Beyond Crypto Value Refactoring
Cryptocurrency is a very novel asset class, with only a decade worth of history. An asset class that has lead to the birth of a new economy; the digital economy. However, this digital economy is in a very delicate infant state; for this economy still lacks a comprehensive, universal valuation method for cryptos.
Like all other digital things, crypto grows at an alarmingly fast pace. A pace that has lead to the infamous boom-and-bust cycles of 2012, 2014, and 2018.
Once the aftereffects of the crypto’s markets price collapse have settled, a new cycle begins. In every new cycle, participants of the digital economy search for Factors that constitute to Crypto asset price appreciation and depreciation.
Not all crypto assets are designed economically equally.
In the digital eco-sphere of crypto, there is a lot of media attention (as well as community forum engagement) that attempts to quantify crypto price movements; maybe you have even heard a few of the reasonings:
“Bitcoin is UP because the USD is down”
“Ethereum is Up because Bitcoin is UP”
“Ethereum is Up because Bitcoin is down”
“Ethereum is down because Bitcoin is down”
“The crypto Market is Down because the DOW Jones is Up”
Most of the available mass media and unprofessional social forums employ reasoning to price fluctuation that is incomplete and downright wrong. Most sources offer reasoning that is defined by correlation; and what do economics and higher levels of logic suggest:
In order to help propel the digital economy into a more robust, anti-fragile version of itself; those involved in the crypto industry must dig deeper and employ entirely new factoring methods for value attribution.
With the proper intellectual systems designed & employed, the digital economy can continue to grow and develop; but, as long as there are no definitive standards for valuation the digital economy will constitute nothing more than a speculative playground.
Looking beyond the topical surface of correlation, we can create evaluation frameworks derived from concepts that are attributable to all cryptocurrency assets.
The weight of each constituting attribute would be heavily shaped by the related projects externalities: namely the niche/industry of the project. (ex. a crypto project that is related to VR gaming has a much smaller social audience and in turn lower bound on the maximum price than a project dealing with finance)
Let’s take a closer look:
The number of users interacting with the network. The partnerships the network has with others in the sphere. The companies that are utilizing the cryptosystem to build products. To express it simply, more on-chain activity leads to more resource/ asset demand. This can be likened to the NVT ratio, a metric that represents the P/E ratio for crypto networks.
Network/Platform Dependence On Asset.
Does the underlying cryptosystem depend on its native asset in order to function? Essentially, this is the utility of the crypto. In the case with Bitcoin, if anybody wants to interact with the network they must account for their usage of the network by using the Bitcoins. However, because not all crypto’s are created equal (and some shouldn’t have even been created) there are crypto projects out there that have a cryptocurrency but the network itself can fully function without it. In the long term rendering the crypto-asset “worthless”.
Speculation/Lack Of Better Alternatives
Would you rather own an asset that produced something or an asset that was valued highly due to social construct? Turning back to the case of Bitcoin; Bitcoin is an asset that produces financial inclusion (very profound) and is therefore valued highly by society. On the other side of the cryptoverse, there exist crypto assets that are poorly (if at all) designed to produce nothing aside from hype and speculation. Many Crypto tokens, literally, have absolutely no purpose aside from being traded among people…
F.O.M.O. – Fear Of Missing Out
To date, this is perhaps the strongest driver of crypto-asset prices. Many individuals who are not educated in investing/finance/crypto have seen the parabolic social shift with companies like Apple, Amazon, Google, etc; and look for their opportunity to make “easy” money or make money in their sleep. Projects might be coming out and making tremendous claims of “changing the future” or being the next “Amazon of the blockchain” among others, and swindle individuals into investing. However, this not necessarily a bad thing! When FOMO meets genuinely good projects/cryptos, a beautiful thing happens. “permanent” Value trans-positioning from legacy financial systems to crypto-systems.
The above identified attributes are DRIVERS of crypto asset valuation that have been identified. They are used to predict the bounds of a crypto assets price. Moreover, there are certainly other methods to use and metrics to apply in order to achieve greater insight into the state of the economy.
The digital economy. The digital crypto-economy is beginning to teeter past its experimental phase and its global social realization/ adoption phase. In order to guarantee the outcome that is promised by blockchain & crypto, we need to speed up the pace at which we fail; that shall guide us to success!
The Future is in our hands…