How things acquire value? 💰
(a short thread)
(a short thread)
1/ Things have either of these two KINDS of value:
- Inherent value
- Relational value
(In reality, things have both kinds of value but it mostly gravitates towards one or the other kind)
- Inherent value
- Relational value
(In reality, things have both kinds of value but it mostly gravitates towards one or the other kind)
2/ Inherently valuable things are what we humans consume either for our physiological (food, warmth, etc.) or psychic (entertainment, status) needs
3/ Inherently valuable things continue to have value even if you’re the last human on earth
4/ Things that have relational value exist between two or more people through an implicit or explicit contract.
Such things such as stocks, currencies, bonds have value only because we expect there’s someone else who’d also find them valuable
Such things such as stocks, currencies, bonds have value only because we expect there’s someone else who’d also find them valuable
5/ Obviously, relational value objects have no value if you’re the last human on earth.
6/ While the prices of inherently valuable things are set by consumption expectations of such objects in here and now, the prices of relational valuable things are set by consumption expectations about future.
7/ That is, price of a chocolate goes up because people want to eat more chocolate now, the price of a stock goes up in expectation that more people will desire to hold the stock in future
8/ Things that have relational value doesn’t just exist in someone’s imagination. They have to help serve an inherent desire of humans.
This is why stock prices and currencies deviate but revolve around an intrinsic value.
This is why stock prices and currencies deviate but revolve around an intrinsic value.
9/ In other words, all relational value has to be backed by an inherent value.
Because if it is not, people will flock to risk-free bonds whose inherent value is guaranteed by the government.
Because if it is not, people will flock to risk-free bonds whose inherent value is guaranteed by the government.
10/ Why would anyone buy a purely relational value object which is totally mood dependent?
The risk with such a thing is infinite.
So, ultimately relational values converge to expectations of intrinsic values.
The risk with such a thing is infinite.
So, ultimately relational values converge to expectations of intrinsic values.
11/ It’s straightforward to calculate intrinsic value of stocks. It’s simply lifetime expectations of cash that a company will generate for its shareholders.
Because different people have different expectations about future, there’s no correct intrinsic price.
Because different people have different expectations about future, there’s no correct intrinsic price.
12/ But the amazing thing is that even though there is no intrinsic price, I can’t invent whatever price.
If for a 100 rs stock, I bid 1000, I’d be foolish.
If for a 100 rs stock, I bid 1000, I’d be foolish.
13/ For commodities such as gold, the value is backed by the intrinsic uses of gold in industry AND consumer psychic need for status.
The price of gold reflects people’s expectation of how these two uses will evolve in future, along with supply of it.
The price of gold reflects people’s expectation of how these two uses will evolve in future, along with supply of it.
14/ What about currencies like INR? What’s the intrinsic value of it which backs the relational value of USD-INR?
The intrinsic value of any currency is ultimately purchasing power of it, which depends on supply of the currency and things that you can buy from it.
The intrinsic value of any currency is ultimately purchasing power of it, which depends on supply of the currency and things that you can buy from it.
15/ You cannot purchase anything from any currency. E.g. there are bonds that are only available to be purchased via USD, they won’t accept INR.
Calculate intrinsic value of both INR and USD, and you get the point around which exchange rate fluctuates.
Calculate intrinsic value of both INR and USD, and you get the point around which exchange rate fluctuates.
16/ What about bitcoin?
Earlier I talked about it
Earlier I talked about it
17/ My current perspective on bitcoin is that it’s a currency using which you can purchase anonymous cross-border money transfers.
This facility isn’t available with any other currency and expectations of growth of this use is what gives relational value to bitcoin-USD.
This facility isn’t available with any other currency and expectations of growth of this use is what gives relational value to bitcoin-USD.
18/ That’s it.
Hope you enjoyed the thread.
If you’ve any follow up question or clarification, happy to provide a perspective.
Hope you enjoyed the thread.
If you’ve any follow up question or clarification, happy to provide a perspective.
