Where’s the Value?
I'VE NEVER BEEN MUCH of a collector. As a kid, I tried collecting comic books for a short time. I found that, after I read them, I had little use for them. I stored the comic books in an open box in my closet, where their translucent sleeves attracted a thick blanket of dust but little interest.
Later in life, I started a small wine collection. I didn’t get too far. It turns out I drank the wine at a rate far quicker than I acquired new vintages. At least I didn’t need to dust the bottles.
Collectibles like comic books, wine, works of art, baseball cards and cryptocurrencies are considered alternative investments, and quite different from shares of publicly traded businesses.
A collectible has value solely because a group of collectors believes it has value. Its price fluctuates based on a number of factors like uniqueness, cultural significance, condition and prevailing fashion trends. A collectible’s value is what we might call “culturally constructed.” A collectible doesn’t “do anything,” so it has no intrinsic value—only a price.
Arguably, the U.S. dollar is a collectible of sorts, especially when it’s held in cash form rather than invested in, say, a certificate of deposit or a savings bond. The dollar has value because large numbers of people agree to use it as a medium of exchange. But one can’t eat dollars for nourishment, or plant it to bear fruit, or grow it into future building material. If we collectively stopped believing in the dollar, it would cease to have value. But the dollar’s status as the world’s reserve currency imbues it with a particular value that makes it quite different than a collection of Pokémon cards or your mother’s closet full of Beanie Babies.
Unlike a dollar, which as of this writing will earn you more than 5% interest in a money market fund, bitcoin earns nothing. Zero. It isn’t backed by any central bank or government authority. It has been likened to a “pet rock” by JPMorgan CEO Jamie Dimon.
Bitcoin doesn't do anything. It’s a purely speculative bet on some fantastical deregulated future in which the governments of the world allow fiat currencies like the dollar, yen, yuan and euro to be “disrupted”—in other words, replaced— by a privatized collectors’ item. Bitcoin embodies the worldview of teenage boys who spend way too much time playing the video game Grand Theft Auto and opening loot boxes in Counter-Strike: Global Offensive. To borrow from an old Dead Kennedys song, bitcoin is “anarchy for sale.” Yet there are plenty of buyers and sellers who have created a market for the digital token and sent its price to the moon based on a story they tell themselves.
Gold is another example of a pet rock. Fear the crypto bros and their artificial intelligence bots are ushering in the end of the world? Buy gold, some say. Why? Gold has withstood the test of time as a store of value, they say.
While gold is a precious metal and has various industrial uses, it too fails the intrinsic value test. Gold does more than bitcoin, in the sense that it has an actual use-value, but that’s not saying a lot. The amount of gold on the planet is limited, which makes it rare, but scarcity alone doesn’t imbue something with intrinsic value.
In contrast to both gold and bitcoin, a wheat farm has intrinsic value because it produces a yield of wheat. People eat wheat to survive. The price paid for a bushel of wheat fluctuates based on a host of factors, but the farm’s value is derived from its capacity to produce wheat. In other words, the farm does something. The farm is an enterprise that produces a commodity. The farm also has the potential to grow and increase its yield of wheat. Unlike a collectible, in which price and value are indistinguishable, the farm has an intrinsic value potentially divorced from its market price.
For example, the market could determine that the world is oversaturated with wheat this year. A farmer who wanted to sell shares of his or her farm might need to accept a lower price than if wheat was in high demand. But as long as the farm maintained its capacity to produce wheat, and wheat continues to be a staple of the human diet, the farm would continue to have some intrinsic value. This kind of discrepancy between the farm’s price and its intrinsic value provides opportunity for active investors.
While I’m not an active investor, I’d rather my total market index fund own shares of an enterprise like a wheat farm than a collection of pet rocks. The successful wheat farm not only produces regular earnings, but also it possesses the potential to increase those earnings as the business expands. Pet rocks, on the other hand, may appreciate in price based on the stories their owners and celebrity shills tell. But pet rocks can’t reproduce themselves, nor can they grow. They are, after all, just rocks.
Jamie Seckington grew up on the beaches of Southern California listening to punk rock and raging against the machine. Decades later, he now lives a quiet life in north Idaho and reads HumbleDollar regularly. He has learned to appreciate the many ironies that life offers. Jamie's previous article was Testing My Faith.
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