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What the Hell Is Happening To Cryptocurrency Valuations? (techcrunch.com)

Posted by msmash on from the figuring-things-out dept.

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.

13 of 258 comments (clear)

  1. tulpenmanie by fabriciom · · Score: 3, Informative

    New boom with disaster to whoever is left holding the last "coin".

    1. Re:tulpenmanie by TheCowSaysMoo · · Score: 5, Informative

      I *GUARANTEE* you the bidding will get to AND surpass $20. It's happened every time I've ever seen the auction experiment happen. Follow along...

      Bidder A: Sure, why not? I'll bid $1.
      Bidder B: (Thinking: So, I can bid $2 and profit $18?) I'll bid $2.
      Bidder C: (Thinking: So, I can bid $3 and profit $17?) I'll bid $3.
      Bidder D: (Thinking: Duh! I'll take $16 profit!) I'll bid $4.
      Bidder B: (Thinking: There's still $15 profit to be had.) I'll bid $5.
      [Bidder A drops out because they're getting a bit confused about everything]
      Bidder D: (Thinking: $14 profit, baby!) $I'll bid $6.
      Bidder C: $7
      Bidder D: $8
      Bidder B: $9
      Bidder C: $10
      Bidder D: $11
      [Bidder B now realizes that the auctioneer is going to make $21 for a $20 bill because both Bidders C and D have to pay up. Bidder B drops out.]
      Bidder C: (Thinking: At least I'll still profit $8.) $12
      Bidder D: (Thinking: At least I'll still profit $7) $13
      Bidder C: $14
      Bidder D: $15
      Bidder C: (Thinking: I don't really care about $4 profit, but I don't want to pay $14 for nothing) $16
      Bidder D: (Thinking: I don't really care about $3 profit, but I don't want to pay $15 for nothing) $17
      Bidder C: $18
      Bidder D: $19
      Bidder C: (Thinking: I don't want to pay $20 for a $20 bill, but I DEFINITELY don't want to pay $18 for nothing. Fine. We'll just end this whole thing and everything's even) $20
      Bidder D: (Thinking: Dammit! Now I'm screwed! He's getting $20 for $20 and I'm getting shafted with nothing, but I still have to pay $19! Screw it! I'll take a $1 loss instead of a $19 loss!) $21
      Bidder C: (Thinking: WTF?!?! He just bid $1 more than what he's getting in return and now I'm stuck paying $20 for nothing?! No way! I'll take a $2 loss instead of a $20 loss!) $22
      Bidder D: (Thinking: $3 loss is better than $21 loss) $23
      Bidder C: (Thinking: $4 loss is better than $22 loss) $24
      [etc., etc., etc.]

      It's not unheard of for the bidding to surpass $100 ($80 loss is better than a $98 loss!) before the experiment is ended due to the point having been made many bids earlier.

      The context is in how people think about risk, loss, and similar factors. Consider an RFP process for a $1-million project with a major, multi-national corporation (MMC) with billions of dollars in market cap. Winning the contract for the project would be a MAJOR windfall for the winning company (WC) on the assumption that a successful project might lead to more work. But, to win the contract, the bidding companies (BC) are going to have to travel to MMC headquarters several times over the course of the next several months on their own dime. They'll also need to create prototypes and other proof-of-concept materials on their own dime. Let's say that over the first month or so of the RFP process that most BC are eliminated and only two BC remain. We'll call them BC1 and BC2.

      Now that things are getting real, BC1 checks in with the group leading the RFP bid and finds out they've spent approximately $100k so far on the bid process. That's okay because their estimates suggest the project will cost $750k to complete successfully ($850k total; $150k profit). BC2 checks in with their group and finds they've also spent approximately $100k and they also estimate the project will cost $750k to complete successfully ($850k; $150k profit). BC1 and BC2 are aware that they are the last remaining companies bidding for the contract and that each very likely has similar expenses and estimated project costs.

      BC1 decides to up the game a bit and tells the RFP group to setup a special one-on-one meeting with BC1 CEO and the head of the project for MMC. They want further refined prototypes and a WORKING proof-of-concept. They estimate the additional meeting/work will cost $25k, but that still has them at $125k of profit. Meanwhile, BC2 catches wind of the special meeting and works up their own special meeting. Estimated $25k expenses, but that still has them at $125k profit as well. If both companies stopped at this point, one would win

  2. Ransomware by Luthair · · Score: 3, Interesting

    are the only external buyers - the rest is a crypto circle jerk.

  3. What's happening by Dunbal · · Score: 4, Insightful

    Human greed. When people start selling houses and taking out new mortgages to "invest" in bitcoin, that's when you get the hell out.

    --
    Seven puppies were harmed during the making of this post.
    1. Re:What's happening by sl3xd · · Score: 5, Insightful

      I have no problem saying that cryptocurrency is a bubble and that there's a huge amount of speculation over hype driving up prices.

      What we're seeing is definitely not a Ponzi scheme, which is its own, very special -- and very different, form of fraud.

      --
      -- Sometimes you have to turn the lights off in order to see.
    2. Re:What's happening by tbannist · · Score: 4, Informative

      It becomes a Ponzi scheme when one or a small group of people benefit from the wealth, and the value of current bitcoins is driven by a constant flow of new buyers.

      Actually, it becomes a Ponzi scheme when the investments of new buyers are used to pay the returns on the investments of the earlier buyers.

      Since cryptocurrencies do actually pay any returns, they can never actually be a Ponzi scheme. Though you could, in theory, run a Ponzi scheme that uses cryptocurrencies... You could also try to argue that the entire marketplace for cryptocurrencies is a Ponzi scheme, but it doesn't fit the definition very well. The central problem is that new investments aren't actually paying the returns (profits) of earlier investors, instead the new investments are buying the inherently worthless numbers that the earlier investors own, which is generally considered a bubble.

      And to answer the submission's question, the proper value for a cryptocurrency is however much the collection of people who want to buy them are willing to pay for them. They have no inherent value. They're the opposite of gold-backed currency, they're demand-backed currency. If next week everyone decided that cryptocurrencies were a fad, they'd all be worthless. It's not likely to be that extreme, but buyer beware.

      --
      Fanatically anti-fanatical
  4. Speculation by sjbe · · Score: 4, Insightful

    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

    Or more likely its a speculative bubble and like the stock price of Tesla it has far outpaced the current underlying fundamentals. They are basing this on valuations of derivative instruments relating to (mostly) bitcoin. Like a stock there is no cause and effect link between the market price and the actual value of the underlying asset. All it takes to get an absurd "valuation" is one party purchasing an interest in a fund or company dealing in bitcoin for a large amount of money. If I buy 10% of your company for $1 million dollars I am de-facto saying I think your company is worth $10 million. But the problem with that is that there is a winner's curse effect at work. Just because one person overpays doesn't mean everyone else agrees.

  5. Bitcoin valuation by Anonymous Coward · · Score: 5, Informative

    Bitcoin is skyrocketing mainly because it's one of the only safe ways for kleptocrats to move their money out of China. For those that don't know, China has exceptionally strict wealth export laws so the paper billionaires there need a way to move their money out and into other markets.

    Take a look at a chart of BTC vs Yuan and you'll see an almost perfect inverse relationship.

    1. Re:Bitcoin valuation by 0100010001010011 · · Score: 4, Informative

      Not just China but I see this being used by anyone wanting to move money across borders.

      They recently had a story on how Trump was going to start taxing money going to Mexico, I can send money right now to anyone in the world sans any tax.

  6. Okay.... by dugancent · · Score: 3, Insightful

    maybe these currencies are actually worth these high prices

    Hahahahahaha

    I have nothing useful to say. Just had to point out that it's not every day that see such absolute BS.

    --
    SJWs are the new boogeyman. -Me
  7. Interesting by jediborg · · Score: 3, Interesting

    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

    1. Re:Interesting by religionofpeas · · Score: 3, Insightful

      You can make as many cryptocurrencies as you wish,

      The value of cryptocurrency comes from the network effect. Sure you can take the Bitcoin code, and create a new blockchain, and change the name, but if nobody wants to use your coin, it's not worth anything. In order to gain value over existing coins it must offer some new distinguishing features that people actually care about.

  8. Two reasons by Sycraft-fu · · Score: 3, Insightful

    First is that gold bugs hate inflation. They see it as the ultimate evil. They like deflation. Well gold can lead to deflation, and likely would in the long run due to its limited supply, but bitcoin is guaranteed to have deflation given its design. So they like it because if it is used it would guarantee deflation.

    The second is something you might have guessed from the first, it is because they don't know shit about money. They don't really have an understanding of what makes money what it is, or what makes a given currency good or bad. They see big amounts = good, big gains = good. Since both gold and bitcoin have been on a run as of late, that makes them good.