How much are cryptocurrencies really worth today?
VCs love beautiful stories and bankers love beautiful numbers. The reality is that good financial analysis is always about a combination of the two. Otherwise, bankers end up having Lehman Brothers, and VCs with Theranos.
So, the present value of Bitcoin primarily depends on the available liquidity — because the supply is practically fixed and the demand is extremely unstable (aka Hype). Hence the price is equal to the function of (1) the current block reward and (2) liquidity on the market. (1) is predictable for 100 years ahead, and all subsequent halvings are already priced in and (2) depends on the percentage of hodlers, the volume of non-trading transactions and, oddly enough, lost keys.
As we know, in any equation in finance, where there is value on the one side, there must be a risk on the other side.
What are the risks of bitcoin?
- Centralization of mining
- Selfish mining, chain reorg
- Efficient solution of the discrete logarithm (quantum computers and how to deal with them)
- Regulatory
Of these, (1) has no practical meaning, from (2) there are protection methods, and (3) and (4) in some scenarios are an existential problem (value → 0).
Ethereum, which is not influenced by the idea of fixed supply, has a present value in the form of discounted cash flow that the network generates. So, technically, this is an equity investment in the business of selling gas.
The risks of Ether are at least the same as that of Bitcoin, but other than that:
- more technological risks (more experiments in the platform)
- more tangible risk of a fork (it will not destroy the platform, but it is a kind of split of value between the chains)
- And most importantly: competition risk and market protection.
Competition should be discussed separately. The barrier to entry into the digital gold market is the public perception (aka brand), which is changing extremely slowly. The barrier for entry to the Ether market is dev adoption, community, and the software itself.
Ethereum market is much larger because it is not transactional, but computational. But any of the visible alternatives has clear and well-reasoned advantages in one or several dimensions: TON, NEAR, DOT, Cosmos, etc. More importantly, there’re also some incumbents: as soon as, for example, DeFi has created a more or less tangible business model, Visa and MasterCard will have no problem launching their public or semi-public platforms.
Today, Ether market share is ~ 90%, but with some assumptions in market growth and a decrease in the market share, we can estimate the cash flow of the future periods, then divide it by the number of tokens and get a relatively fair present value.
As in any investment business, the only way to make money is not just being right, but being right when the majority is wrong. The problem of the crypto market is that the majority are not just mistaken, but in principle are not guided by any reasonable logic, so it is extremely difficult to predict their actions. As a result, this is still a market for selling stories and emotions but when investing for the long term the logic of financial analysis should give more tangible results.
