A Few Thoughts On “Fundamentals Analysis” Of Cryptocurrencies (by Adam Ludwin)

A cryptocurrency is an asset that makes a decentralized application (“dapp”) possible.

If you buy a cryptocurrency you should be able to argue for why the dapp is valuable. The first dapp was a decentralized payment network, and that network’s cryptocurrency was called Bitcoin.

In general, a dapp allows you to do something you can already do today (payments, computing, storage) but without a trusted central party. Just as Bitcoin is a dapp for payments, Ethereum is a dapp for computing, and Filecoin is a dapp for storage.

You CAN’T argue that for EVERYONE Bitcoin is “better” than Visa, Ethereum is “better” than Amazon EC2, Filecoin is “better” than Dropbox. In fact, on almost every dimension — speed, cost, UX, features, governance — dapps are WORSE than their centralized counterparts.

But on one critical dimension — censorship resistance — dapps are not only better, they are arguably the ONLY solution. Censorship resistance means that the transaction is UNSTOPPABLE as long as the dapp’s fee (denominated in the cryptocurrency) is paid.

Thus, the “fundamental” value of a dapp = how much a given user group NEEDS censorship resistance in a given market. I say “needs” and not “wants” because, as I already pointed out, dapps are WORSE user experiences; you have to overcome that friction.

Most people do not feel persecuted by centralized payment systems; but for some, bitcoin truly is the ONLY way to make a payment. Who are these people? Why do they need or want censorship resistance? Will this group of people grow in size over time? If so, why?

These questions = fundamental analysis of a cryptocurrency.

Likewise, most people are not concerned by centralized file storage; but for some, filecoin may be the ONLY way to store/transfer files. Again, who are these people? Why do they need/want censorship resistance? Will this group of people grow in size over time? If so, why?

A valuable dapp is one that has found users who are truly harmed/oppressed/taken advantage of by the intermediary in the market. And where, for whatever reason, competitive forces or government regulation either have not, or will not, solve the problem.

And thus this group of users is willing to put up with all the ways in which the dapp is WORSE than the centralized option, and switches.

This is why people tend to point to China or Venezuela as countries where using bitcoin could make sense (I tend to disagree btw). And also why people point to black markets or illegal uses as “good use cases” for bitcoin (I tend to agree).

At a macro level, investors buy STOCKS because they believe the corporate form of organization will continue to create value in society. Those investors can also study specific companies and try to figure out which ones will create the most value. They can argue for how and why Apple or Tesla or GE will create value for people and do so in a defensible way over time.

Likewise, investors buy bonds because they think governments create value and will capture some through taxation to pay back debtors. Those investors can also look at specific governments and argue for why Venezuela or the U.S. should have a certain rate of return.

Investing in cryptocurrencies SHOULD BE NO DIFFERENT.

Investors looking for a fundamental reason to buy cryptocurrencies have to believe that decentralized apps will create value for people. If they buy a specific cryptocurrency, they should be able to argue for why that specific dapp NEEDS to exist. They should be able to articulate immediately why those people need censorship resistance and can’t use a centralized option.

Ideally they should also be able to explain why this cohort of people will grow in size over time.

If they CAN’T do this, they are the worst kind of speculators because they have no conviction (🎶“Jefferson has beliefs. Burr has none”🎶). They either assume a) someone else knows the why the dapp is valuable or b) someone else thinks someone else knows why it’s valuable.

Bottom line, a cryptocurrency has ZERO fundamental value if the dapp has no value to a human.

Show me a dapp that people NEED (or believes they will soon need) and I will show you the price of that cryptocurrency going up over time.

Show me a dapp that NO ONE REALLY NEEDS and together we can watch as the value of its cryptocurrency goes to zero.