Is Cryptocurrency a Bubble? How I would value it

Originally drafted in September 2016

Triangulation via 2 models.

  1. Value proposition
  2. Bubble model

Value proposition model

All things equal (large assumption), the product/service that wins is the one that delivers the most value to its customer. In the day we would trade using gold. Then we traded using paper and metal printed by a government. Today we mostly trade using proxies of these via electronic book keeping (credit cards, electric wires, etc.). Each innovation, by and large, maintained much of the value of the old method while offering outsized value related to the previous offering (i.e. credit cards saved you the risk of carrying large amounts of cash, time from going to the bank, and safety in case of fraud).

Bitcoin, Ethrium, and other currencies have value proposition elements that are better than credit cards and pure cash. The question: How much better are they?

Conclusion: As of today, on net, cryptocurrencies have a less attractive value proposition

Bubble model

What was a bubble

  • Large majority using the “tool” for speculation rather than its functional purpose.
  • Difficult to use for intended purpose (volatility)
  • Near-term value proposition built on sound probability

Was not a bubble but believed to be a bubble

  • Long term dot com
  • Facebook at IPO
  • Google at IPO

Counter arguments

  • Trust in governments declining (relative basis)
  • Historical trend of other services moving online and/or becoming decentralized
  • Throwing the word “decentralized” as a blanket panacea or inevitable
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