The “Currency” Aspect of Cryptocurrencies — Uses, Valuations, and Thoughts

I’ve recently seen a surge of posts on the use of cryptocurrencies as actual currencies. This is extremely interesting to me because I’ve been thinking of cryptocurrencies as an investment for quite some time now. But that could be purely a result of the recent price appreciation, and I’m always willing to examine new evidence to change my thoughts.

I’d like to first link to a couple of interesting articles on this subject, then provide some color around what I think they could mean.

Article 1: The Cryptocurrency Singularity
In this article, the author discusses the idea of “good” currencies vs. “bad” currencies, and describes how people tend to spend their “bad” currencies on everyday purchases while they hold on to their “good” currencies, whose value will grow in the future. The author refers to the point where “cryptocurrencies become as stable as the US dollar” as the “singularity” of cryptocurrencies.

Now, this is probably not the best term to use, but his point is interesting, there may be a time when users choose to pay for items with fiat and hold on to their crypto.

Article 2: Is a Bitcoin Worth Half A Million Dollars?
In this article, which was written by my good friend John Mantia, John discusses one potential method of valuing Bitcoin as if it were a true currency, and analyzing how its exchange rate must be tied to existing currency formulas and patterns.

John makes the case that if Bitcoin is worth anything at all (it could go bankrupt, which is the same binary distribution I’ve claimed exists for cryptocurrency’s future, and I’m not the only one), it must be worth significantly more than what it’s worth right now.

A comment on John’s article from my friend Tim Geisenheimer pointed out that if we instead view cryptocurrencies as a store of value, like we do with gold, then we could use the economics of gold to value Bitcoin as well. His estimate has the price of Bitcoin much higher than the current price as well, though not quite as high as John’s estimates.

If nothing else, I highly encourage you to read John’s analysis, as it’s a new way of thinking of valuing crypto, one that I haven’t seen anywhere else, and it provides a bit of a best case scenario that should act as an upper-bound (albeit a very high one) on the possible price of BTC.

Article 3: The Crypto Currency Debate: Future of Money or Speculative Hype?
This article was written by one of the professors at my former b-school: Aswath Damod, who is widely considered to be one of the, if not the, world’s foremost expert on valuation.

On top of that, he’s just a plain good guy, very down-to-earth, and very humble for someone that has reached his level of success.

In his article, he describes how Bitcoin could be used as a currency, and the blockers that it faces before it’s truly an accepted currency. What’s ironic, yet totally understandable, is that he stays away from putting a fundamental value on Bitcoin. He does state, however, that its price will depend on adoption, and will either fall dramatically, or it will be justified by its usage.

My thoughts

Ultimately, I think that as long as the price of cryptocurrencies continues to be as volatile as it is, I think it’s tough to see a lot of people using it as currencies. But the fact that people are thinking about it is encouraging, since, these are, after all, cryptocurrencies. At least in name.

I think that it’s important to acknowledge the fact that these cryptos could certainly start to find widespread acceptance as currencies, instead of as stores of value.

This would actually be fairly tough for me, since my investment thesis in cryptos lies in their limited supply and my belief in their likely increased demand.

If they end up being used as currencies in such a scenario, my conviction on their place in an investment portfolio will start to wane, and that could be one thing that gives me pause in my enthusiasm for them.

With that said, I do believe that if they do start to gain traction as currencies, I’ll find a way to value them, maybe using one of the methods mentioned above, and will be able to invest in them using fundamentals. That case would be a welcome change from the buy, hold, and believe/hope situation that we’re in now.