’re a renter Car insurance if your own a car Health insurance if you own a...

Why inflation is good

Inflation is often seen as the enemy of investment performance and financial planning in general. Inflation is what made the German economy collapse in the 1930s and led (among other things) to the rise of Hitler and the Nazis. But it's the less horrible setting for...

Investment performance isn’t everything

What if I told you that investing at 7% can be more profitable than investing at 10%?  In this article about my best investment so far, we’ve seen that performance isn’t everything - liquidity matters just as much. But today, I would like to focus on performance....