Where Will Cryptocurrencies Settle?

Some investors are not afraid of volatility but rather seek it. Until recently, these people have had considerable satisfaction trading crypto-currencies.

But, that satisfaction has not proven durable. Bitcoin is down 70% from its 2021 peak. Others are down similar amounts or more. Solana down 82%, Ethereum down 74%, and the original LUNA fell from $119 to less than 1 cent in May 2022. Its replacement Luna 2.0, has fared little better. Introduced at $17.80, it is now under $2.50.

Crypto as an investment

Cryptocurrencies are not a traditional investment, and both Warren Buffet and Charlie Munger have expressed disdain for them. Not without reason because businesses can be assessed to create an intrinsic value in their world. That value relies on future cash flow. Since Crypto, as we know it, has no cash flow, it can have no intrinsic value arising from that metric. Old investment rules do not apply.

The two-factor value system of investments

If you recall, investment decisions rely on how two valuation systems interact. The intrinsic value (what it will earn) and the market value (what you can buy or sell it for.)

When the market price is too high compared to the intrinsic value, you might sell, and when too low, you might buy. As Crypto has, as yet, no intrinsic or fundamental investment value, no such comparison possibility exists. You are left with what it will sell for now and in the future.

Actually, the future is unknowable, so the only data points are what it sells for now and what it has sold for in the past. For a rational investor, that is thin porridge. Lacking substance and significance, you must place your money in a situation where the future could be nearly anything. The future price depends on how our fellow humans will feel about it someday.

How skilled have you been at predicting that?

Will past prices matter?

Maybe, but to be rational, you must know what factors put the price where it was in the past. Then, you must estimate if those circumstances will reappear or if some as yet unseen set of circumstances will provide the same result. For Bitcoin, you have a wide range. From less than one cent in 2010 to about $65,000 in 2021. Using objective information, can you place the future value somewhere in that range and show your work to support your choice? Me either.

Will future values to be provided drive the price?

Several platforms offer services, and their coin is used when paying. These have some possibility of becoming businesses. Bitcoin, Solana, Ethereum, Binance, and nearing the end of its development phase, Canadian-based AXIA. The intrinsic value of these is yet to be determined, and part of the future price will include the value they can create by offering valuable services for a fee.

For most of the others, the coin will be worth whatever it will fetch, with no earnings while owning it. Most of those will disappear.

In the next few years, the excitement will drive the prices, but eventually, a thing is worth what it can earn. The critical skills in the next few years will be like those found in the stock market. Intrinsic value and market value. Two-fold.

  1. Is there a value-added component offered for a fee, and if so, how much cash flow is expected and when?
  2. Can I read the minds of my fellow humans about the need to own fiat currencies so a Crypto owner can take advantage of what they think the price will be?

Neither of those skills is within the standard human repertoire, so we will be left with hoping, much like owning a lottery ticket.

Hoping is not a valid investment strategy.

Cryptocurrencies are not widely understood.

A surprising fact. People who own BitCoin tend not to sell it. Just add to their holdings. Volatility does not mean everyone is in a frenzy. There is a measurement called HODL (hang on for dear life), and the data is quite interesting. It measures how long since a particular bitcoin was last involved in a transaction. This picture’s yellow line connected to the left axis shows the percentage of Bitcoin that has not moved in at least a year. It looks like there is profit-taking as the price, the blue line rises, but the idea is clear. Since 2014, 40% or more of all bitcoins have not moved in a year. I wonder what the Graph for particular stocks looks like. You can find other graphs that show the hold for more extended periods. About 10% of bitcoins have not moved in 10 years.

To the extent crypto is a currency, how much can they appreciate or fall? Most people intuitively reject the idea of a $20 bill changing in price. Nonetheless, people are familiar with foreign exchange. They know the Canadian dollar fluctuates in value compared to the US Dollar. Compared to 10 years ago, the US dollar has appreciated about 30%. Or maybe the Canadian dollar fell. Not quite the way crypto has behaved but instructive.

An explosive example.

The point is about the relative value of currencies. Ten years ago, one US dollar would buy about four Venezuelan Bolivar. Today it will buy more than 560,000. Crypto may become worth many US dollars if the desirability of owning US Dollars falls.

The story of how much and when has not yet been written. The critical concept around the future value of a cryptocurrency is relativity, and as Einstein showed us a century ago, relativity is not intuitively easy to understand.

You can understand it, but it is not effortless. The first thing to dismiss is micro thinking. You must become more skilled in macroeconomics to have a chance. Bitcoin will rise in price as the value of fiat currencies is perceived to fall. That doesn’t help us to know the intrinsic value, though. It is just a way to think.

The points to take away.

Some people seek volatility and believe they can outsmart their fellow humans. A few are right.

Cryptocurrencies will develop rational values based on their usability and use relative to the changing values of other world currencies.

If you love volatility and can afford any losses that come along, Crypto is a fascinating game. Keep in mind it is a game with no observable rules.

I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.

One Comment on “Where Will Cryptocurrencies Settle?

  1. Pingback: Where Will Cryptocurrencies Settle? – Schmitt Trading Ltd

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