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As an investor, why is crypto so hard to value?

fundamentalinvestor.substack.com

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Re: As an investor, why is crypto so hard to value?

#171

Post by roenxi »

headmelted wrote: post #67
roenxi wrote: post #54

Earlier quoted context omitted.

Although I agree with your view there is one aspect you aren't considering - Bitcoin is currently backed by a mining network that is managing to achieve around 200 Exahashes/second or however they measure it. A big number. While at a theoretical level different crypto tokens are the same that will not be how the market plays out. That sort of computing power isn't easily replaced and while it exists Bitcoin is unique…

Wouldn’t smaller tokens need comparatively lower resources though?

'Need' doesn't really come in to it, Bitcoin doesn't need that much power. But from a raw value perspective, Bitcoin has something that the other cryptos do not have - a massive network of computing power. That means bitcoins and other crypto currencies can't be simply swapped for each other. Bitcoin is different, for now.

Re: As an investor, why is crypto so hard to value?

#172

Post by WastingMyTime89 »

Lazare wrote: post #161
walkhour wrote: post #144

Earlier quoted context omitted.

The fundamental problem of any such criticism of crypto is explaining then how crypto is different from gold besides "some people value gold also because of intrinsic value". Why is gold not exactly like having stock in a long bankrupt company? If gold is indeed like crypto, then when is this gradually built dogma finally going to be exposed? Holding gold would've been good investment advice almost in any civilizatio…

Very similar arguments can be made about gold. And have been! And the fact they have been wrong until now is not necessarily a good predictor of the future. In any case, there is one key thing which differentiates gold from crypto - there's only one kind of gold, and there's only a very small number of metals with similar properties to gold - perhaps 8 in total, all of which have been valuable since mankind figured o…

Gold is not really scarce and as seen its price plummets multiple times throughout history as large quantities were unexpectedly discovered. If even a minority of the people currently hoarding gold decided to sell, the price would crash.

Gold is a strange asset. It is valuable because it is seen as a strong way to store value and it is a strong way to store value because people collectively believe it to be so. In that way, it is actually quite close to bitcoin.

Re: As an investor, why is crypto so hard to value?

#173

Post by headmelted »

stillsut wrote: post #122
throwaway6734 wrote: post #105

Earlier quoted context omitted.

>So bitcoin competes with other currencies by being a system with transparent and predictable behavior There's no reason to believe that the crypto ecosystem is 100% secure. Any security vulnerability could destroy the value of the entire market. Not to mention that the crypto ecosystem is unable to use force.

This is a good point - that we trade political risk for technical risk, e.g. will sha256 be broken, will quantum computing break ECC, or will a well funded actor launch a 51% attack or empty block attack on the network. These are the big known-unknowns. In these cases, ideally a hard fork would be able to maneuver the network out of the way of the technical vulnerability in time. Less ideally, there's just the fact t…

> These are the big known-unknowns.

It's the big unknown-unknowns that are the problem. Is there a relatively simple implementation bug that hasn't yet been discovered in the biggest projects? They're all less than 12 years old at this point, it's entirely probable that they include 0-day vulnerabilities that are undiscovered.

That's enough to destroy the whole thing. One single 0-day, exploited slowly over the course of a week. It's not like the transactions can be reversed, so all of that value would have been reassigned to the exploiter.

No government is insuring balances in any of these projects - so a single shock will (rightly) shake all of these holders back out again.

Re: As an investor, why is crypto so hard to value?

#174

Post by WastingMyTime89 »

vmception wrote: post #102
eldelshell wrote: post #89

Earlier quoted context omitted.

There are this things called "Exchanges" in every airport in the world. With the US dollar, Euro and some others, the world is your casino (following the comparison) and you can trade all of them. Same with gold and silver (although this are a bit harder to trade). Hell, try to pay a taxi in Djibouti, Sao Paolo or Islamabad with a BTC or USD and see which they'll accept and which will get you kicked out.

> try to pay a taxi in Djibouti, Sao Paolo or Islamabad with a BTC or USD and see which they'll accept and which will get you kicked out. Even though the "merchant adoption" meme is the least interesting part of any asset, currency or potential payment method, the question is where does the goal post move when you can do that? Can you give us a preview of what your next goal post is?

I mean that’s the definition of currency not really moving the goal post: store of value, unit of account and mean of exchange. At this point, I am not sure bitcoin even ticks one.

It’s an asset with a volatile price. It is not a currency.

Re: As an investor, why is crypto so hard to value?

#175

Post by WastingMyTime89 »

my50cents wrote: post #49

Crypto is not hard to value. Valuation is the estimation of the present value of future free cash flows. Since most crypto tokens produce negligible free cash flows relative to their market cap, they have approximately zero intrinsic value relative to their market price.

> Valuation is the estimation of the present value of future free cash flows.

That’s only DCF valuation. It is not the be all and all of valuation. DCF is a way to value perpetuity. It makes sense for assets you can assimilate to a perpetuity (like a company). It makes no sense if you can’t. The easiest counter examples are raw materials and currencies.

Re: As an investor, why is crypto so hard to value?

#176

Post by WastingMyTime89 »

hiq wrote: post #64
my50cents wrote: post #49

Crypto is not hard to value. Valuation is the estimation of the present value of future free cash flows. Since most crypto tokens produce negligible free cash flows relative to their market cap, they have approximately zero intrinsic value relative to their market price.

> Since most crypto tokens produce negligible free cash flows relative to their market cap, they have approximately zero intrinsic value relative to their market price. What's the intrinsic value of stocks that don't distribute dividends in this model?

You don’t value the cash-flows associated with the share. A share is not an abstract financial product. It is direct ownership of a company.

You value the company and then you can divide the price by the total number of shares if you want. Apart from some rare exceptions like Amazon in its first years, a company which doesn’t generate any cash-flows is soon to be an ex-company.

Dividends muddy the water a bit but you get the general idea.

Re: As an investor, why is crypto so hard to value?

#177

Post by WastingMyTime89 »

bb88 wrote: post #31
plebianRube wrote: post #17

Earlier quoted context omitted.

Not to someone who has had civil asset forfeiture experience.

Things can have high utility without any actual value. Toothpicks, eating utensils, screwdrivers, etc. The problem comes when people mistake one for another. IOW, buying a bunch of screwdrivers isn't a great retirement strategy.

Last time I checked Home Depot was doing quite well. There certainly is value in selling things with high utility with a small markup. You just have to do it at scale.

Re: As an investor, why is crypto so hard to value?

#178

Post by headmelted »

roenxi wrote: post #171
headmelted wrote: post #67

Earlier quoted context omitted.

Wouldn’t smaller tokens need comparatively lower resources though?

'Need' doesn't really come in to it, Bitcoin doesn't need that much power. But from a raw value perspective, Bitcoin has something that the other cryptos do not have - a massive network of computing power. That means bitcoins and other crypto currencies can't be simply swapped for each other. Bitcoin is different, for now.

I've heard this argument, but there's no utility value whatsoever to that power, or the energy consumed to run the hashes (in that the energy and hashing power is spent on the mining task and therefore unavailable for other uses).

The argument is essentially that the computing and hashing power has intrinsic value for other use cases it could be reapplied to if not doing this. It could, but that value would accrue to the person selling the energy and/or the hardware, not whoever held the token at that time.

Re: As an investor, why is crypto so hard to value?

#179

Post by spiralx »

WastingMyTime89 wrote: post #172
Lazare wrote: post #161

Earlier quoted context omitted.

Very similar arguments can be made about gold. And have been! And the fact they have been wrong until now is not necessarily a good predictor of the future. In any case, there is one key thing which differentiates gold from crypto - there's only one kind of gold, and there's only a very small number of metals with similar properties to gold - perhaps 8 in total, all of which have been valuable since mankind figured o…

Gold is not really scarce and as seen its price plummets multiple times throughout history as large quantities were unexpectedly discovered. If even a minority of the people currently hoarding gold decided to sell, the price would crash. Gold is a strange asset. It is valuable because it is seen as a strong way to store value and it is a strong way to store value because people collectively believe it to be so. In th…

I remember being surprised when I read that half of all of the gold we have has been mined since 1961, which really does show that basing your currency on it would have massive problems.

Re: As an investor, why is crypto so hard to value?

#180

Post by throwaway6734 »

headmelted wrote: post #173
stillsut wrote: post #122

Earlier quoted context omitted.

This is a good point - that we trade political risk for technical risk, e.g. will sha256 be broken, will quantum computing break ECC, or will a well funded actor launch a 51% attack or empty block attack on the network. These are the big known-unknowns. In these cases, ideally a hard fork would be able to maneuver the network out of the way of the technical vulnerability in time. Less ideally, there's just the fact t…

> These are the big known-unknowns. It's the big unknown-unknowns that are the problem. Is there a relatively simple implementation bug that hasn't yet been discovered in the biggest projects? They're all less than 12 years old at this point, it's entirely probable that they include 0-day vulnerabilities that are undiscovered. That's enough to destroy the whole thing. One single 0-day, exploited slowly over the cours…

It's a massive big bounty program especially as vehicles for shorting the market mature
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