Financially, 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".
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 civilization.
What a completely nonsensical comparison. There are plenty of valid criticisms of crypto speculation and the underlying assets, but this is just hateful posturing painted up as sophisticated opinion.
First, even "financially" (thought what does it even mean???) holding crypto is not the same as holding a stock of a bankrupt company. Bankruptcy is a process with many mandated "financial" steps with set dates none of which are required from crypto.
Second, there are things beyond "financiality", such as easiness and reliability of "creating a derivative", and finding a buyer for it. So the premise of the whole comment is 100% useless in reality.
I think this analogy is almost correct, but it's better to think of crypto as owning a deed to land. You can in fact hold on to it and trade it, but at the end of the day all you are doing is changing the name on the deed. The land stays the land. You can put a house on it (store tokens), or you can build a factory (smart contracts), but the only reason why it has any value is because some other person may want to put a house or build a factory on it. Land has no intrinsic value because it can never truly be owned. It will outlast us all.
Depending on the underlying contract / agreement it can be anything you want. I view crypto as any piece of paper.
In general crypto is freely tradable / sellable, and the markets/tools are there. Illiquid 'assets' are a lot more liquid than when hidden / on paper somewhere.
Want the crypto to represent shares in a company? They're worth that.
Want an NFT to represent the ownership or the beneficiary of the profits of some music/IP? Can be worth millions or 0. Depending on the success of that IP.
Want to notarize something on a public blockchain for future proof / timestamping? Probably worth about $500-$2000 or whatever your notary charges.
Want the crypto to represent karma points on hackernews? Priceless!
But 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 know exactly how bitcoin works presently and how it works in the future. It's right there in the cpp file. It doesn't matter who the Senator from California is, it doesn't matter who is the chairman of the Fed is.
So bitcoin competes with other currencies by being a system with transparent and predictable behavior. Meanwhile the current dollar system - which is valuable precisely because the government always meets its obligations - is being valued by pretty much just ignoring all its underfunded obligations in the hope that some unknown solution will be arranged when it becomes a crisis.
To tie these findings back to the concept of financial "valuation", I think the author elides the role that predictability plays in it. And specifically overestimates the predictability of status quo at a time length of five to thirty years.
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.
>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.
I’m not exactly a proponent of crypto currencies, but this description seems like it holds true for any currency in the world, regardless of whether it’s crypto, fiat or natural. It’s not like you can carry dollars or a nugget of gold and expect any human being anywhere in the world to accept it as legal tender, and as long as that is true every type of payment is dependent on a “casino”, they just vary in size.
And as with any other casino, the house is the only consistent and long-term winner. People bringing in the real money are just suckers, even if they score once in a blue moon. And since there is no actual value attached, every win requires an equal amount of loss elsewhere.
With the methods the author is using, I think they would also be unable to value gold and other non-producing assets.
Crypto (despite claims that it's a currency) is a digital "asset". Like gold, but without any real-world use like jewellery, coatings, etc, and with a far shorter history of being a store of value. The problem with valuing it then is due to assessing risk.
It could be trading at zero tomorrow, and there are plenty of plausible paths to that scenario.
You also can't take physical possession of it (unlike gold) as well. Crypto value is inherently tied to how secure they are and although they seem to be secure now, that might not actually be the case.
Crypto could crash tomorrow but the value won't be zero, similar to gold it has intrinsic value. Some people value it because they think it's cool, because they think they're fighting the government, because it would've been historically important, ...
Look, 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.
Transaction processors provide a service consisting in processing transactions, and transaction fees are a good estimate of how much utility such services provide. But this does not not tell us anything about the 'value' of cryptocurrencies.
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?
> 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.
Most "cryptos" are just affinity scams riding on the coattails of the true innovation of Bitcoin. They offer nothing significantly new or important over Bitcoin. Most people in the space understand this and why. Institutional investors starting to come in understand this. State governments are starting to understand this. The energy sector is starting to understand this.
Yes crypto is a bubble, and it will pop. When it does Bitcoin will likely get dragged down with it for a while, but at the end of the day it will be one of the few left standing.
Save yourself time, money, and effort. Ignore all other cryptos, and just buy Bitcoin (i.e. dollar cost average), and hold it for 4+ years.
Tbh Bitcoin does nothing interesting compared to say Ethereum. I think Ethereum is a far more interesting ecosystem when you consider the only cryptocurrency CoinBase runs is built on top of Ethereum. Bitcoin is the most boring coin and its only valued so much based on speculation and brand recognition.
Bitcoin can even be a base layer for decentralized autonomous organizations (DAO)s. Take a look at bisq's DAO, built directly on top of bitcoin by using colored bitcoin for its BSQ governance token. Its been operating and paying for the software development (and project management and customer support) for bisq for over a year and a half. See https://bisq.network/dao/ for details.
> 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, Amazon, Google to start paying dividends?
The fundamental idea is buy low, sell high, right? Or has that just become the fundamental idea because so much of the market is now part of the same monopoly-money-fueled bubble?
Crypto, AI, green tech, alt meat, electric cars, space stuff… very few of these things are profitable in the traditional sense, so their valuations are instead predicated on the notion that the entire global economy will just flip a switch one day and become a tech utopia, ignoring the fact that the current infrastructure, supply chain and economic system took generations to build. People seem to have baked in the idea that billionaires and governments and greater fools alike will continue to pour money into this indefinitely, but what happens if/when it comes to light that “none of this scales”?
Google is effectively paying dividends to the tune of 60 billion dollars a year through share buybacks [0]. Share buybacks reduce the number of outstanding shares increasing the P/E ratio which should increase the stock price. You can realize your dividend by selling a proportional amount of stock which might be bought by Google themselves.
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.
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.
>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 $10k rental-yield-after-costs? In which case I'm completely lost.
The value comes from targeted marketing at the get rich quick sensitive individuals. Most of the regular folks now know about bitcoin as the form of making money from the sky. Add to that cynical views of a financial market and you will get that 2t$.
Crypto is worthless. All the VCs pouring money into crypto/web3 (a16h, sequoia) are worthless. All the companies pivoting to web3 are worthless (square). All the companies building up web3 teams are worthless (stripe, mastercard). All the fastest growing startups (coinbase, ftx, opensea) are worthless. All the devs who get started in crypto/web3 and won't go back, are worthless.
Simple answer: because it has no fundamental value. Crypto is not an equity or a claim of ownership. Thus the value is solely determined by market speculation. Gambling in crypto may be profitable but it is not an "investment."
There is a quote, attributed to Mark Twain and others, which can be adapted to Crypto Currency.
A mine is a hole in the ground. The discoverer of it is a natural liar. The hole in the ground and the liar combine and issue shares and trap fools.—Detroit Free Press.
https://quoteinvestigator.com/2015/07/19/gold-mine/
And as applied to Crypto Currency:-
A crypto currency is a hole in the air. The discoverer of it is a natural liar. The hole in the air and the liar combine and issue shares and trap fools.
Maybe there are a few people who use crypto as real investment but the vast majority is just gambling or FOMO. What actual uses does crypto have other than waiting for it to increase “value”? I bought some magic mushroom spores with BTC but that was the only time I ever used it.
We will see if eventually there will be real use cases but it seems that’s far in the future.
Bitcoin is massively, overwhelmingly manipulated by a very small number of actors. The price is a complete fantasy, and exists mostly to transfer money from new investors to those manipulators, and bitcoin miners.
There is a lot of money going in. There will not be a lot of money coming out. The money is gone.
[+] [-] tveita|4 years ago|reply
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".
[+] [-] walkhour|4 years ago|reply
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 civilization.
[+] [-] authed|4 years ago|reply
That's what people that don't understand it hope.
[+] [-] helloworld11|4 years ago|reply
[+] [-] evandwight|4 years ago|reply
[+] [-] lostmsu|4 years ago|reply
First, even "financially" (thought what does it even mean???) holding crypto is not the same as holding a stock of a bankrupt company. Bankruptcy is a process with many mandated "financial" steps with set dates none of which are required from crypto.
Second, there are things beyond "financiality", such as easiness and reliability of "creating a derivative", and finding a buyer for it. So the premise of the whole comment is 100% useless in reality.
[+] [-] robcohen|4 years ago|reply
[+] [-] jbverschoor|4 years ago|reply
In general crypto is freely tradable / sellable, and the markets/tools are there. Illiquid 'assets' are a lot more liquid than when hidden / on paper somewhere.
Want the crypto to represent shares in a company? They're worth that.
Want an NFT to represent the ownership or the beneficiary of the profits of some music/IP? Can be worth millions or 0. Depending on the success of that IP.
Want to notarize something on a public blockchain for future proof / timestamping? Probably worth about $500-$2000 or whatever your notary charges.
Want the crypto to represent karma points on hackernews? Priceless!
[+] [-] stillsut|4 years ago|reply
In contrast, we already know exactly how bitcoin works presently and how it works in the future. It's right there in the cpp file. It doesn't matter who the Senator from California is, it doesn't matter who is the chairman of the Fed is.
So bitcoin competes with other currencies by being a system with transparent and predictable behavior. Meanwhile the current dollar system - which is valuable precisely because the government always meets its obligations - is being valued by pretty much just ignoring all its underfunded obligations in the hope that some unknown solution will be arranged when it becomes a crisis.
To tie these findings back to the concept of financial "valuation", I think the author elides the role that predictability plays in it. And specifically overestimates the predictability of status quo at a time length of five to thirty years.
[+] [-] hnarn|4 years ago|reply
[+] [-] throwaway6734|4 years ago|reply
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.
[+] [-] MilaM|4 years ago|reply
[+] [-] hnarn|4 years ago|reply
[+] [-] classified|4 years ago|reply
[+] [-] cube00|4 years ago|reply
[+] [-] jacknews|4 years ago|reply
Crypto (despite claims that it's a currency) is a digital "asset". Like gold, but without any real-world use like jewellery, coatings, etc, and with a far shorter history of being a store of value. The problem with valuing it then is due to assessing risk.
It could be trading at zero tomorrow, and there are plenty of plausible paths to that scenario.
[+] [-] throwaway6734|4 years ago|reply
[+] [-] walkhour|4 years ago|reply
[+] [-] oxymoran|4 years ago|reply
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.
[+] [-] ZitchDog|4 years ago|reply
[+] [-] lottin|4 years ago|reply
[+] [-] my50cents|4 years ago|reply
[+] [-] hiq|4 years ago|reply
What's the intrinsic value of stocks that don't distribute dividends in this model?
[+] [-] WastingMyTime89|4 years ago|reply
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.
[+] [-] Quindecillion|4 years ago|reply
Yes crypto is a bubble, and it will pop. When it does Bitcoin will likely get dragged down with it for a while, but at the end of the day it will be one of the few left standing.
Save yourself time, money, and effort. Ignore all other cryptos, and just buy Bitcoin (i.e. dollar cost average), and hold it for 4+ years.
[+] [-] giancarlostoro|4 years ago|reply
[+] [-] jkepler|4 years ago|reply
[+] [-] bestouff|4 years ago|reply
[+] [-] plaidfuji|4 years ago|reply
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, Amazon, Google to start paying dividends?
The fundamental idea is buy low, sell high, right? Or has that just become the fundamental idea because so much of the market is now part of the same monopoly-money-fueled bubble?
Crypto, AI, green tech, alt meat, electric cars, space stuff… very few of these things are profitable in the traditional sense, so their valuations are instead predicated on the notion that the entire global economy will just flip a switch one day and become a tech utopia, ignoring the fact that the current infrastructure, supply chain and economic system took generations to build. People seem to have baked in the idea that billionaires and governments and greater fools alike will continue to pour money into this indefinitely, but what happens if/when it comes to light that “none of this scales”?
[+] [-] mrep|4 years ago|reply
[0]: https://ycharts.com/companies/GOOG/stock_buyback
[+] [-] sabellito|4 years ago|reply
[+] [-] crenwick|4 years ago|reply
[+] [-] roschdal|4 years ago|reply
[+] [-] barbarbar|4 years ago|reply
[+] [-] plebianRube|4 years ago|reply
[+] [-] unknown|4 years ago|reply
[deleted]
[+] [-] wickoff|4 years ago|reply
[+] [-] pentae|4 years ago|reply
[+] [-] HamburgerEmoji|4 years ago|reply
[deleted]
[+] [-] bsanr2|4 years ago|reply
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.
[+] [-] Exendroinient|4 years ago|reply
[+] [-] postcynical|4 years ago|reply
[+] [-] morpheos137|4 years ago|reply
[+] [-] aurizon|4 years ago|reply
A mine is a hole in the ground. The discoverer of it is a natural liar. The hole in the ground and the liar combine and issue shares and trap fools.—Detroit Free Press. https://quoteinvestigator.com/2015/07/19/gold-mine/
And as applied to Crypto Currency:- A crypto currency is a hole in the air. The discoverer of it is a natural liar. The hole in the air and the liar combine and issue shares and trap fools.
[+] [-] Gunax|4 years ago|reply
What you're buying is the prediction that someone else will come along and buy it for more.
As it increases in value, it gets more exposure and more appealing, so the idea spreads.
[+] [-] nickdotmulder|4 years ago|reply
[+] [-] spaetzleesser|4 years ago|reply
We will see if eventually there will be real use cases but it seems that’s far in the future.
[+] [-] user-the-name|4 years ago|reply
There is a lot of money going in. There will not be a lot of money coming out. The money is gone.