A study about what crypto is worth

5년 전

With his text named "An (Institutional) Investor's Take on Cryptoassets", John Pfeffer made the community a christmas present by submitting his work on the value of crypto tokens from his point of view for free to the online community. You can download the PDF using the following link. 


I highly recommend the read as it was inspiring to read some of the ideas that spin around in my head with the words of someone else. None the less I want to summarize what I got from going through the paper since it took me more than 2 hours to go trough it.

First and foremost John makes a distinction between platforms, utility token and store of value. Platforms are everything that compete with Amazon AWS as the future framework to develop and host applications. These are ETH, NEO, QTUM, EOS, LSK and the like. They are doomed to fail to deliver long term value for investors because they can only be successful when they are cheap. A cheaper version of the same is just a fork away and ultimately it is unlikely that one platform will rule them all for exactly that reason. Successful applications will have incentive to fork their underlying platform and have a more stable base for their project at lower costs without suffering from scalability problems like congestion and governance issues. The technology of each of the platform coins can be seen as a framework for developing decentralized apps. 

The problem gets more severe with the invention of proof of stake. Securing a fork requires no investment since the fork can allocate the needed funds to stake to the developers of the fork at no cost. Investors who want to retain the right to stake will be required to buy coins from the early adopters that got the coins for free. The example used to illustrate this is a taxi license. Newcomers who want to operate a taxi have to buy a existing taxi license and will have to add the costs to the price they take from the customer. To make profit the cost for using the network have to yield high enough interest rates to compensate for higher starting costs of master node operators. While the network matures, transaction fees go up to a point where they are high enough to incentivize new forks. Thus the interest received by the master node operators will in the long term converge with the interest rates on traditional markets and therefore become uninteresting since the risk is much higher.

Utility token suffer from the problem that crypto can be easily exchanged and the utility acts as fuel to support a certain transaction. People put gas in their cars tank but never more than they need for the immediate use. Especially they will not use utility token as store of value. This can be compared to having a PayPal balance for later use that never makes up a large chunk of ones personal wealth.

A decentralized AirBnB and Uber will have the same problem: the token they use are no share in a product or company but fuel to facilitate transactions. Especially the value of the network will be much smaller than the value of todays platforms since the only thing that is payed in the native currency to the network is the computation power that is needed to process the transaction. Thus every token is only needed for the moment of the transaction. A blink of an eye later it can be used by someone else to transact. Conversions form one token to another will become frictionless and virtually free using atomic swaps.

When it comes to payments we have a number of utilities today, while each and every one serves a different purpose. We use SWIFT, credit cards, SEPA, PayPal, cash and more. Cash is the only one of these that also serves as a store of value and medium of transaction. As soon as cash is deposited to a bank account it is transformed into a legal contract with a financial institution that is operated under fractional reserve.

The only interesting feature of cryptocurrencies from the view of investors is the store of value. The only store of value in use today is gold. Cryptocurrencies are better than gold in many ways, because they combine features that are good for payments with features that are good for storing value. But there needs to be only one store of value and from everything we know today this will be most likely Bitcoin. It doesn't have to evolve. It's already good enough (and its evolving) while it is the only coin that has the credibility.

In case the central banks choose a crypto currency to replace a majority of their reserves, it would have to reach a market cap of the equivalent of 5 billion USD.

This translates to a Bitcoin price of around 400,000 USD.

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