The value of cryptocurrency is 0.
Or 2 trillion, but who's counting
As an investor, why is crypto so hard to value?
91–100 of 193 posts
Re: As an investor, why is crypto so hard to value?
#92> The fundamental idea behind investing in a company is that one day they will grow and be so profitable that they will start to send cash back to investors. Is this really the fundamental idea behind equity investing at this point? My impression is that (a) dividends are becoming more rare and (b) the valuation of dividend-paying equities is not explained solely by dividend cash flow. Does anyone expect Tesla, Amazo…
I was following your argument until "[...] on the notion that the entire global economy will just flip a switch one day and become this green tech utopia". I'm no equity investor, but this assumption feels quite exaggerated.
Re: As an investor, why is crypto so hard to value?
#93>To value cash flowing assets, one can use a number of methodologies such as discounted cash flow, capitalization rate/rental yield and valuation multiples (i.e. EV/EBITDA, EV/EBIT and P/E). These methods are not perfect and are rough approximations in a hard-to-model world. To give an example, when looking to buy a rental property, I might look at the rental yield after costs of say $10k. Using the capitalization rate method and assuming a cost of capital of 7%, the property would be valued at ~$143k by dividing ~$10k by 7%. Now this is a simple example which does not include debt/leverage but hopefully you get the point.
I understand that a jargon avalanche is part of the way finance and investing is effectively gate-kept, but boy is it annoying that, every time I try to read an article on the subject, I feel like I'm pulling up a particularly convoluted page out of the Silmarillion or a Final Fantasy Ultimania guide.
At any rate, is this what he's saying?:
$10k costs * (7% capital units/cost)
Or is the $10k rental-yield-after-costs? In which case I'm completely lost.
Re: As an investor, why is crypto so hard to value?
#94> The majority of crypto tokens produce zero free cash flow
Then pick the ones that do have cash flow.
The stablecoin MIM only uses interest bearing tokens as collateral, so thats straight up a list of tokens that fit that particular valuation criteria and risk profile.
Crypto can represent any kind of asset, multiple kinds simultaneously, or none at all. That’s interesting enough for me. As a builder its extremely lucrative to help move that along, and also practically nullifies the investing risk because earning is different than putting up capital, with non-linear O(nlogn) returns, better than linear.
Re: As an investor, why is crypto so hard to value?
#95> The fundamental idea behind investing in a company is that one day they will grow and be so profitable that they will start to send cash back to investors. Is this really the fundamental idea behind equity investing at this point? My impression is that (a) dividends are becoming more rare and (b) the valuation of dividend-paying equities is not explained solely by dividend cash flow. Does anyone expect Tesla, Amazo…
The author is a value investor, which is an out dated death cult among equity investors at large. You’re spot on to question his importance of measuring equities via dividends. He also places value on metrics like P/E, which has never (“never”, like since the start of the US stock market) been an indicator of a strong stock.
Re: As an investor, why is crypto so hard to value?
#96Financially, cryptocurrency is pretty much exactly like having stock in a long bankrupt company.
You can trade it with other people, you can create contracts and derivatives involving it. What you can't do is ever get anything of value from holding the stock itself.
This is easy to value, but some people are uncomfortable with the answer. With so much hype and magical thinking, it feels like there most be something meaningful behind it. Repeat it enough and the dogma gradually becomes a truth you can build anything on top of.
And since the company is already bankrupt and all the assets are stripped, it is immune to news that will force the traders to reevaluate and dispel the illusion. The company can't go any more bankrupt, so the traders are looking around at each other and seeing everyone else continuing to trade thousands of dollars for shares of nothing, so they shrug and think "if someone paid a thousand dollars for this today, they will probably be willing to do so tomorrow as well".
Re: As an investor, why is crypto so hard to value?
#97But what's easy to value is public pensions. Do the existing reserves and projected inflows match the liabilities? Of course not, they are underwater by trillions of dollars. How will fifty very different state governments and the federal government distribute these losses? Impossible to say, because different factions are already lining up different schemes with vastly different outcomes. In contrast, we already kno…
I don’t mean to sound tongue in cheek, but claiming that “predictability” is one of the major benefits of crypto currencies seems like a very rose-tinted way of describing how they behave in real life.
Agreed. Crypto is risky and volatile, and can go to zero and that makes it difficult for the average person to treat it as a savings vehicle. The distinction in predictability between the two system is kind of subtle:
In bitcoin, the internal system mechanics are highly predictable. But there's no external "Open Market Committee" (e.g FOMC) that will change the market price to hit the targets mandated by its stakeholders.
In dollars, the internal system is becoming more unpredictable, while there are numerous external systems (e.g. bailouts, QEx, etc) which are very predictable: they will act to make sure the economic tradeoffs shield the voters of the system from experiencing pain to the next election cycle.
Neither seems ideal in its present form.
Re: As an investor, why is crypto so hard to value?
#98Earlier quoted context omitted.
Of course you could, you make a new version of your smart contract or blockchain and people use that instead.
This defeats the core idea of having something immutable, that no one can mess with. If you can agree to roll out a new version, why not do it with regular software?
Why would you not need to update it when bugs are found? If you don't then your blockchain and everything on it could be rendered worthless, depending on the bug. A blockchain is just regular software and this software changes over time.
Re: As an investor, why is crypto so hard to value?
#99Earlier quoted context omitted.
Money is hard to value. Fundamentally, it relies on a consensus that it's useful and valuable, but there's nothing inherent in money that makes it that way. It's a useful collective hallucination. So is crypto. Some people came up with a collective hallucination that they considered useful and valuable, and convinced some other people that it was, because, hey, we all like valuable things, especially when we can crea…
> there's nothing inherent in money that makes it that way Yes there is. Typically money is legal tender, which means you’re mandated to accept it by a government with large numbers of guns and prison cells. That’s what for all debts public and private means.
And legal tender is mandated within the country that issues it, but not outside of it, or on the global internet.
For a global economy, we need a global currency, and USD/EUR have been the closest thing to that so far.
Re: As an investor, why is crypto so hard to value?
#100Look, I get it, this is Finance 101. But even as I was learning this 2 decades ago, it never sat well with me. This process of valuation of a company works well under “normal” conditions. But at the end of the day, the asset price is really valued based on the supply and demand from investors and literally can have nothing to do with the underlying asset. Under “abnormal conditions”, the asset price is not a tangible thing, it’s the reflection of the hopes and dreams of market participants. Just look at Tesla which is trading at many times multiple earnings. Or look what happened with Hertz after it went bankrupt a while back.
If we collectively all determined we wanted to buy stock in the worst, most bankrupt company in the world, we could still drive the price up to relatively astronomical prices.