What is Crypto’s Value? (Part 1)

At a very high level, there are two types of values that we can consider when thinking about the value of anything: the market value (price) of an asset, and the intrinsic value of an asset. When referring to the market value we are always talking about what a given party is willing to pay you for a given asset, at a certain point in time. This can, at any one time and for any given item, vary greatly from its intrinsic value, which is extracted by looking at its fundamentals.

Let us illustrate: in summer, you can likely sell ice cold lemonade in the park for two dollars a glass, in winter you are unlikely to sell any, at any price. This, of course, does not mean that the intrinsic value of your lemonade has changed in any way between the first and second cases; it’s still lemons, sugar, and water, commodities with clearly positive intrinsic (fundamental) value. But the market will value the lemonade differently depending on the season, even to zero.

Financial assets such as securities are special because they throw off excess cash, which makes it relatively straightforward to determine their intrinsic value. We can determine the intrinsic value of a stock by discounting these cash flows into the future. In other words, we can calculate how much this future cash flow is worth to us today, and then determine a fair price to be paid for that security. We know lemons and water have intrinsic value, but it is not always simple to calculate, thankfully, crypto assets are more akin to stocks than lemons.

Dash is a perennial favorite of mine as it throws off excess cash in multiple ways: masternodes allow you to earn income by providing services for the network (a form of staking), and a recently launched project called Dash Ventures, will invest tokens into third-party projects and use profits generated to buy up and burn as much Dash as possible, increasing the worth of the remaining Dash. This is a bonanza to an investor focused on investing in value as opposed to price.

Crypto also resembles stocks in that they can not be replicated without much expense and hardship, each cryptocurrency is for most intents and purposes unique. By this, I mean that if I attempted to replicate Hershey’s Chocolate and create a stock of equal intrinsic worth, I would need to build factories, hire personnel, create lines of distribution, and, as importantly, build a brand with comparable associations. The words “Hershey’s Chocolate” mean something to you. An asset such as a share of Hershey’s chocolate is valuable precisely because it is not easily replicable; this applies to crypto networks as well. Bitcoin is a network, a brand name, and a source of excess cash.

A stock also represents part ownership, participation, and perpetuation (through network effects) of a given company (or network); the same concepts apply to crypto through token ownership. Sustainable network effects create a moat around a cryptocurrency such that the cost of replicating the network only increases. The wider the moat, the harder to replicate the network becomes, and the more valuable it becomes. Mere ownership of a token or security increases network effects, but we are looking for large scale network effects because crypto makes it easy to copy a project, the network effects moat must be wide.

Intrinsic value when discussing cryptocurrencies is really a mix of brand recognition, network effects, and excess cash investors can reap from participating in the network. Excess cash may be had by simple price appreciation, but we should prefer cryptocurrencies where excess cash is directed at stakeholders in meaningful and myriad ways. We should aim to avoid cryptocurrencies which lack network effects and brand recognition and are thus simple to replicate. These assets lack intrinsic value and it is impossible to intelligently invest in, even if their market value is high due to external forces.

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What is Crypto’s Value? (Part 1) was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.