Stellar's valuation is a HUGE problem!
There is a HUGE problem with Stellar's valuation. This also applies to many other cryptocurrencies with the same issue. Cryptocurrencies are a very new asset and most people don't know how to base their valuation. Stocks are commonly compared using a P/E ratio, which is the company's market cap divided by its earnings in the last four quarters. With cryptocurrencies, there are no earnings to go off of. Most people compare them based on what they think will become most popular or widely used. Yet this is a terrible way to value cryptocurrencies.
Cryptocurrencies should be valuated based on how much money will be used with the cryptocurrency at any one moment. They can't be valuated based on yearly usage. Stock earnings are valuated on a yearly basis because it tells you how much the company is earning over a set period of time. Cryptocurrencies do not make income. The market cap tells you how much money is currently held in the cryptocurrency. It's not how much is held over a year or a day, but for a single moment of time.
The Stellar network uses Lumens as it's cryptocurrency for moving money across borders. You can read on their website that Lumens prevent spam attacks by charging a small transaction fee and by requiring you to hold at least 20 Lumens to use it's network. In the future this requirement will be lowered to 0.5 Lumens and could be reduced even further. Transactions using Lumens only take 2-5 seconds. When someone wants to exchange USD to Euro using Stellar, the Stellar network buys Lumens with USD and then the Lumens are sold to the receiver in Euro credits. Those Euro credits can then be withdrawn for Euros. The Lumens themselves are only held during a transaction for 2-5 seconds. There is no use in holding Lumens besides for those 2-5 seconds, for holding more than the base requirement, and for investing purposes.
Every day, there is about 5 trillion dollars traded between currencies. Since transactions take 2-5 seconds, we can use that information to calculate how much money will be used in Lumens for currency trading at any one moment.
Even if 100% of all currency trading in the world is done using the Stellar network, only about 200 million dollars worth will be used for currency trading (on average) at any one moment.
That's a very small amount compared to its current market cap of about 10 billion. Almost all other value in Lumens comes from people investing in it because they hope that other people will invest in it who are also hoping that other people will invest in it. This is not a sustainable model and will eventually collapse.
Yes, there will always be people who are going to invest in Lumens which will give it more value than it needs, but the cryptocurrencies that have the most potential are ones which the world will use billions or trillions of dollars worth at any moment. Here are some examples of assets that investors use for more than just investing:
Storage of value cryptos such as Bitcoin, Litecoin, Dash, and Monero are used to hold money and purchase goods and services. These cryptos aim to replace traditional fiat broad money which there are 90 trillion dollars worth in the world. Even if storage of value cryptos only take up 5% of that, there will be about 4.5 trillion dollars worth held in those cryptocurrencies at any one moment.
You can use Steem to upvote content you enjoy which improves Steemit or Dtube or other sites that use Steem. The more Steem you have, the more influence you have.
You can use stocks to vote on corporate policies. The more shares you have, the more voting power you have.
But what does investing in Lumens give you besides a chance it will raise in value? Nothing! It's not a good way to store money, it's not a good way to purchase products, and holding it does not give you any sort of voting power. You might be thinking, "Lumens can be used to purchase products and you can hold your money in it. So it's no different than Bitcoin or Litecoin and could end up being worth a trillion dollars." But it will never have enough adoption to have that sort of value because there isn't enough development towards making it that way. The developers are trying to make Stellar a way to exchange fiat currency quickly and cheaply between countries. That's not going to change.
Stellar is not the only cryptocurrency with this problem.
I can't go through every single one of them, but there are lots of cryptos which have no advantage to holding it. Many cryptos are only used to pay for fees associated with using its blockchain. Most people who use these cryptos on a regular basis will only hold enough to pay for those fees. Only investors will hold lots of value in the crypto as a bet that its value will go up. If there is no other use in holding the cryptocurrency then many investors will sell it as soon as it starts going down.
Eventually we will get to a time when there's a single cryptocurrency that's been established as the main crypto for storing money and for purchasing goods and services. No one can really say which one that will be, but when the value of that crypto goes down, people aren't going to panic sell because they will still need to use that cryptocurrency at stores and market places.
So before buying a cryptocurrency, make sure you think about how much of that crypto people will need to hold if they want to use it for its intended purpose. If it's used to store money, then some people will hold millions or billions of it at all times. In the case of Stellar, you will only need to hold 0.5 Lumens at any time. Any more is only used for 2-5 seconds. Stellar's current value is ridiculous and I expect it to be much lower in 5 years.
Good post and I like the analogy compare to steem.
Steem can be used to upvote which give you reason to have more.
Keep on steemin'
The thing about Bitcoin is that it's original intended purpose was to be a digital cash, not a store of value. Cryptos will never be a good store of value without utility. That's why I think STEEM is so great.
Bitcoin is still used that way. Cryptos are a better store of value than fiat money because they're deflationary instead of inflationary. But I think the cryptos that make a good digital cash will be the ones that people will store the most value in.
It's only deflationary for a single blockchain. You can just copy the code and start a new blockchain. You have to have a reason for people to want to store their value in a particular blockchain.if not it's just speculation like everything else.
Store of value only works when there are no close substitutes.
The blockchain gives you full control of your own money.
And if someone buys or sells stuff using a crypto then they might as well store their money in it as well for convenience.
Hard to say. I'm not sure about "never be a good store of value" but in comparison shouldn't do as well as the ones with utility. Speaking of which, if I were to be investing for retirement 30 years down the road like your generation might be doing, I wouldn't invest in any crypto that are Proof of Work, like Ethereum. They will slowly become obsolete as more people realize it just doesn't make sense to have to consume huge quantities of electricity to ensure security in the platform, when other options like Delegated Proof of Stake (like Steem) exist and become more known. I wonder what would happen if some big, well respected name like Ben Bernanke comes out and says something like, "Well, I guess crypto isn't such a bad idea after all, but I sure as hell wouldn't invest in Bitcoin as long as they still use Proof of Work. Who thought that was a good idea"?
Keyword is "good." Ethereum is supposed to switch over to PoS this year.
Insightful analysis REH and a few weeks ago I would have agreed 100%. I do like the way you quantify the value of crypto taking cues from the stock market. I think as time goes on with this new technology and new means of investing we will see more and more things "borrowed" from the world of stock trading, such as indexes like the Dow Jones or S&P 500, or the development of a crypto equivalent of the mutual fund.
I also like how you've tagged the value of a stock to the ability of the stockholder to influence the company. But here's the thing: the vast majority of stockholders have no interest in doing that. Maybe 1/100th of 1%. The other 99.99% of investors are just that - INVESTORS. And they look at other things, not just price/earnings ratio. Those companies who report P/E ratios in the top 20% don't just TANK in comparison to the ones in the lower 20%, but rather just don't do as well, by comparison.
So with cryptocurrency, as long as there are millions of people like me looking for a place to grow money and willing to keep the money in as long as it takes to be positive, that will overshadow any considerations of utility. In the long run, one would hope that the coins with the most utility will do the best in comparison to the ones that , but to say the ones with less utility, or the ones like Stellar that have current values far beyond what's needed to actually use the token, are going to crash or have their bubble burst, ignores the mass psychology of cryptocurrency investing, that is, why people are getting into this game.
It's a brilliant idea, but I don't know that a Price/Actual Use ratio will ever be used as a metric, but if it is, it will be decades down the road and be one of a hundred metrics used to predict future performance, and will only be meaningful if enough others, particularly the respected pundits, use that metric. It may not make sense today to have billions invested in something that only needs millions to function, but really the value of any of this is the value we give it, as a mass of people looking to do something with our money. It doesn't make sense for a public company to be worth 5 times in stocks what it would be worth as a private company based on its merits alone, but that's the nature of the beast when we allow investors in the room.
Glad to see you're getting interested in crypto, Dad.
This bull run of investors getting into stocks just because they are going up and not looking at fundamentals is eventually going to end. Stocks like Netflix that have a huge P/E ratio but not much expected growth are going to be hammered in the future when the bubble bursts. Cryptos with huge market caps but small utility value are also going to get hammered when the crypto bubble bursts. People who hold stocks and cryptos for quick profits are always the ones that panic sell first when the market tanks.
In a few years I expect a coin to take over the market and end up at stores around the world. People will take their money out of fiat and put it into that coin, whatever it is. That's when I expect the value of that crypto to sky rocket into the trillions or tens of trillions and the value of fiat money to tank. Which that will cause stores to stop accepting fiat or charge a lot more for fiat. At that point, people aren't going to be selling their crypto because there won't be a better place to go. I don't expect that to happen for another 10-15 years though.
But going back to my point about Stellar, maybe it will keep a high valuation in the tens of billions of dollars, but I'm putting my money into cryptos that have the potential to go up into the trillions.
Right now, the majority of coins have an overwhelming majority of their use in just being investments and a space to store value. I don't see any disadvantage in holding my money in Stellar to let it grow, even if it slowed to 2% a month, that's still better than in a bank and i can spend as much of it as i want whenever i want, vs the banks limits on times and amounts. What makes bitcoin any better in that regard?
Also, it is never going to come down to one single coin that everybody uses. There will still be a multiple that are accepted and often bundled together like a co-op or like how we have a few main social media or video sites without just 1 being a complete monopoly. They all have different purposes and even if 2 or 3 share 99% of the same features, the world is big enough to accept more than just 1 everywhere. The problem you highlight is noteworthy, but exagerrated. Most people are not converting fiat to stellar and then to a purchase. They are converting to crypto and spending crypto, with only a few that eventually go back to fiat for profit because they want to buy things not (yet!) payable with crypto. That gives it value, similar to fiat, but better.
Eventually coins that people don't use are going to pop. Eventually there will be a coin that dominates store sales and web sales. People will move their money into that because they know it's won the adoption game. Yeah there will be other coins, but a normal distribution is the top coin taking 30% market cap, second coin 15%, third 10%... I forget what the distribution is called but it's already looking like this. It could be a different coin that takes the top besides Bitcoin though.
This is an issue no one seems to talk about. Glad you brought it up. I am hodling some stellar. Not a huge fan of it though.
Why hold it if you are not a fan?
I'm just curious how high can this go. Markets Go Crazy Sometimes For Coins That Doesn't Even Have a Good Use Case. I personally doesn't like stellar's project. I'm just trying to make a quick buck from it. Not hating though, maybe it will be on the top.
Wow!!!
Thanks for the blog.
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Disclaimer: I am just a bot trying to be helpful.
You should change one of your tags to steem
done
Your estimate is valid in ideal conditions:
In reality there will be orderbook that will hang much longer than 2-5 seconds needed to settle transaction. And there needed much more XLM on orderbook than average transaction because there will be transactions much higher volume than average.
Conservative gesstimate is 10x average transaction which leads us to 2 billion worth XLM.
Other approach is:
Just imagine you have one more fiat currency trading to all other currencies on forex.
It gives enormous liquidity to that new currency, hence gives it big value compared to other currencies. The price of that currency will be proportional to price of basket of all currencies, which gives it even more value given limited supply.
XRP and OMG all plays this field and expecting enormous gains even from current valuations.
Of course they can not achieve it, but their followers evaluate it from "world currency" model.