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What the Hell Is Happening To Cryptocurrency Valuations? (techcrunch.com)
The investment category of cryptocurrencies hit a new milestone this week, one that would have been unfathomable just a couple of years ago: $100 billion in combined market capitalization. The break above the 12-digit threshold is largely attributable to bitcoin, which is by far the largest digital currency in the still-nascent category, and which has been on a tear lately. From a TechCrunch article: There is one rational explanation that, if true, would totally justify this rapid increase in price across some of the major cryptocurrencies. And that is, maybe these currencies are actually worth these high prices, and maybe even worth many times more than that at which they are currently trading. But the problem is we have no way to figure out their value. Cryptocurrencies aren't public companies with earnings and expenses and EPS. For example, we can look at Apple's financials and determine its book value -- what the company's assets would be worth if hypothetically liquidated today. Of course, stocks trade at a premium to this, because people are enthusiastic that Apple will continue to perform well and this book value will continue to rise. But we can't do this with cryptocurrencies. We could guess -- and compare it to things like the total money or gold supply in the U.S. For example, if you're someone who thinks of cryptocurrencies as a store of value, the total estimated value of all gold in the world is more than $8 trillion dollars... meaning if bitcoin would ever replace or supplant gold, its current value is pennies on the dollar.
are the only external buyers - the rest is a crypto circle jerk.
Think about this: money buys what can be made. Making things takes time. Technology makes it take less time. Labor.
You work for 10 hours, you make $10/hr, the thing you make has to cost at least $100 or you don't get paid. Next guy works for 10 hours, makes $20/hr. You have to work 10 hours to buy something he worked on for 5; he only has to work 5 to buy something you worked on for 10.
Trading labor.
You can produce gold. Excessive amounts of labor can generate enough energy to do it by nuclear fusion; smaller amounts of labor can mine it out of the ground. If you use gold as currency, you get a source of instability by people hoarding it (can't just issue more) or finding new, rich veins.
If cryptocurrencies became the currency, then cryptocurrencies must reflect in value what can be bought.
Because of who holds these currencies and their lack of broad distribution as money, they don't have the purchasing flexibility of currency. That means you can't just take bitcoins and buy stuff. Bitcoins are nothing but a commodity, like gold: there's a cost to produce more, and a current stock.
Cryptocurrency valuations are not based on their capacity as a theoretical currency or even their cost to produce; they're based on a fascination. The market is narrow enough and the capacity to produce e.g. bitcoins is scarce; cryptocurrencies aren't scarce. It's like iPhones versus any Android phone: if people stop caring that it's an iPhone, it can't sell for $1,000 when it's identical to a $500 Android phone. Anyone can create a new cryptocurrency with little cost.
It's all speculation and bullshit.
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Financial Expert Peter Shiff made an interesting point in his podcast this week about crypocurrency valuations. As an Austrian Economist he believes the digital currencies will eventually implode and become worthless. The interesting point he made is that while bitcoins may be limited (they will eventually be capped at 21 billion bitcoins) cryptocurrencies ARENT. You can make as many cryptocurrencies as you wish, meaning they can be created in excess and therefore be exposed to inflationary or hyperinflationary effects that could cause a massive crash in the value of all crypto currencies.
That said, i'm still gonna wait for a crash in bitcoin value this year, and then buy some as a purely speculative bet