How To Value Crypto Assets

Given the explosive increase in the prices of crypto assets this year, there is a growing discussion on how to value them.

This is a very good thing.

Andy Kessler weighs in on the topic in this WSJ piece which was published over the weekend.

You should go read the piece as it does a good job of dissecting the economics of the transaction processing system that underlies Bitcoin (aka the Bitcoin Mining Network).

Andy finishes his post with the following statement:

at some point the market will wake up and apply rational valuation techniques. That price—$4,361—implies a lot of belief in Bitcoin as a long-term store of value well beyond the economic value of the transaction platform. 

Like Andy, I hope and expect that the market will apply rational valuation techniques to crypto assets. There are a number of people trying to do that. I think the work of Chris Burniske is very solid.

My issue with Andy’s analysis is that he’s conflating the market value of the Bitcoin Mining Network with the value of Bitcoin, the crypto token.

My partner Albert says it well in this tweet:

Blockchain technology upends many of our traditional notions of what networked applications look like.

Our former colleague Joel captured this “upending” well in his seminal post on Fat Protocols, in which he says:

What’s significant about this dynamic is the effect it has on how value is distributed along the stack: the market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer. And again, increasing value at the protocol layer attracts and incentivises competition at the application layer. Together with a shared data layer, which dramatically lowers the barriers to entry, the end result is a vibrant and competitive ecosystem of applications and the bulk value distributed to a widespread pool of shareholders. This is how tokenized protocols become “fat” and its applications “thin

Networked applications that run on top of the shared data layer of blockchains will be forced into commodity pricing and rent seeking will be nearly impossible. Those who build the Visas and Mastercard networks on top of Bitcoin will never achieve the economics of Visa and Mastercard. But that is the point. The Bitcoin protocol will capture those economics and the only way you can participate in that is by earning or buying and owning the crypto token (ie Bitcoin).

And so that is what we must model, analyze, and understand. We cannot use EBITDA multiples to do this work. We need to turn to other tools and that is what Chris and others are doing.

I applaud Andy for putting this critical issue on the table and hope that he and other serious market analysts and observers will take the time to understand what is really going on here and help us all figure out how to properly value it.

Speculation is rampant right now and without the proper valuation tools, we lack the ability to arbitrage and profit from that speculation. We need that.


Comments (Archived):

  1. OurielOhayon

    Indeed. Excellent article and even better distinction between the value of the coin and the protocol. The protocol enables a lot more than just financial transaction but any kind of transfer of assets which goes beyond financial transactions (eg legal assets and more…). So the comparison to visa/Mastercard is limitative significantly

  2. William Mougayar

    No doubt that Valuations are way ahead of Value, and there is little relationship between the two. Fact of current reality in cryptocurrencies.There is a lack of credible (and comprehensive) metrics to back such valuations, despite attempts to theorize on it. What complicates this is that we still don’t have a full picture yet on the overall utility of these cryptocurrencies. So valuations techniques could be a moving target with invisible parameters.One part that is typically ignored (and one I am focusing on framing) is the actual ecosystem that forms around the specific currency. That ecosystem is a key driving force in moving value forward, and we need to learn how to quantify it.

    1. DJL

      Agreed. Per my post above. Show me a company that has delivered real value to customers (that they are willing to pay for) based on crypto – and then you have value. The rest is just tulip mania. I am still waiting for the first killer app?Bitcoin is trying to have it both ways. Be a “foundation protocol” and a currency at the same time. Too greedy. Too confusing.

      1. Rob Underwood

        If, as Professor Damodaran argues, it’s a hedge like gold, why would anyone spend (use) it? I agree with the “both ways” point. If it’s a hedge that will, say, zig as geopolitical risk zags, it’s going to be priced much like gold. Witness what’s happening now — lots of risk and the price is soaring.But if it’s a currency (token) that will be frequently and necessarily converted to fiat, there has to be some stability and trading band between currencies, right? Why would I use a currency that might be worth 10-20% more in a month against the fiat currency I use to pay my mortgage?

        1. DJL

          Well said.

  3. BK

    Currencies are priced, where assets are valued. The link below is Aswath Damodaran, NYU Stern, discussing how bitcoin can’t be valued.

    1. Girish Mehta

      My comment a few months back that cryptocurrencies have no fundamental value to deviate from –

    2. Rob Underwood

      This is an interesting take. Professor Damodaran essentially argues that utility (e.g., utility as a currency) is not the point – just as people don’t buy gold with any real intention that it might be used for fillings and jewelry, though it could be, and of course its role as jewelry was its historical source of value (not just basis for pricing). Rather it’s (crypto) is, like gold, “only” an alternative store to hedge risk and into which people will move from fiat currencies in times of uncertainty.In this case the aggregate value (pricing) of all coins would not be correlated with the overall value of the bitcoin economy but rather simply a pricing mark to reflect people’s confidence or lack thereof in fiat currencies and associated geopolitical risk reflected in fiat currency pricing.

      1. Girish Mehta

        Gold’s role as jewelry was not its historical source of value. The reverse.Gold was not valuable because it was used as jewelry. Gold was used as jewelry because it was valuable.Gold was valued as money because of these six required characteristics – (1)-Divisible (2)-Portable (3)-Fungible(Acceptable) (4)-Durable(5)-Scarce (6)- Stable.

        1. Rob Underwood

          I stand corrected. And that makes sense. In other words it was a way of essentially making a dress of hundred dollar bills because you have enough to spare. The ultimate status symbol. That said, I believe there was some interplay and virtuous circle of gold’s use as a currency and its value as jewelry – its aesthetics in a bubbling mountain stream as a shiny yellow sparkle was likely the initial reason it was paid any mind to begin with. And wealthy people wearing it is an endorsement that it has value in the 1st place, contributing at least indirectly to acceptability.Was the scarcity the most important of these attributes compared to, say, silver? As the cobwebs are being removed from my macroeconomics I seem to recall that there are lots of things (e.g., metals) that meet 1,2,4, and 6. And 3 is really a function of the others.

          1. Girish Mehta

            Many things used as money at different times, including silver.To your question, the difference with silver is #4 actually – silver tarnishes more easily.Here is a 4 minute clip from NPR Planet Money to your exact question, the five metals shortlisted – Rhodium, Palladium, Silver, Gold and Platinum….and why Gold.

          2. Rob Underwood

            Thank you.Not to nitpick, but if my dollar bill is faded it’s still worth the same to the grocery store I use to buy a gallon of milk as a crisp dollar bill.That it tarnishes – that it loses some of its aesthetics value – points to some connection and interplay with its utility where aesthetics matter, namely jewelry. Hence while a cursory look on the interweb shows you’re right – it was valuable first, then used as jewelry – the interplay too was important.

        2. JLM

          .Add “understandable” and “recognizable” and you have run the table, you smart SOB.Well played.JLMwww.themusingsofthebigredca…

          1. Rob Underwood

            Worth nothing that rich people wearing it as jewelry contributed to it being seen as acceptable, understandable, and recognizable. Some of these traits are function of its chemical properties. Others are a societal convention.

  4. rich caccappolo

    Glad you weighed in – as you say, it is a discussion that is required – so kudos to Andy for taking a position, presenting it to the world, and encouraging the conversation.

  5. jason wright

    and interesting to observe when a token’s fund has a higher valuation that its market cap. if you’re right that Bitcoin is the protocol for the ages then those funds expressed in BTC will increase in value enormously while their projects wither and probably fail. then what? it’s a weird prospect, and totally counter intuitive – “our network just collapsed, but our fund is booming”.EDIT 14:37 GMT;number of nodes?of wallets?of applications?of regulations?of wars?

  6. DJL

    Hmm.”the market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer.”I don’t get this. So if everyone building an internet application had to pay a fee for TCP/IP, the use of DNS and HTTP protocol, would the web ever have taken off? I don’t think so. The basic protocol needs to be free. Then you build value in the apps and the value these apps bring to real people who want the apps. Pricing the protocol is nonsense.I want to be wrong here. So please correct as needed. But I don’t see the logic in this.

    1. PhilipSugar

      See my comment.Here is the challenge though. How much is the “internet” worth? But you couldn’t monetize it as you say.But in this case the whole point is that the main thing is the underlying currencies value.Really interesting.

      1. DJL

        I think the entire idea is flawed and does not match any historical precedent. If the internet backbone did not start as ‘free’ – the internet as we know it would have no value (perceived or otherwise).Certainly the “Net Neutrality” crowd can see the folly in trying to monetize the underlying protocol. How unfair! You are censoring people based on how much protocol they can afford to buy!

        1. PhilipSugar

          The whole point is it does not match any historical precedent.That is what Fred and William saw years ago.Now as to who makes money that is interesting. If I buy a bitcoin for $100 and sell it to you for $1,000 I’ve made money. If it goes back down to $100 you lost money.Edit: and I believe in net neutrality and I believe the government will start regulating bitcoin. But it will be tough because it’s hard to track, and that is exactly where when you say there is no precedent. There is: Swiss Banks.

          1. markslater

            I see this as analogous to Napster for money. The banks and the regulators are the labels. This genie is out and no amount of regs can stop it – it will morph to safe harbors in perpetuity.I feel like people need to start throwing all the rules out on things like “how to value”.

  7. Tom Labus

    It would be very difficult to separate the two components of the process. Packing the “unwanted aspects” off balance sheet is Enron like accounting.It was a great article and should be applauded.

    1. Girish Mehta

      I read it this earlier this morning…tea all over the keyboard when I read the last line – “Maybe coin owners should appeal for tax-exempt status if the IRS would consider Bitcoin a faith-based organization.”p.s. applies to all money.

  8. PhilipSugar

    I love posts like these. It certainly “feels” like we’ve gone from the innovators (you and William), the imitators, to the idiots.But instead of “feelings” you have and BK have posted some valuable discussion about where we are on the inevitable cycle that new technology goes through.It’s a really interesting question.Usually I would say the underlying protocol is what gets commoditized. It’s the networked applications that make money. Think about Cisco versus Twitter or Facebook.Nobody cares what hardware Twitter or Facebook run.But just like the internet really did change the world what is this going to look like?Very interesting, and I am going to say I don’t know. So it is great to compile opinions and make your own mind up. And I’m happy that Andy was willing to put out his point of view.

  9. iggyfanlo

    I believe this is the “next” great example in Carlotta Perez’s model of hype/disillusionment/deployment. At this point, we are deep into the hype cycle as you can tell from the number of searches for BTC and cryptocurrencies. To that end, we are hearing the exact same phraseology around “different valuation methodologies; people don’t get it” that we heard in the internet space in the late 90s.There will be a deflation, but I also believe that a strong and global deployment will follow. But that’s for another day

    1. PhilipSugar

      Totally agree when I said “it feels like” I should have said I know that speculators with deep pockets have started trading.As we say at the poker table……if you look around and can’t point out the sucker….it’s you.

      1. iggyfanlo

        I resemble that remark… going to wash my face in the mirror after a few rounds of Texas Hold ’em and realizing the worst player was in the mirror 🙂

      2. Richard

        Glen Beck was invited to be a guest speaker at @msuster’s LA tech conference (which seems totally bizarre). I recently read that he is now promoting bitcoin to his audience.

        1. JLM

          .Would short it on the strength of that alone. JK. I don’t have the courage to short BC.JLMwww.themusingsofthebigredca…

  10. Chris McCoy

    We unpacked txns/sec and its correlation to token price for BTC and ETH. Data, charts, and next steps here

  11. Pointsandfigures

    Where is the invisible hand in this marketplace? Or, is it working. I believe that markets are efficient. Hence, all information is priced into them. All current information is reflected in the Bitcoin price. When new information comes, it will be priced in. What people want to know is when the crash will happen in Crypto prices. Answer is no one knows. It will happen when it happens and when a lot of people feel supremely confident.

    1. PhilipSugar

      I don’t. I believe if you and I went onto the CBE I lose and you win. Luck aside. Yes the underlying principle is the same but skill counts and that makes it not efficient, because you can play me and make me lose.I give you poker. Theoretically nobody has an advantage, but the same people consistently make the final table.

      1. LE

        It is both skill and information/knowledge. For example at the ‘thing’ that I do I have both skill and knowledge. I know I have skill because I use that same skill in things I don’t have any additional information about and do quite well. I have knowledge as well because of the years of transactions and observation in the market. Maybe what I am saying though is what you mean by skill. I see skill and knowledge as to different things. Mainly because that is why people who simply read instructions or what others do can’t apply it like someone with skill and gut can.

        1. PhilipSugar

          We agree.

    2. Tom Labus

      See Greenspan comments about “efficient markets” post crash 08.

  12. JLM

    .Currencies are priced.Most assets are valued, based on market appeal.Going concerns are assessed based on their ability to deliver a predictable, repeatable cash flow.Whether the cash flow is a currency or an asset becomes an important element in evaluating the value of the business engine.A gold mine is valued on its ability to deliver gold to the surface at a cost of production which is the friction imposed on the value of the asset. It is priced in a currency.A gold mine is further valued on the magnitude of its proven reserves, but they still have to be produced and priced. Nobody should be offended that big reserves have an impact on the long term net present value of the gold mine.In most enterprises, much of what is spoken of here is already priced in.Bitcoin and the engine which produces bitcoin can be evaluated in a similar manner. Getting it wrong can happen.A bad idea held by a majority is still a bad idea.An erroneous value offered by a market, is a trading opportunity. Money can be made on both sides of such a situation, if you recognize it is a trade, not a long term investment.I think the hysteria continues for a long time.JLMwww.themusingsofthebigredca…

  13. Richard

    Bloodcoin – estimates on the use of bitcoin for illegal activities seem to suggest that comminity can not continue to ignore this issue.

    1. PhilipSugar

      I don’t usually comment to people with no full name but I agree that Glen Beck is promoting and he does gold as well.I think that one of the hallmarks of true change is that people use it for activities that are not legal/acceptable to other people, and that really makes it “sticky”Sorry but Porn was a huge driver of first the VCR and then the Internet.Problem is it’s usually a boon for the first people and then it commoditizes.

      1. LE

        Sorry but Porn was a huge driver of first the VCR and then the Internet.I always wonder about whether that is an ‘8 glasses of water a day’ [1]. That is info that keeps getting passed along that is simply whispered down from the original and potentially dubious source. Then it becomes truth and gospel.I was around (as you were) when the internet came into commercial acceptance and dealt with end user companies and many people and honestly porn was not as large as I think people think it might have been. I believe that statement (while somewhat correct) is just repeated for impact and very well may be exaggerated. (Maybe haven’t done any research..)[1]

        1. PhilipSugar

          I know somebody who sold the most storage for a while on the internet, you could expand NetApp or EMC boxes without paying them license fees for the extra disks. Kind of like when Compaq had those proprietary disk enclosures which he also made.That shows my age. Porn.

  14. Kevin Hill

    “the market cap of the protocol always grows faster than the combined value of the applications built on top”Please name a single time this has ever been true.

    1. Girish Mehta

      I understood that post to mean that this will be a first/different from before.

      1. Kevin Hill

        You have a very different definition of the word “always” than I do.But seriously, then the whole piece becomes “we have no rational economic model for bitcoin, but we think it will be different”. Fred and co are very smart people, but they are talking like people who know nothing about finance or economics.

        1. Girish Mehta

          The “always” threw me off as well at first. It does not refer to what has happened with protocols before (which has been exactly the opposite over the past 30 years).The author meant it as an expansion to the previous sentence (phrase) – which is separated by a colon and not a period.”What’s significant about this dynamic is the effect it has on how value is distributed along the stack: the market cap of the protocol always grows faster than the combined value of the applications built on top…”

          1. Amar

            Yeah I agree there. Just thinking loud here -> so pardon typos and holes in logic :)1. The protocol (or layer below the application layer) in general is more resistant to competitive threats and has a stronger built in organic moat when compared to the apps built on top of it. Especially if there is a vibrant well funded app marketplace emerging on it2. (IMO) We don’t have an obvious historical exemplar for this because it is really really hard to monetize a protocol layer or claim clear ownership over a protocol layer. Much less talk about a “market cap” for a protocol layer#2 is non trivial and there is yet to be a clear explanation for why this will be different with Bitcoin. Speculation driving the bulk of bitcoin price is proof of this struggle.Protocols are always at the heart of innovation. Enterprise middleware (messaging, backup and redundancy, caching, etc) has thrived as a business model because they don’t sell protocol but package it as an end-2-end solution. There is not a market cap for the TCP stack that fluctuates based on Mulesoft, Informatica, Twilio, etc stock price. I don’t see how this protocol stack is any different?

          2. Girish Mehta

            Agree and I can’t understand it either. Just trying to be fair to what the author meant with “always” as that part of the sentence was confusing.I have read that post a few times over the past several months and I still don’t get how the value capture on the protocol this time will be in the manner that the author argues.

  15. JamesHRH

    Isn’t the current value of the protocol layer of HTTP @ 0?The value of the service or product companies that provide HTTP access is very high, but the protocol could be switched ( theoretically ) by those market players and no one would care, if it was backwards compatible.And, um, now its gold? #grasping

    1. Rob Underwood

      It strikes me that it will be priced in one of four ways:1. An asset that generates cash flow (I don’t think that’s the case, but that could be a model for other crypto/tokens)2. Gold – e.g., a hedging mechanism against macroeconomic risk3. A fiat currency that is used in most or all forms of transactions4. Something new/none of the above.If the answer is 4, which our host implies in his post, than new tools are needed as he says. It would be great to hear some general description of what that is though. A stable value to other currencies is required if it’s going to be used in transactions though right? At least so long as the crypto economy has some crosswalk to economic activity done in fiat?( I asked the same question / made same point on Twitter a moment ago –… )

    2. JLM

      .Glad to see our Houston agent has Internet. Having seen the pics of HOU, I am surprised anybody has Internet or power.We got 5% in ATX of what you did in HOU.Godspeed.The President is coming tom’w. Luckily, he can walk on water, no? Melania is also coming. She may just part the waters.Stay dry and stay safe.You know that floods drive the snakes to the “dry” land? Be careful.JLMwww.themusingsofthebigredca…

      1. PhilipSugar

        Godspeed Houston and Lake Charles. Many friends and relatives live there.Godspeed.

        1. JLM

          .Everybody I know who has a small boat has gone or sent it to Houston. It feels like Dunkirk.The National Guard has 3-5,000 men there and it’s supposed to keep raining for the next four days.I am pretty sure that if Houston and the rest of Texas had a place to dump the buckets, they’d have a bucket brigade emptying it right now.Rockport, Port Aransas, the shoreline of Corpus are destroyed.HEB, Texas based grocery chain, has a convoy of mobile kitchens and food on the road right now.No sign of the ACLU, Antifa, BLM, the KKK, any Nazis just yet. Sure they’ll be along shortly. Just lots of cops, National Guardsmen, and Texans.It is, after all, Texas. God bless Texas.JLMwww.themusingsofthebigredca…

          1. LE

            What is your thought on the ‘didn’t declare emergency/evacuation because nowhere to go’?

          2. PhilipSugar

            To be blunt. It is Texas. Having been born there in Fort Worth more than a half of a century ago.Texans view ourselves as Texans first an American’s second. I can remember that was taught in school.Has this affected family in Houston? Yes.Do they want help? No.I remember Katrina and that was Mississippi. I sent two huge boxes down to my wife’s step sister. The post office clerk said what is the contents of these boxes?Answer: Half of my wife’s clothes.When she got sent to Yemen another two 50 pound boxes: What are the contents?I hemmed and hawed and then fessed up they were Tasty Cakes and baby wipes. She put something on the label and said next time I’ll pony up as well.

          3. JamesHRH

            100% correct.They did not know they had a big storm until Wednesday.They did not know where the storm would dump the rain until Friday.The last time they tried a partial evacuation, 2.5M people hit the roads and 100 people died on the interstates, after the rain, of heat.Sylvester Turner will be governor – he is upright, airtight and on target.

          4. JLM

            .The Mayor says, “Six and a half million people (county and city) can’t evacuate. Road network not big enough. Not enough destinations, shelters.”His call, not mine.This looks to be the 1000 year storm and getting worse, so who knows?JLMwww.themusingsofthebigredca…

          5. JamesHRH

            HEB was open today.As was Valeri gas / convenience.Incredible commitment to their communities.

      2. LE

        My younger cousins house (Houston or suburb not sure) is almost flooded on 1st floor or near that. His office is in Sugarland and he doesn’t have any idea of what is going on there other than someone said there were a few tornados.He is a guy in his early 30’s with a big medical practice and 25 employees. It’s interesting because this is his first ‘business’ experience with unpredictable events. For example I wonder what he will do with employees (with regards to pay) if the office doesn’t re-open soon or they have issues because of the storm and can’t work. And all those patient reschedules and so on. His wife works at a local hospital so it’s not her aggravation like running a business.I still, to this day, hate when there are storms. PTSD Reminds me of my first business when we used to get hit by snow and employees couldn’t get to work and we couldn’t meet rush deadlines. In that case the work came from the local area (so everybody was more accepting of delays (kind of the business ‘cancer card’ let’s call it) but it was still rough.The Pres should hopefully take full advantage of this ‘wag the dog’ event.

        1. JLM

          .There is such a thing as a “lost rents” or “lost income” rider which can be married to any liability policy. I had one when an operating unit was burned and got 12 months of NOI while it was being rebuilt.Hope they had something like that.JLMwww.themusingsofthebigredca…

          1. LE

            I have those as well. However there is one other thing to be considered in any business situation and that is long term damage from loss of customer base.For example the deli across the street had a fire and I used to stop in predictably to buy lox from them. They were closed long enough that I ended up just being happy to get the Spence & Sons from Whole Foods. So I no longer go there. I used to go there to the point where I gave the deli guy a tip because he took extra effort to slice it thin. Starbucks doesn’t (from what I heard at least) completely close stores when they renovate. They have found out (I have been told) that many people simply shift their habits and find another source or do without (break the addiction)). So it hurts business in that way. You know even a 7 percent loss can be a killer.In another case way way back a vendor of mine (printing contractor) was hit by a fire. He told me that many of his old commercial customers found new sources or vendors and didn’t come back. Even after he called them personally. (And he was a nice guy who did nice work when I dealt with him as a commercial account). I think by the way that is one of the things that young people today in business who have never been burned don’t understand but that’s a topic for another day.In the case of my cousin he is a doctor with a specialty practice and gets referrals from other physicians. Now in his case the entire region is toast so he is in better shape but will still probably loose some of his referral base as docs look for other options or perhaps even don’t refer non emergent cases.Ditto if I have offices that I rent and have lost rents what if I lose a prime tenant (so the lease for the next year or two is covered but not the renewal). Otoh if you have a bad tenant and get to renovate and get covered could be much different.

      3. JamesHRH

        We are power, water and internet ON.Lots of respect to the founders of Bunker Hill Village ( City), their high standards for public and private infrastructure. As well, for over 5 decades, city staff had met those standards. City water station lost power but natural gas backup kicked in seamlessly, etc.As for our new home town, the depth and breadth of the misery is hard to describe. Downtown is likely 3/4 underwater; the west edge of metro ( Katy down to Dickinson), the south and east got pounded Fri&Sat only to have the north end ( both sides ) take it on the chin last night & today.And now it looks like Lake Charles is up next.Houston is a town that draws people – energy and medicine bring talent of all colours, cultures and faiths. It’s heartening to see so many competent diverse faces in leadership roles and to see everyday guys of all backgrounds rescuing people of all backgrounds because ‘ it’s what we do. ‘When this clears, I am buying a Boston Whaler for the sole purpose of being able to enlist in the Cajun Navy, of which I am eligible via marriage!!!

        1. JLM

          .Jimmie, you’re new to Texas. You do not buy a BOSTON Whaler.You buy either an Ankona polling skiff or a Carolina Skiff. Different latitude, different attitude. You’ll learn.Having said that, there is nothing that floats like a BW filled with foam. I used to see then with fifty bullet holes still floating like a champ.JLMwww.themusingsofthebigredca…

          1. JamesHRH

            Thanks for the Pro Tip.What I am currently loving is video clip after video clip of young cats back ing $40,000 bass boats onto a boulevard in some subdivision, to be put into rescue service ( with a 50% chance of doing real damage to their Pride & Joy Toy ).God Bless Texas.

          2. JLM

            .It’s sort of infectious, isn’t it?Early to say, but Texas will be fine. Hate that you had to learn about Texas this way.JLMwww.themusingsofthebigredca…

          3. JamesHRH

            Yes, but when you see the storm path – up over Houston and then back down – it at least makes meteorological sense, in none other.Lowland metro areas I guess too. Tough to hear news of levees breaking.

  16. Paulo Trezentos

    There will be life beyond blockchain in the industries that adopt it.Blockchain will unlock and it will make harder to create silos, but in an open ecosystem you can add value and create your differentiation.You don’t own what is inside the blockchain but you own the channel to get there. The way to discover. The credibility. The UX. Network effects apply as well to features built on those.

  17. Michael Elling

    The maths are all wrong wrt to the natural business models of networks (and inter-networks):1) shared data layer. Huh? You mean transport too? Who pays for access. How are technologies upgraded efficiently and inexpensively? 2) in all networks or internetworks the value is captured at the core and top, while costs are mostly borne at the bottom and edge. so value capture of the applications on aggregate are higher than the control (protocol) layer which in turn are higher than the transport and access layer.3) because of #1 & #2, both margins and ROI tend to go up the higher up and closer to the core the business model is; reinforcing the conclusion of #2.It’s not just that the distributed crypto crowd believes this time it is different (and it ain’t); they’re not recognizing fundamental network reality and maths. Joel has zero basis for proving what he claims. The reality is that the hourglass business model of the internet failed; it did not work the way Wu and Lessig thought it should. But making the opposite argument (fat protocol) does not make it true or right.How long will this charade go on? Tough to say but ultimately someone (innocent and naive) points out the Emperor has no clothes.

  18. LE

    get paid close to a 3% fee when you buy gas or stuff on Amazon. That is a ridiculously high fee in this day and ageOnce again we have someone (apparently well respected by at least a few people here) saying smack for impact and pageviews. (One other statement was quoting what John McAfee thinks; who cares?).First of all Amazon isn’t paying anywhere near 3% because ask any small merchant and many of them aren’t paying 3%. (I understand the exact number isn’t important to his overall point). Second calling it ‘ridiculously high’ is absurd when you consider the benefits to the merchant who accepts credit cards an pays the fees (whatever they are). I built a few businesses and will say 100% (and have said before) that I would never be able to as easily do so w/o credit card acceptance. Taking credit cards in my first business (instead of having to extend credit) was like the birth of a child to me. No more issue with new customers and credit checks, collections, the list of benefits is endless. Ditto for when the internet rolled around if there were not the ability to accept credit cards we would not have the internet that we have today. It would still be academics using it.So ok he says ‘in this day and age’. No not true. The cc vig covers many things that the alternative payment methods don’t. That is also part of what you are paying for if you are a customer or a merchant.And lastly I really hate all this ‘race to the bottom’ making as if a legitimate business model is somehow ripping people off. By people who are only on (as he is) one side of the transaction.

  19. Bruce Warila

    If it costs X to make lemonade out of lemons, but it costs Y to make lemonade out of lemons using a tokenized system running on token Z, isn’t token Z worth a fraction of X?

  20. prankeapple

    As the BBC’s new pidgin section might say, ‘dis post don be on on da money.’ I, for one, welcome the use of tens of millions of British taxpayer pounds on reaching out to the third world with pidgin English. Anyone who disagrees is… well, I hate use the dreaded ‘N’ word, but they’re definitely a Nazi.Anyway.Given the massive potential network effects and the fact that we’re in many cases dealing with mediums of exchange (how do you value taking over civilization?), there’s currently no meaningful way to value crypto assets, outside of pointing to obviously scammy or technically ignorant projects that have raised 9 figures and saying, “Retarded!”Think you’re gonna launch a huge end-user facing dApp with no thought or concern for protocol level scalability issues?Think you’re gonna be able to stuff a bunch of info on the blockchain and treat it like an abused, red-headed MySQL database?Think you’re gonna catch the ‘next Ethereum’ by investing in a certain project (it sorta rhymes with Legos) that had fewer commits and lines of code than the average software developer’s weekend side project at the time it raised over $200 million?Say it with me now: Retarded!

  21. Adrian Jonklaas

    I’ve written a blog post on “Justified Token Value”, which also links to a financial model for valuing tokens that provide distributions of some kind (i.e. dividends, profit share, etc.); take a look:

  22. rich caccappolo

    “that wsj dude” is a legend. Look him up

  23. sigmaalgebra

    “altcoins”? When attempting serious work, the first case of terminology not clearly defined, exemplified, explained, motivated, etc. is a good place to stop reading.E.g., I still won’t read anything about “alt-left” or “alt-right”.If some word is not clearly defined in a common dictionary and used clearly according to that definition, then that word is at best a technical term, more likely just jargon, and needs clarity on definition, explanation, motivation, examples, etc. Sorry ’bout that.I might be willing to think about the question of the thread today, the value of bitcoin, but I won’t think about that question if it is not clearly stated and explained. As it is, first I’d have to straighten out a lot of jargon and undefined terms, study badly drawn graphs (e.g., that don’t make the meaning of the axes clear, that use font sizes way, Way, WAY too small on the axes, that don’t make clear the data sources, that don’t make clear the intended conclusions from the graph, etc.), etc.We’re not yet in a question about applied math, science, economics, or even a well posed question. Instead, we’re in mud wrestling in a swamp, hot, humid, alive with crawling and flying insects, alligators and poisonous snakes, etc.

  24. Pointsandfigures

    He was pretty transparent as to how he valued the market. You can argue his assumptions, but the guy is super smart.

  25. Rob Underwood

    Josh,Serious questions as I continue to get a handle on this:1. When will people and companies be spending bitcoin on a widespread basis (I recognize that, “widespread” is a bit nebulous)? What are the conditions that must exist for that to occur – the use of BTC as a currency)?2. When BTC is being used as currency do you anticipate that there will still be a lot of flux between the pricing of BTC compared with fiat currencies with what we’re seeing now? I.e,. much a trading range between BTC and USD be established for BTC to be used as currency? Or can both conditions exist (huge swing in values and utility as a currency)?I still don’t see why people and companies would spend BTC on pretty much anything right now given its soaring price. So it seems to me either it needs to stabilize it price or people won’t use it in transactions. But maybe I’m missing something and people smarter than me will be happy to spend something that today is trading at BTC 1 / USD 4000 and in a month could be BTC 1 / USD 10,000.

  26. jer979

    I tend not think of BTC as “currency” that you use every day. You use it on occasion for ever larger purchases. As for the “spending,” I have no proof of the following, it’s just a theory.The beauty of BTC (and many of the cryptos) is that the customer acquisition incentive is built directly into the protocol which turns every existing customer into a marketer for the protocol.Let’s take a simple example where 1 BTC is worth $1000 USD.Now, let’s say that I have 5 BTC and never “spend” it on anything, then the network doesn’t grow because I don’t help the protocol acquire any new customers (or increase the perceived value of the coin among existing coin holders.) As a result, the value of the BTC (measured in dollars) stays constant. However, I WANT the purchasing power of BTC to increase, so the more that I spend it with others, the more the value of the remaining coins.Let’s say that I am willing to spend 10% of my coins (.5) to do “customer acquisition” by spending them on activities with other people.If everyone does this, the perceived value of BTC as a means of exchange increases. There’s probably some mathematical formula for velocity or something like that, but if as a result of my (and everyone else’s) 10% expense, the value of a BTC (as measured in dollars) goes up 20%, then I now have 4.5 BTC @ $1200 each, which is $5400. So I have reduced my BTC holdings by 10%, but seen an increase in the value of my BTC holdings by 12.5%.Again, I haven’t run a regression analysis to see how all of this works out and there are obviously issues like free-rider problems, etc., but the primary hypothesis is that, if all of us use a small portion of our BTC holdings on a regular basis, that the value of the entire network increases in total purchasing power at a far greater rate to compensate for the reduced BTC holdings.

  27. Rob Underwood

    But the “some mathematical formula for velocity” is really important (and likely part of the needed valuation analysis FW alludes to).It’s not just BTC – the customer acquisition incentive is built into any currency. The more USD is used – and that is usually correlated with the United States economy as most (though not all) of USD is associated with US economic activity – the more USD is in demand and the stronger the dollar in my pocket is worth (the higher its priced) is compared with other currencies. Or at least that’s how it’s generally supposed to work minus currency manipulation. The more a currency is used, the more the currency is in demand, and the higher the price to buy that currency with other currencies provided a constant supply (again, minus currency manipulation).The “place” of BTC is different of course. It’s disconnected from geography in a way that USD, JPY are not. But there will/would still be a concept of a BTC economy – the net sum of economic activity conducted in BTC.It’s worth noting of course that strong currencies are a blessing and a curse. Strong currencies are great when you want to buy products (or companies) that are denominated in other currencies. However, strong currencies are disincentives to those holding other denominations (those whose primary economic activity is primarily conducted in other currencies) from buying goods and services denominated in the strong currency. For example, Fred was running a tip jar for a while, and also did a fundraiser once in BTC for CSNYC. As I recall some of the suggested donations amounts were .01 or .005 BTC. Those were trivial amounts, in USD, then. Now they are not.It strikes me that to a degree it, respectfully, it sounds like you’re having your cake and eating it too. You’re describing a currency that will have utility, but that people and orgs will still have a pool of which that they are expecting to appreciate in price. Of course, that happens with USD — I spend it and it appreciates (or depreciates) compared with EUR and JPY. But what you are thinking about sounds like something more, where people and orgs are spending it in order to make what they still keep more valuable against the currency they will still use for most of their bills. That sounds hard and like a delicate balance that if not done right will lead to big swings in pricing against fiat.Curious @InformationShield’s take on this.

  28. sigmaalgebra

    > Oh I’d say with 1,000 altcoins at this point they’re pretty well defined.Well, the “1,000” means they exist! So, if study those examples, then can construct a definition, descriptions, explanations, properties, etc.But I haven’t studied those examples, have not dug into the literature, and have yet to see a clean definition, etc., of an “altcoin”.So, for me, for evaluating “altcoins,” I’m stuck right at the start.Sure, is awash in links about bitcoin, altcoins, crypto-currencies, etc., but I have not followed those links because they promise to be not trivial, promise to be new, done in a rush, and, thus, not cleanly written, and are not something I’m interested in instead of my startup.So, I just can’t try to work on the value of “altcoins”.