Thread by @KyleSamani

0/ A thread on valuing stuff

Any stuff really

1/ All assets, without exception, are valued on the basis of supply and demand

As supply approaches 1, market mechanics often become very weird. This is why certain pieces of real estate, domain names, pieces of fine art, etc can sell for massive sums

2/ When supply is 1, any demand can cause the price to sky rocket

3/ However, there are a few categories of assets that can *also* be valued on the basis of the yield the generate

To be clear, there is no law that dictates the value of an asset based on yield, but yield helps market actors figure out if they demand an asset

4/ As a simple example, let's just take an annuity that pays you $100 / year

If your discount rate on that is 5%, then that asset is worth $2000 to you ($100/.05)

5/ But let's say someone offers you $2500 for that asset. What should you do? Should you sell?

Well, if your discount rate is 5%, then you would want that annuity to pay you $125 / year.

So either you sell now, or you accept a lower yield of 4%

6/ The same works going the other way. If someone offers you $1500 for the annuity, then based on your discount rate of 5%, you would only expect $75 / year

So you'd be crazy to sell

7/ Most assets we think of - real estate, debt, and equities - can be valued based on their yield. As such, there are relatively objective valuation models for these assets that all boil down to the simple example above, albeit with more complex inputs and models

8/ The fact that investors have a target amount of yield they're seeking effectively provides both a ceiling and a floor on the valuation (in the long run. in the short run, the market can be irrational)

9/ If the price goes up too much, yield plummets and hodlers sell

If the price goes down too much, yield-seekers buy because the yield is great

10/ So, what about assets that don't generate yield. How do the supply and demand mechanics for those assets work?

Well, it varies *widely*

11/ The only real truth to these assets is that they're NOT valued, but just priced based on marginal supply and demand

This is purely arbitrary, yes

12/ The simplest way to understand this is to consider the USD-EUR exchange rate

Does anyone *value* EUR in terms of USD?

No

EUR is just priced in USD. This is purely a function of capital flows

This post provides a nice explainer - aswathdamodaran.blogspot.com/2017/10/the-bi…

13/ All fiat currencies are priced this way, as are commodities and commodity monies (Bitcoin, gold, silver, etc)

{fin}