In short, the price model lands at the conclusion that, assuming as a commodity like , energy, metals or other raw materials, the “intrinsic value” is the marginal “cost of production” formed by inputs such as estimated computational power, electricity expense and hardware energy efficiency.
The community reacted to this analysis, showing an enormous disappointing in providing such note and recommendation not required since at the time the digital currency was landing at $8,400. The note created, of course, an instant dangerous pullback. The truth is that all media reported this with great emphasis without clearly explaining the analysis behind the JPMorgan’s opinion and without clarifying that it was just a statistic analysis to demonstrate that has not a “nil value”.
However, this analysis does not change the crypto debate of the nature of and its valuation that are the core of the dilemmas. The objective of the work, indeed, was only to demonstrate some “intrinsic value” against the mainstream that worth is zero. What we know for sure is that JPMorgan agrees now to consider a commodity overpriced. After the release of this dogmatic opinion, the market dropped at $7,600 but then it recovered…of course.
The nature of bitcoin and crypto asset valuation
Concerning the potential intrinsic value of or other in tokenized economies, we can’t apply the corporate finance valuation principles, or any standard, to calculate the utility value of these crypto assets. The value cannot be represented by the present value (PV) of expected cash flow which is the common criteria to estimate an asset. In literature, there are different descriptions of measures to calculate the expected cash flow of an asset that can be calculated before debt payments (cash flow to the firm) or after debt payments (cash flow to equity). Concerning economies, we cannot strictly apply a typical DCF valuation since a may not have cash flows per definition in case it may be considered a utility or a currency. To address the valuation, we can say that there is no single method to evaluate utility . However, the fundamental equation of monetarism elaborated by Irving Fisher can be extremely helpful to study economic systems and provide monetary analysis for economies (Chris Burniske’s had the intuition to use the Equation of Exchange). Following this model a serves as a currency in the underlying protocol economy that supports. Other methods exist like the Ken Alabi’s one that argues how at the value of certain crypto asset networks such as can be computed using Metcalfe’s Law that states that the value of a network is proportional to the number of its nodes or end users. More specifically, the value of the network is proportional to the square of the nodes of the network where V is the network value and N is the number of nodes.
JPMorgan agrees on the concept that does not act as a currency in a certain economy which, on the contrary, it could be, for its natural propension to be a currency formed by a new decentralized network. Following this assumption, the “intrinsic value” of this commodity takes into consideration only the marginal cost of production that would be the “intrinsic value” around which the market price should gravitate.
In my opinion, the dogma of considering a commodity can be easily discussed and countered. is not a raw material and it cannot be used in any production in this world. There is no industry that demands any bitcoins to produce things. Another strong argument against this assumption of considering as a commodity is that the creation rate is programmed and is not linked to requests for raw materials that can influence its purchasing power or demand. As we know, Bitcoins are created at a decreasing and predictable rate. The number of Bitcoins generated per block, indeed, is set to decrease geometrically, with a 50% reduction every 210,000 blocks or about four years. The result is that the number of existing bitcoins will not exceed 21 million.
To avoid any doubt, the fact that commodity markets are now futures on , it is not an argument against this thinking. That market doesn’t care if the commodity exists or not, they just trade digital numbers with a certain value expressed by the market itself. Finally, if we conclude that is a commodity, of course, it would not make any sense using this “asset” as a currency, even if, in theory, it could be exchanged or berated according to a certain “market value” which would vary according to the requests of the market for its usage (that does not exist), and affecting by this way the “market value” itself. However, which would be its ultimate usage in the production cycle?
What we can affirm is that ’s value is determined entirely by market expectations based on its functionalities that are expressed by its potential future by the economy as a digital currency built on a global network of payment decentrilized with a clear and secured set of rules. If you think about it, also now there are strong shreds of evidence and signals of the massive of and potentially a few other . The truth is that seems perfectly working as a new global digital currency created by the market by itself. The value of any fiat currency is a product of the interaction of the supply and demand of currencies in the foreign market due to a range of reasons and facts such as inflation, interest rates, monetary policy economic uncertainty, public debt, import and export levels, and other real factors or external shocks in a country or in a commercial area.
We can, therefore, conclude that the “intrinsic value” for derives from the expectations that its functionalities, together with the progress of technology, will allow it to be used as a medium of exchange in the future coexisting with national Fiat currencies.
My contribution in the crypto community was the introduction of “the functioning curve demand of ”, explained in my book “imagine there’s no currency” available on Amazon and, later, in a few articles on . It was just my first attempt to elaborate this intuition on which I’m still studying and improving by the passing of the time considering also the effects on the aggregated demand, money and credit creation. However, it was the first attempt to explain the factors that can generate the potential demand of any and it explores, therefore, possible alternatives equilibria between fiat money and virtual currencies, following the intuition that with real functionalities and national fiat currencies can coexist through an endogenous process driven by the technology factor.
The fundamental argument was that the demand of any grows in the economy with the increase of the real functionalities behind them together with other variables that are the income spent and the real costs that households have to pay the sellers to accept Fiat money, or both. This intuiton stated that the choice, therefore, depends exclusively by an endogenous process driven by technology. The decision to shift to represents, in short, a new form of “digital liquidity preference”. My analysis, indeed, explains how the demand of any virtual currency can interact with national currencies in a modern and digital economy, introducing the “technology variable” and deriving “The functioning demand curve of .”
Simply, more the technology and move forward, more we will see to the massive of those with strong and real functionalities behind them able to support a certain economy.
Of course, volatility and stability of any currency can be everywhere a problem. Volatility and stability are something connected to the value of any fiat currency and it is usually formed by the foreign market due to a range of reasons and facts such as: inflation, interest rates, monetary policy economic uncertainty, public debt, import and export levels, and other real factors or external shocks in a country or a commercial area. That was a limit, but I assumed, therefore, the fundamental concept that with the increase of the users the volatility decrease and it will not discourage the as effectively seems to happen.
Indeed, the volatility of , included , can be then reduced through advanced payment systems. When a customer makes a purchase, these systems convert the transaction to an equivalent price and then immediately exchange the funds to dollars and deposit them in the merchant’s traditional bank account. For example, a new payment network called “Flexa” is launching a new system that will let us spend in physical stores. The technology currently supports , ether, cash and it’ll work at retailers including GameStop, Nordstrom, Whole Foods, Caribou Coffee, Jamba Juice, and Crate and Barrel. The eventual goal for Flexa is to support payments using any to pay any merchant. Many other payment providers, included the giants of the card payment industry is involved in this digital revolution.
Finally, we can conclude that seems perfectly working as a new currency formed on a strong system network of payment free of central bank or any government control. It has clear functionalities built on a decentralized network with a transparent set of rules. This system is inducing people to keep both for transactional reasons as a medium of exchange and also for precautionary reasons. The massive will derive by an endogenous process due to the progress of technology.
We can argue that ’s value rises for the reasons explained above and currently it has a value since the market recognizes a price that can vary according to the market sentiment and expectations that will achieve a massive in the economy because the system effectively can work, support a certain economy and it can be easily adopted.
This article is the property of Alessandro Raffelini and may not be used without his express written permission. Alessandro Raffelini is a strategist and an corporate finance Advisor to Vcs, PE and startups. Feel free to contact me on , or linkedin.
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Published at Sun, 26 May 2019 16:28:42 +0000
