Cryptocurrency values

With Bitcoin reaching $20.000 most probably, the question of what is “the real” value of Bitcoin Ethereum or altcoins is going to reach highs in parallel.

Me, being a tender novice to crypto world and to blockchain world, and at the same time with no inclinations towards capital markets derivatives and futures, might not be the right person to write about. Me, understanding hashtag as a kind of obscure hobbit lurking from a computer screen not understanding a bit of its DNA, cannot reliably discuss neither questions of digital (technology) part nor currency (finance) part of crypto mania. But I will since I should. Value creation is the central issue of branding and business modelling that I am occupied by most of my time. Since crypto currencies are here, I should at least understand value chains that they are part of and values they create.

First of all, there are two values of cc. (cryptocurrency) on the market. First one is exchange value of each currency. There are around 1300 such currencies on the market at the moment. Site conmarketcap.com behaves like forex page, each cc. being a state with its own currency. I will leave aside at the moment the question whether cc. currencies based on ICO are not in fact FIAT currencies as Dollar or Euro.

What makes cc. crucially different from offline currencies it that there are decentralized. But then: what prevents states being decentralized? They could be in principle. So, the mere fact that cryptocurrencies are decentralized does not make them that much different from offline currencies. They behave like national fiat currencies that can be exchanged among each other on the basis of their exchange value. This means that most probably since there is no central authority behind any of them, they will unlike offline currencies merge and emerge over time.

But what creates the value that defines their exchange value?

Part of the question lies in the fact that cc.s’ are fiat currencies if they are based on ICO’s. Why? Because they rest on debt towards investors. They are nothing but futures at the same time. The debt that makes the basis of cc.s’ are future services that are going to be monetized through each of cc. But while we know that the US is never going to pay all debts on which Dollar is resting, we do not know whether particular cc. is going to create a service that value of which is going to fill the gap towards market capitalization of this particular cc. It might, but as well it might not. In later case, investors are going to lose. But only investors in specific cc.

And here we come to the second, more important value of most of the cc.s’ and especially altcoins. While Bitcoin and Ethereum (and some other cc.’s as well???) do not have any specific service as a backbone value creation device behind, a majority of altcoins rest on ICO that had specific service promise as its pitch. And this is first really an important difference from offline currencies, at least from my point of view. Altcoins are behaving like a Dollar that could serve as a coin for toothpaste, airfare or gold.

If this is true, and I am not at all certain that this is true, then we might come up with zillions of different cc.s’, each one for one product or service or each one for few of them. Should that happen then the question of the intrinsic value of such currency would evaporate since their value would be equal to a capital/market value of such service or product.

As we all know, there are offline projects that behave like Altcoins. Various local offline currencies have developed all around the world that tend to represent more intrinsic value than national currencies, but are confined to be exchanged for specific local products or municipal services only. Cryptocurrencies thus from my point of view bring nothing new but blockchain decentralization backbone. And as we all know; this backbone really makes difference for no offline local product based currency passed the test of time. Well, we could not say that 10 years of cc.s’ proves the test of time, but what is proven is that local and particular events became instantly global through this decentralized technology only.

So, at the end it is true that cc.s’ cannot inflate since the final issued amount is defined at the very beginning and cannot be changed, and should thus not be subjected to offline currencies inflation, but since there are in principle no restrictions to put on market new and new cc.s’, the inflation is necessary on the level of all of them. On the other side, we know that due to market principles, that govern the decentralized digital world as much as offline analogue worlds, inflation is going to be self-regulated due to intrinsic link between each cc and its products and services. CC.s’ are going to adjust their exchange value according to market value of goods they are going to be exchanged for.

We might be a bit closer to understand values represented by cc.s’, but closer is simply not enough!

Disclosure:

Author of this post is member of CreditDAO https://www.creditbit.org/

Andrej Drapal