Fundamental Valuation of Cryptocurrencies — It’s About Faith

Shanif Dhanani
Aug 28, 2017 · 2 min read

Fred Wilson wrote a piece today about how some folks are starting to think about valuation of cryptocurrencies. He was primarily commenting on a piece that Andy Kessler wrote in the Wall Street Journal about why he thinks Bitcoin is currently overvalued.

Fred Wilson and his partner Albert Wenger accurately call out Kessler’s flawed analysis by pointing out that he’s confusing the total value of the entire crypto with the companies that mine the crypto itself. In fact, to me this seems so obvious that I think Kessler may be practicing journalistic deceit for his own purposes. This analysis is horrible. If I did something like this as a product data scientist, the internal customers that I reported to would have called me out and chased me out of the room.

I’ve written before about how I think it’s currently impossible to truly value cryptocurrencies. Unlike stocks, they’re not tied to an underlying organization that generates profits, they’re tied to a system that utilizes them to verify and moderate transactions. These systems aren’t in use right now, so it’s impossible to determine the ultimate supply and demand dynamics that will come into play.

Chris Burniske has tried to do this by estimating Bitcoin’s potential impact on the remittance market, but when he does this he’s using a single application of Bitcoin as a store of value in a small-ish niche (all things considered) to value an entire crypto. I think he’s probably underestimating the overall impact.

But then again, I don’t know yet. Neither does Fred Wilson, or Albert Wagner, or Chris Burniske, or Satoshi Nakamoto, or anyone. We just don’t know what the ultimate impact will be.

My personal opinion is that the impact from cryptocurrencies is either going to eat the entire market or go bankrupt in a giant ball of flames, and I’m leaning more towards the former, rather than the later. But right now we just don’t know.

We can’t estimate the supply and demand dynamics, and as I mentioned, the crypto that’s out there now isn’t truly tied to some underlying organization that’s going to pay its holders a dividend or any other share of generated profits. So we have to wait and see.

Kessler, who did make a lot of other good points, made one key point that I think everyone needs to keep in mind: right now (and in general), it’s about faith. If you believe that the impact of crypto is going to fundamentally change everything, then crypto is dirt cheap, and you buy it now expecting it to skyrocket in value when the rest of the market starts building applications on top of the various blockchains out there.

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