How to value cryptocurrency

In this article I will be discussing the topic of cryptocurrency valuation. As the price has bitcoin has risen over 1000% in the last 12 months, the average person thinks this must be a bubble. Many so-called financial experts are saying that it cannot be valued.

This is noncents of course. The value of currency including cryptocurrency does have a value, it is just difficult to calculate. For instance with stocks, the value is defined as the all future profits discounted by the risk free rate. Bonds are similar to stocks and can be valued the same way. Commodities are more difficult to value supply and demand is fluctuating and the intrinsic value can very greatly from person to person.

And then there is currency. You may ask questions like how do you value a currency? If you can then is how much dollar value? What makes a currency worth more than another currency? Answers to these questions are to follow.

First, we must know what a currency is. First it is a unit of account. Unit of account means that 1/10 of the amount of currency is worth exactly 1/10 the original amount or whatever fraction you want to substitute. Government currency meets this purpose, as did gold and silver, bitcoin and crypto. It must also be a store of value, which means it does not spoil over time. It should have low transactions fees, preferably not massive or very dense.

These are not absolute requirements but the more a currency meets these requirements the more utility it has. Gold is a unit of account, is a noble metal which does not react easily and has some intrinsic value. For these reasons gold replaced barter as a better medium of exchange. Have governments not made fiat currency and forced people to use it, gold or gold backed notes would still be preferred today. Until now.

Cryptocurrency is a game changer. It is similar to digital fiat currency and has all of those benefits but in addition it is a store of value. So we've established that cryptocurrency is probably the market's preferred way to transact, which implies bullish upside. But how much?

Imagine money as a physical gooey substance that has certain properties.

This substance can be dissolved into infinitessimally small particles that make it's way into the economy. Think as all currency as this substance and a dollar is an arbitrary unit of measure. The goo by itself unremarkable and worthless, but it's unique properties allow economies to run.

It is like the gas needed for the engine(economy) to run. It may have no intrinsic value on it's own but like gas and the engine neither has any worth without the other. So we can measure the value of a currency not directly but indirectly by the production of goods that the currency that its special properties facilitates.

So what does crypto facilitate that government fiat does not? For one it is a better store of value than gold because it is more secure and portable. If gold is 6T. So cypro is worth at least $6T from $300B currently. But there's more. Internet of things and micropayments / sharing economy is something that crypto enables that fiat does not. Think of decentralized Uber or AirBnb the centralized corporation gets 30% commission on all revenue through these platforms. These can be decentralized and the gains spread to consumers and produces (or crypto speculators). Or corporations such as Google or facebook where enormous profits are made by users giving their information for free. Users can choose to get paid for the info or content they provide. Overall this value transfer this is probbaly $20T. It is unsure if bitcoin will fulfull these roles, but IOTA with its no txn fees and scalability seems to be the fulfill these roles and may see 100x upside.

TLDR: Crypto has intrinsic value of at least $6T and probably will stabilize at $20T over a 5 year bull market. Current valuation is $300B. I'll let you decide what that means.

Disclosure: Am long BTC and IOTA.

More articles to come about cryptocurrency and valuation.