0/ We need better ways of discussing value accrual in cryptoassets.
Some thoughts after a recent convo with @SpartanBlack_1
Some thoughts after a recent convo with @SpartanBlack_1
1/ Skeptical investors love to point out cryptoassets that failed to attain a monetary premium (like $BTC) have no "intrinsic value", and are succumb to the velocity problem, and are hence worthless.
Yet the market clearly disagrees.
Yet the market clearly disagrees.
2/ Today, even in a choppy market where volatility is half of what it was in 2017-2018's speculative highs, there are 30+ cryptoassets with fully diluted network values of $500M+, many of which are supported by 6 - 9 figure daily *real* trading volumes. 
3/ "It's all speculation and it will collapse."
While there are overvalued projects and blatant scams that may one day collapse in value and volume, this does not mean cryptoassets are worthless unless they become digital gold.
There are many ways value can be measured.
While there are overvalued projects and blatant scams that may one day collapse in value and volume, this does not mean cryptoassets are worthless unless they become digital gold.
There are many ways value can be measured.
4/ When discussing value accrual, it is helpful to distinguish between:
- Intrinsic value (the "inherent" value of an asset)
- Fair value (the "justified" value of an asset)
- Market value (what the market is willing to pay)
- Intrinsic value (the "inherent" value of an asset)
- Fair value (the "justified" value of an asset)
- Market value (what the market is willing to pay)
5/ "Intrinsic value" is the measurable cost of production.
For a painting, this is the value of the canvas, the paint, and perhaps the amortized cost of the paintbrush and tools used. For Proof of Work coins, this can be the average cost of producing a coin for miners.
For a painting, this is the value of the canvas, the paint, and perhaps the amortized cost of the paintbrush and tools used. For Proof of Work coins, this can be the average cost of producing a coin for miners.
6/ Difficulty adjustments ensure that efficiency gains in hardware do not drastically reduce cost over time for PoW coins, which Adam Hayes covers in his 2015 paper.
This enable investors to plot out a "price floor" for Pow coins.
economicpolicyresearch.org/econ/2015/NSSR…
This enable investors to plot out a "price floor" for Pow coins.
economicpolicyresearch.org/econ/2015/NSSR…
7/ For (most) PoS coins however, the cost of production is often much lower than PoW, especially if cloud servers are used for staking infra.
Delegation also means people running the infra aren't the only ones who can sell newly minted coins.
Delegation also means people running the infra aren't the only ones who can sell newly minted coins.
8/ The cost of production for PoS networks is better thought of as the cost of acquiring a stake, or the cost of purchasing coins, rather than the cost of running staking infra.
A handy way to approximate this is by realized cap, proposed by @coinmetrics.
A handy way to approximate this is by realized cap, proposed by @coinmetrics.
9/ Realized cap multiplies the # of assets by the price the time it was last moved. While rough, it can be thought of as the average cost basis of the coin.
Caveat: realized cap is imprecise, and still a WIP for account-based blockchains.
coinmetrics.io/realized-capit…
Caveat: realized cap is imprecise, and still a WIP for account-based blockchains.
coinmetrics.io/realized-capit…
10/ Now that we have an understanding of how intrinsic value could be measured, we can look at fair value.
Fair value is a basic concept borrowed from the equity valuation world, and often refers to the NPV of the discounted cash flows of a company's stock.
Fair value is a basic concept borrowed from the equity valuation world, and often refers to the NPV of the discounted cash flows of a company's stock.
11/ In PoS coins, one can discount the value of future staking reward; however, this requires some circular logic as you must also assume the price of the token.
Some tokens have a burn mechanism tied to dollar-denominated value - such as $BNB (or any exchange token) & $MKR.
Some tokens have a burn mechanism tied to dollar-denominated value - such as $BNB (or any exchange token) & $MKR.
12/ For burns, one can readily use a discounted cash flow model to back out a fair value, as a stock dividend payout and a proportional increase in % owned of a crypto network are mathematically identical.
13/ However, some tokens such as $DOT have a staking yield, a burn mechanism, plus other functions (e.g. governance, fee payment).
The market applies a speculative premium for these additional use cases (and also something's "moneyness"), which is reflected in market value.
The market applies a speculative premium for these additional use cases (and also something's "moneyness"), which is reflected in market value.
14/ The market value is merely the price that the someone is willing to pay for/ part with an asset.
Since this is easily game-able, investors can create arbitrary thresholds for real daily trading volume to determine whether price discovery is reliable.
Since this is easily game-able, investors can create arbitrary thresholds for real daily trading volume to determine whether price discovery is reliable.
15/ The market's appraisal of a network's value is dependent on market conditions (euphoria/ depression), and also appraisal of a network's growth.
Should a network grow, the market's appraisal improves, and market value should increase over time.
Should a network grow, the market's appraisal improves, and market value should increase over time.
16/ To paraphase Howard Marks's latest book, the market value of an asset should spend little time at the "justified" fair value due to animal spirits.
As investors, it may make sense to invest in a fairly priced, lower quality project, than a richly priced, high quality asset.
As investors, it may make sense to invest in a fairly priced, lower quality project, than a richly priced, high quality asset.
17/ As a parting thought - "cryptoassets" is misleading as it is an amalgam of multiple asset classes backed by similar technology.
PoW assets are similar to commodities, and some have even applied gold valuation frameworks to BTC (@100trillionUSD):
digitalik.net/btc/
PoW assets are similar to commodities, and some have even applied gold valuation frameworks to BTC (@100trillionUSD):
digitalik.net/btc/
18/ Meanwhile, PoS assets may be more similar to FX. Instead of sovereign nations each having their native currencies, we have sovereign networks having their respective tokens.
That may imply they can be priced, not valued - but as seen above that is not entirely true.
That may imply they can be priced, not valued - but as seen above that is not entirely true.
19/ In summary - cryptoassets do not fit one bucket. They can be valued as commodities, priced as currencies, some even modeled as pseudo-equities.
@CremeDeLaCrypto said it best when referring to Bitcoin (also crypto imo) as a "platypus"
forbes.com/sites/spencerb…
@CremeDeLaCrypto said it best when referring to Bitcoin (also crypto imo) as a "platypus"
forbes.com/sites/spencerb…
