How do you value a cryptocurrency? Traditional model will base it on net income or cash flow. I think we have a paradigm shift going on where this metrics is no longer being used, and a new valuation will take it's place. By guess would be based on network value and transactions will be the new Wall Street model. Facebook has 6 billion users worldwide, so you base their valuation not on it's quarterly net profit, but how many people interact with their network per day, hour, second. If this is the case, how many users interact or transact with BitCoin or any other cryptocurrency per day, hour, second will determine it's valuation. What's your thought?
RE: What gives Crypto value? A letter to potential investors.
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What gives Crypto value? A letter to potential investors.
Facebook and other traditional companies use discounted cash flow not just current net income. The difference is that discounted cash flow takes into consideration the value of future cash flow. For example, Walmart has 5x the revenue of Amazon but a smaller market cap (https://www.forbes.com/sites/gregpetro/2016/08/25/amazon-vs-walmart-clash-of-the-titans/#3ea163228844)
Crypto is hard to value because you could either say that it will replace currency or all financial products. If crypto only replaces currency, then the market cap is around ~10s of T. If it replaces all financial products, the value could be much much higher. Some estimates put the value of the derivatives market at 1.2 Quadrillion (https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp). Why are the sums of financial products greater than the sums of currency? The main reason is because people are making bets on bets on bets. For example, let's say I bet that the Golden State warriors will win the NBA Championship. A second person may make a bet that I win my bet and so on. This means the actual value of all bets is much higher than the original bet.
I feel bitcoin has a strong potential to displace significant amounts of traditional currency and various smart contract platforms could replace many financial products.
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I'm in agreement that traditional model is based on current and future discounted cash flow, or in other words, future potential net income or earnings. Either way, it's difficult for anyone to wrap their mind around that fact that you are no longer evaluating earnings of a company, even though most of these companies do look like a regular "company" stock. In fact, what are we really buying on an ICO, if it's a currency and not a stock. I heard Dan Larimer of EOS says for legal reasons with SEC that he calls it "revenue". If it's indeed "revenue", what is the product we are receiving when we buy it. A handshake trust that he will give us some tokens of the network that EOS will operate in?
If it's indeed a currency and we are evaluating based on usage of the network, then as a conservative estimate, we need to consider the global money supply and not the derivatives. The source has the global narrow and board money supply at over $100T USD.
(http://money.visualcapitalist.com/worlds-money-markets-one-visualization-2017/)
With cryptocurrency being about $600B, I say we have quite a bit of room to grow!
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I agree. There's quite a bit of room to grow. It's hard for me to agree that blockchain is a currency though. It can do so much more. It can be real estate, it be derivatives, it can be debt and things we haven't thought of yet. I'd put currency usage as only the first widespread application.
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Hello and thanks for your question @rockdog. I guess I side with those who say there is not one type of valuation, as emphasized in my video.
However, my video strongly supports your focus on network strength, and I feel that (despite its brevity and over-simplifications) it does a better job of outlining what’s involved in network strength than most expositions I have seen.
For example, network strength goes beyond the extensiveness of utilization. Regulatory support, as well as support from linked institutions, are also important — Japan being a case in point. (Another example is Veritaseum (coin is Veri), which has been “impacted” by not getting good support from linked institutions, IMO. Ethereum (ETH) and Ripple (XRP) are “in heaven” on this dimension of valuation.)
One key aspect that I forgot to include in my video is the production function approach to valuation of cryptos. This relates to mining costs, mostly. Prof. Adam Hayes at Cornell has several papers where he exposits this approach re. bitcoin valuation.
Cheers.
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