Value and Measurement in a Digital World

tl;dr: Checking assumptions about how to measure value may be as important as the process for measuring value itself.

One of the biggest mental blockers for people trying to get their head around crypto-economics is the question of:

“It’s cool tech, but how do we measure its value?”

It’s a fair question, but it usually comes loaded with a set of pre-conceived notions. The biggest of them is: we know how to measure value today.

I would challenge that assumption.

In a minute, I will tell you why I think that, but first, let me set up some context.

Meet Chris Burniske

Chris is a partner at Placeholder.vc

He has done more than anyone in the world in trying to adapt the models of valuing assets and markets from the “real” world to the crypto world. Furthermore, he’s openly and transparently presented his ideas for new ways of valuing assets.

His first book, Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond was a modern economic treatise with a crypto-catalyst.

If he had stopped there, it would have been enough (dayenu).

But that is not how Chris rolls. Recently, he published the Value Capture and Quantification: Cryptocapital vs Cryptocommodities, which offers an updated set of thoughts and opinions on the questions of value in crypto-economics.

Chris pays particular attention to the inherent quality of store-of-value assets (and the potential necessary components that make them up) as well as some thought-provoking ideas on the real value of utility tokens.

Unlike some people, there is no doubt in Chris’ mind that there is value in them thar assets, however, he is incredibly humble in his acknowledgement that he is on the scent, but has not “cracked the code.”

That makes it all the more worthwhile to read.

Now back to the topic at hand….

Valuing Value

Assuming that we “know” how to measure value in the “real” world is the first mistake.
As Chris writes:
“Existing models to value public companies are highly stylized beasts that have taken decades for market analysts to converge upon. They only now appear obvious because they’ve been used for so long. In reality, it wasn’t until Security Analysis was published by Graham and Dodd in 1934 that we entered the modern era of stock valuation, over 300 years after the creation of equities as an asset class.”
Second, is that once we have a model, it just works.
Another friend of mine is a guy named Meyer Shields who is one of the world’s leading analysts for the insurance industry.
His claim to fame?
He’s the only industry analyst to be disinvited from Warren Buffet’s annual meeting.
Why?
He thinks Buffet’s valuation model is outdated and that is the reason he is trailing the S&P 500 over the past decade.
The point of all of this is to remind myself that it’s important to look at the assumptions and then the assumptions about the assumptions (all the way down) about value.
Because one constant in life, as we all know, is change.
The models for valuing economic interests came about in an era pre-dating the arrival of the Internet and computers.
All of this matters because of the idea of “hard” vs. “soft” assets.
Here’s Chris again:
“Soft commodities” like oil will create as much supply in a year as there was pre-existing stock, whereas “medium commodities” like silver may create 20% as much supply in a year as there was pre-existing stock, and then “hard commodities” like gold only pump out 1-2% supply inflation in any given year.
Which is great, but it’s the next sentence that matters the most:
“If Bitcoin remains steadfast in its monetary policy, then when it converges upon 21 million units with 0% annual supply inflation it will have achieved perfect hardness. Perfect hardness is only possible in the digital world.”
Only possible in the digital world.
I feel like my motto for this era is “moving from impossible to possible.” When things used to be impossible and now they are possible, it is not an option, it is mandatory to go back and ask some basic questions again.
It’s uncomfortable, I get that, but there’s no other way. Otherwise, you’re combining two paradigms that don’t make sense.

The next moment when we see a huge, public experiment on the road to perfect hardness is the Bitcoin block halvening event next year.

Meanwhile, as people challenge the existence of value in crypto (versus challenging their assumptions about the origins of value), the signs of growing mainstream adoption are literally all around us.

On the DC Metro the other day, I was in a car that was blanketed by ads from the Gemini exchange.

I wonder if those who are less hung up on “how to measure value” will be the ones left behind as the next evolution of the market unfolds.