Valuing Cryptoassets from the Ground Up
medium.com
medium.com
So to take your example of gold, if BTC is gold, then is ETH more like silver or more like a new source of gold? If ETH is silver then there will be some base demand for ETH separate from BTC but if ETH is just more gold then all we've done is drastically increase supply. To me it seems that demand for specific cryptocurrencies isn't really that high while demand for cryptocurrencies in general is, that makes ETH and BTC seem both like gold to me and that makes me question the fundamental notion that the appreciating cryptos have supply restrictions.
Optimal holding percent is not going to protect you against a total whale coming in and selling off because they're bored of the currency.
Trading is based on emotion and the control of that emotion. Buy into technology you understand and find valuable. The only calculation you need is to know what you're willing to lose and set your stop loss, everything else is a bit of a waste in my opinion.
> ETH Value: $0.088
(There are 100M ETH)
Correct me if I made a mistake, but it seems like this is not a stable market. What's to stop me from buying a large chunk of the supply and sitting on it? That would increase the value of my ETH because VISA throughput would have to be maintained. Many others would come to this same conclusion, driving the price up massively.
Another factor in crypto is that especially with proof-of-stake coins (like ETH is heading toward), part of the security of the protocol is in the expense of doing a hostile takeover of the network. A paltry $8.8 million valuation would presume that someone with as little as that could buy up all the supply (or 51%) of ETH and take effective control of the network.
You're right that attempting to do so would drive up the price, very rapidly.
Another sweeping point the author makes without backing up is the idea of "infinite competition" in the crypto space. Yes, anyone can fork BTC or ETH and make their own coin, but miners, stakers, exchanges, users, app developers, etc, won't necessarily flock to it. "Trust" is not built into the protocol.
I have no faith that someone who clicks the "Fork" button on Github necessarily has any idea how to run, maintain, secure, and grow a blockchain into doing something unique or novel. And I wouldn't stake my business or assets on it, per se, unless I was convinced that a team of people and a community was able to spring up around that blockchain.
Network effects matter, especially in crypto-assets. I trust the BTC network, because it's gone 9 years without a major exploit. I trust it because of the community, network, and ecosystem behind it. To act as if a fly-by-night crypto can swoop in and steal that crown so easily is foolish. Anyone can make a Linux fork, doesn't mean you're going to dominate the desktop market.
As for network effects, I find that to be a super interesting question. Because you're right, there are definitely certain levels of trust that existing networks have earned, and there's a good argument for why that creates friction and earns those networks the ability to charge a premium. I personally don't think that extra friction is long lasting. I'd expect that if there were indeed a new solution that accomplished the same thing at half the price, it would get attention and the market would gravitate to it fairly quickly (maybe not within weeks or months, but years? maybe it depends on the timeframe you want to consider, and the level of improvement it provides). But it's a really good point, and something I think about a lot.
"We accept any of the 2021 or prior World Bank approved ETH forks." Your multi-wallet client automatically chooses the one with the lowest transaction fees (also economically regulated).
There's an underlying assumption that a cryptocurrency must be either a store of value or a medium of exchange, but not both, which is a bit odd since every fiat currency is both, and gold was both for thousands of years.
In fact, if people were to contact an exchange for every transaction, it's hard to see how there'd be any advantage over just using legacy financial systems.
I used to put a lot of stock in velocity of money considerations but now I'm thinking it doesn't have that much predictive value. All it's really saying is that the GDP is defined as the number of transactions, times the nominal amount of those transactions, times the real-world value of the currency unit. The currency price could be anything and the equation still holds true. If you assume a maximum achievable velocity, you can work out the minimum currency price for a given GDP, but the price could also be arbitrarily higher than that.
But it's a good point — maybe there's some minimum level of holding that happens (could be high, 99%? 99.9%) that is solely about making it expensive for others to increase the price arbitrarily (even if they can't do so profitably), in order to maintain price stability. But that would be about paying for stability, not for the underlying utility. I need to think about that more.
On a slightly different note, another relatively minor but important thing to take into account when valuing from fundamentals is the percentage of permanently burned supply. ETH may have a supply of 100M in theory but in practice, maybe it's 70-90M due to private key loss or smart-contract lock.
The author's equation produces low valuations at high velocity and this suggests a use case for low valuation, high velocity cryptocurrency as a medium of exchange if not a deflationary store of value. I don't think this currency exists yet, though I get lots of pitches for things that want to be this while also trying to justify their own value into the future.
In the early days of crypto, libertarian economists predicted that bitcoin would go to the moon and the USD would undergo hyperinflation. This is clearly not happening. What I think could happen is a relatively stable USD under the guidance of the Federal Reserve and a simultaneous hyperdeflation of ETH and BTC as they become the reserve currency of distributed AI capital organizations.
This seems like a strange thing to believe. Why do you believe it?
I think in the future, the average technologically savvy person will be just as confused about what bitcoin is and does as they are today and it will mostly be used to securitize options and derivatives of unprecedented complexity.
Really bitcoin is pretty bad at everything except atomic transfers.
Bitcoin is shit at loans, it's shit at writing wills, it's shit at scheduling payments, it's shit at offering shorts, it's shit at offering options, it's shit at providing oracles etc.
Capital that you can not leverage is a disadvantage.