The Greek philosophers, Socrates, Plato and Aristotle, form a chain of mentor and pupil. Not just philosophers—they were also educators. Aristotle, in particular, was deeply concerned about civic and political affairs. He lived from 384 to 322 BCE.

During Aristotle’s formative years, landowners, shopkeepers and commoners shifted from barter to currency. Even those far from the city accepted chits of stored value rather trading food for chariots, medicine or clothing. Having money in your pocket conveyed upon traders a world of benefits, a fact of which Aristotle was keenly aware.

In the 4^th century BCE, Aristotle pondered the issue of a proper coinage. Upon debate, research and reflection, he defined five characteristics that define a functional and convenient form of stored value or currency. The characteristics point to something that is trustworthy, portable and easily tradeable. He said that money should be:

• DURABLE Money must stand the test of time and elements. It must not fade, corrode or change throughout its useful life.
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  Two thousand years after Aristotle, we have come to accept that money can be recalled, reprinted and even stored and transmit in ways that were not envisioned by the ancient Greeks. And so, today, our list drops this first requirement and splits Aristotle’s second item into our #2 and #3, below.
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• PORTABLE: Money must convey a high value relative to weight and size. Today, we use ‘portability’ to mean that a buyer can carry either cash or a widely accepted instrument on his person at all times—except, perhaps, when he is bathing.
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• DIVISIBLE: Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics or its value.
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  For example, if you cut a bar of gold in half, each half is worth ½ bar of gold. Likewise, you can shave gold into very thin pieces and still ascertain fractional value by weighing it with reasonably good accuracy. Not surprisingly, tulip bulbs—like garlic can be divided, at least into 6 or 8 similar sized pieces. But wait! Tulib bulbs have other problems. They are perishable and farms can grossly inflate the market by growing more. On the other hand, a pretty, round marble is difficult to divide without smashing it into pieces; And then, it loses the property that gives it luster and enchantment. Therefore, marbles make a poor currency.
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• FUNGIBLE: A functional form of currency is exchangeable for a like denomination, without concern for recovery of the original asset or token.
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  For example, if you loan a car or a favorite coat to friend, you want the return of that same car or coat—not just one of the same value. On the other hand, if you loan 100 dollars to a friend, it makes no difference if he returns a 100 dollar bill, five twenties, or even a personal check—as long as your bank accepts it.
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• INTRINSIC VALUE: The value of money should be independent of any other object and useful as an inherent value contained in the money itself.

Hold on now! This last property jumps to the heart of the whole Bitcoin debate…

Some economists take property #5 literally. That is, the money itself must be a thing of very dense value, like gold. Each transaction is simply the trade of two things with equal value. One is just more value-dense than the other. For example, you can trade 30,000 dollars worth of gold for a new automobile. (Ignore for a moment that I am referring to dollars in an example in which gold is the only portable value medium).

But does a US dollar have intrinsic value? Before 1972, foreign governments could redeem their US dollar reserves at a fixed rate of $35/oz. The bill wasn’t made of gold, but at least it was backed by a fixed exchange rate and the promise of a fairly stable national government.

That promise was severed by the Bretton Woods agreement. Now the dollar is as much a fiat currency as Bitcoin. In fact, it has much less going for it!

Bitcoin is valued by a growing community because of its provable scarcity coupled with “brand recognition” and its growing adoption as a very low cost medium of exchange. In effect, it is scarce, portable, frictionless, and is rapidly cultivating recognition and trust.

Of course, scarcity is also a property of gold, because it is a limited natural resource. It is difficult to find and to refine. But dollars have nothing to do with gold. In 2013, a dollar bought less than 1/1600 oz. It’s not hard to divine the reason for this rampant inflation against intrinsic value. There is no trustworthy cap on its supply. Just bickering politicians, bad loans and uncontrolled borrowing and printing.

Which measure of value is reasonable? How can intrinsic value mean anything other than real, honest-to-goodness portable value? To answer this, let’s look closer at gold, and then let’s compare Bitcoin to the US dollar…

Gold is an industrial metal widely used in jewelry, electronics and chemistry. Although jewelry and many electronic gadgets are not a necessity, they form a vast and widely dispersed market (along with investment, of course).This establishes a value that floats with supply and demand. Although the value floats (especially relative to government issued currencies), it is reasonably immune from long term manipulation by governments, institutions or individuals.

Critics point out that Bitcoin has no intrinsic value and that it’s transient value is based on speculation or greed. That is, its value is driven by individuals who want to possess something that is limited, but ultimately worthless. In the case of Bitcoin, the ‘thing’ is a unique string of code. Owners can verify that the code is a provably unique fraction of a finite asset. The “asset” is a limited solution set to a mathematical equation. Users are trusting math rather than the transient promises of a government.

And the really neat thing about all this is that the government can trust it too!

But wait! US Dollars and most other national currencies have no value either. At one time, each dollar was a legal contract. It was a promissory note from the US Treasury that could be redeemed at any time for 1/35 oz of gold. That is, it had a genuine value and a fixed exchange rate of $35/oz per gold. (Well, at least it could be redeemed by foreign banks. US citizens outside of industry and jewelry were barred from owning gold, but that’s a completely different story!).

So in the jargon of economists, both Bitcoin and paper currencies have no intrinsic value. A Bitcoin has ethereal value only because some individuals seek to stake a claim to something that is scarce and the dollar has value only because the US government says so and accepts it for taxes and debts.

In truth, both Bitcoin and the dollar have value because we trust that they are rare and likely to remain popular. Individuals and organizations that accept either one, trust that they can spend or exchange it—at least in the immediate future. That is, they assume that someone else will value it within the time frame that they possess it. They also trust that it will not quickly inflate due to lack of demand or a rapidly growing supply.

And therein lies the problem. Bitcoin detractors suspect that the demand for something mathematical will dry up—perhaps because another fad will come along, or because governments will regulate or outlaw its use. But Bitcoin proponents point to a far more alarming concern with dollars. They are not provably scarce and they can easily be lost, manipulated, printed, leveraged with government debt or even forged.

In fact, dollars have no production cap at all. Their circulation and rates are governed by monetary policy. Banking and transfer regulations are used as a political tool, to effect social or territorial policy, or to punish and manipulate other countries. Most importantly, the entire system is based on the good faith and credit of a country whose industrial base has dried up, whose treasury is deep in debt and whose government sometimes seeks to redistribute wealth rather than create wealth.

Recall that in property #4, Aristotle also said that money should be ‘independent of any other object’. Unfortunately, this is an ideal to which no currency even comes close. The day to day value of any currency—even gold—is set by both supply/demand and a collective perception of world events. Even a rumor can affect the value of money drastically.

But certainly, money should be free from government manipulation, inflation, debt and political agenda. While no currency can be free from short term effects of speculation (that monkey is tamed by time and by arbitrage), at least with Bitcoin, the long term trend favors investors and anyone who saves. That’s because no one can ever mint another Bitcoin. There is a theoretical and literal cap of 21 million coins. Although there are only 12 million in circulation today, most traders assume that all 21 million exist and will someday be in circulation or savings. That means that each and every Bitcoin will rise in value as it is shaved thinner and thinner to support an increasing number of users and in any economic expansion that ensues.

Sure, gold has intrinsic value! In the strict sense, dollars or Bitcoin fail this test. I cant match wits with a Greek philosopher. But I suspect that Aristotle would accept this: In the absence of bonding a currency with underlying assets (like gold), a scarce and or provably capped supply is a far better assurance of value than the oversight of a government or bank.

In short, I would replace the words “has intrinsic value” with “a provably scarce commodity that is immune from inflation and manipulation”.

Further reading:

The Genesis Block specializes in digital currency research and data. In June, veteran journalist, Phillip Archer, measured and compared fiat money (e.g. dollars), gold and Bitcoin against 9 desirable characteristics of money The article title is a spoiler, but it’s a superb read! In fact, Archer makes economics understandable. This should be a must read for researchers and pundits alike.

Related: Ellery’s articles about Bitcoin
Ellery is a founding member of CRYPSA, the Cryptocurrency Standards Association