Why a coin is worth a dollar, a hundred, or ten thousand
One of the most common arguments you will hear between proponents of cryptocurrencies and its skeptics is regarding the value of a coin. You might have come across some variations of these:
“Cryptocurrencies lack fundamentals!”
“How can you put a value to Bitcoin or Ethereum?”
“Unlike gold and other physical assets, cryptocurrency is intangible.”
Indeed, if cryptocurrency is the technology of tomorrow, as the Internet is today, how do you put a value to it? What is the monetary value of the Internet to you? Is there an absolutely right way to price it? Is it just the market forces of supply and demand at work?
Yet, take a look at CoinMarketCap and you will find that there is a price for every cryptocurrency. Buyers pay whatever they feel is a reasonable price for a coin.
So how do they decide on what price to buy their first coin? Who says Bitcoin is worth $10, $10,000 or $100,000? What gives a coin its dollar value today?
People. Product. Process.
Borrowing on some concepts of marketing and business evaluation, we can assess all cryptocurrencies in a similar fashion. I propose that ‘Process’ falls in the intersection between ‘People’ and ‘Product’ because it refers to the steps in which people come to adopt and use a product.
One group of people are the internal stakeholders like developers, partners, and founders, who can influence the development of a cryptocurrency and its strategic advancement. The other group are external stakeholders who merely put their money in, and have little or no say to the product.
Traditionally, investors in companies are internal stakeholders with equity and influence on the board. However, cryptocurrency allows anyone to be an investor, and do not own any equity stake.
Although investors are now ‘external’ and cannot influence the product, they can influence the prices by purchasing and selling a substantial amount of tokens at any one time. They can also coordinate buys and sells in what are commonly called the pump-and-dump groups.
Furthermore, investors can be anyone like gamblers, mom-and-pop investors, or someone with little knowledge about cryptocurrencies, who tend to be extremely reactive to price changes and public news.
Hence, the value of a coin is largely determined by the external stakeholders who price their buys and sells. The constituent of external stakeholders is thus an important factor as the type of investor they are and their motivations will affect how a cryptocurrency gets bought and sold.
The fact is that most people are in for speculative reasons, which is why I argue that most of the dollar value in a coin is speculative.
People aside, what about product differentiation? Surely, not every cryptocurrency is created equal. There are legitimate and promising cryptocurrencies as there are weak ones or scams.
I previously wrote about the classification of cryptocurrencies, and categorised the tokens by their functions — Mode of Payment, Store of Value, Protocol Improvement, Coin as a Service, and Utility Tokens.
While that is one way of assessing the functional purpose of different cryptocurrencies, it is also important to consider how different cryptocurrencies achieve that goal. For example, how is Bitcoin Cash (BCH) or Litecoin (LTC) better than Bitcoin (BTC) or Ethereum (ETH) as a mode of payment? What about the feeless design of Nano or IOTA?
Cryptocurrencies will change the way of payment, business transactions, machine economy and much more, and cryptocurrencies will have a functional value. However, given their current limitations (security, scalability, hacks etc) over traditional methods, their functional value remains minimal, and today’s prices should still be attributed to speculation.
Given the open-source nature of cryptocurrencies, it is possible to have two or more similar Products seeking to tackle the same problem. Assuming that the People and Product factors are identical, how can we compare them?
‘Process’ is the way in which People interact with Product, and this interaction can be using it, influencing how it is used, or marketing a product. That is to say, Process is the strategic way that a cryptocurrency comes to adoption.
When we look at the Process for different cryptocurrencies, we can see the nuances and then decide which strategy we prefer. For example, Ethereum was built to tackle smart contracts rather than to compete with Bitcoin as a mode of payment. Nano on the other hand aims to tackle the scalability and high transaction fees of blockchain payment by building a feeless, non-blockchain system.
Some cryptocurrencies like Ripple and IOTA focus on creating partnerships that will help improve the product and encourage adoption. Having dedicated partners and a steadfast community also gives them a competitive advantage over competitors and copycats.
As cryptocurrencies gradually go through improvements and adoption (or the lack of), Process becomes the way in which the functional value of the product is realised. On the other hand, its speculative value will gradually diminish whether it loses value or become more concrete in its use case.
Today’s cryptocurrency market is highly speculative and prices are largely influenced by the sentiments and speculation of People. Prices are affected by negative news, by rumours, by market trends, by greed. When we buy a coin thinking that its value will go up upon achieving certain milestones, that is speculation.
Many changes can happen for cryptocurrencies — regulations, improvements, use cases, copycats, hacks etc. While it is important to recognise that most of the dollar value of coins today are speculative, we should also look at their functional value because that is what will prevail in the long run.
How heavily speculated is a particular token? What are its merits? Is there a real need for it to be on the blockchain? What is its strategic Process? Once you are aware of these, you might be able to make a more informed decision in your cryptocurrency investment.
Thank you for reading to the end. I’m excited to write and share about cryptocurrencies as I believe there are many ways that they can pan out. If you found it useful, feel free to share this article with someone! Or you can comment below on your thoughts or disagreements; I would love to get some feedback on some of these points.