How to value Crypto

It’s hard

Everyone is talking about Bitcoin and Crypto. The main reason is probably just because prices are increasing, and increasing fast. A lot of money has been made by people, and quickly. No one wants to miss out on that. Just look at the google trends of Bitcoin vs Beyonce this year…

Google Trends

This price increase has been polarizing. Smart folks are calling Bitcoin and all crypto a mirage. Other smart folks are saying Bitcoin and crypto are undervalued. It’s not a question of off by a few percentage points, it’s folks saying the valuations are off by orders of magnitude. I personally find polarizing assets interesting, they make you think.

Bitcoin Bubble

The WSJ ran a story this weekend called The Bitcoin Valuation Bubble. In it, the author declares that bitcoin is merely a payment Sass business and should be valued accordingly.

“Bitcoin is a $400 million a year software-as-a-service business like Salesforce , which sells for around eight times its sales. That implies a $3 billion value. Potential profits might be 30% net and even at 50 times earnings you get at most $6 billion or $300 for each bitcoin in enterprise value.”

But, the author is missing the point.

Bitcoin Bust

Fred Wilson wrote a great post with a counter argument and it’s worth reading in it’s entirety. He contests that it’s difficult to value crypto assets right now. One way to think about it is:

“Networked applications that run on top of the shared data layer of blockchains will be forced into commodity pricing and rent seeking will be nearly impossible. Those who build the Visas and Mastercard networks on top of Bitcoin will never achieve the economics of Visa and Mastercard. But that is the point. The Bitcoin protocol will capture those economics and the only way you can participate in that is by earning or buying and owning the crypto token (ie Bitcoin).

If applications are built upon the Bitcoin protocol then they will need to use the Bitcoin token. Given that the token supply is limited, many applications are being built and others are yet to be built, these tokens could be much more valuable than just a cheaper Visa or Mastercard.

The Takeaway

Bitcoin and crypto assets are new. We’re still trying to understand them. Is it a store of value? Is it digital gold? Is it something else? They evolve and new assets are released. Some are completely new protocols and tokens, some are built on existing protocols like Bitcoin and Ethereum.

I wish I had a scientific way to value crypto, I don’t. My general view has been that if these protocols work, they will really work. They might have network effects like we’ve never seen before because of their economic structures. However, there is certainly speculation taking place right now. It’s too easy to make money. I dislike how dogmatic many Bitcoin folks are. But maybe that’s the way to get these projects funded and get the attention they deserve. I don’t know.

I don’t know what’s going to happen in the next year. It’s difficult to predict what happens in the short term. In the long term, I think Bitcoin and crypto assets will be worth more than they are today.