Differentiating Between Asset Classes

There’s a common misconception doing the rounds for the last few years that we can just pop open a spreadsheet and quantify the extent Bitcoin’s value. Of course, nuanced analysis using valuation models for cryptocurrency as a whole exist. But just how accurate and meaningful can they be?

Let’s take a breather and just focus on the variety of asset classes for now. The most popular ones are equities (stocks), bonds, commodities, real estate, and cash/cash equivalents. Other than cash and certain commodities, we can find the intrinsic value of each and every asset listed here. Equity shares are fractionalized ownership in companies, and they represent a claim to the assets of said company in proportion to the total outstanding equity shares. Bonds, or fixed-income securities, represent a debt owed by a company or government to an investor. And so on and on and on.

All assets, barring certain commodities and monetary assets like cash, have this one thing in common. Equities are valued based on the assets the company holds, the dividends the company pays its shareholders, the real cash flows earned by the company, or the profit that they record on book (net profit, operating profit, etc). As complicated as it is, there are already frameworks in place to value these companies. Now, we don’t actually know if these valuation methods can be considered fair or just. But they’ve existed for decades now, and they’re ingrained in our curriculum and minds. As a result, everything shapes up based on this. But, all of this is a conversation for another day; the key aspect here is that stocks, bonds, and property can be valued as they generate cash flows.

“Valuing” Gold

Maybe I just live in an echo-chamber, but I’ve never heard of anyone being able to accurately value gold. Gold has always been a cyclical play that serves as an economic hedge against bad government decisions. Your friendly neighbourhood central bank (and government) can always be relied upon to make bad decisions at some point or the other!

People buy into gold casually. Nobody sits and tries to value gold – not even institutions with countless manhours to waste. Instead, we see its value as something larger than a “buy low, sell high” strategy. We see it as a cushion. But why is this?

Well, it’s mostly because gold has been used as money beyond the eras we can track our lineage to. Unfortunately, nobody can accurately track when gold was first used as a means of exchange. The earliest account we have are of Lydian merchants using gold coins, and this was back in 700 B.C.

You see, gold is the safety net that anchors us back to millennia of monetary havens. Although it should’ve lost that value proposition back when FDR started seizing gold, we still do see it as a hedge against economic disaster. Because all said and done, if the economy implodes forever, we can always rely on gold to resurge as money. Right?!

The point I’m trying to get across is that gold is a nearly $8 trillion asset class on its own, and it has no fair value. Although people do try to value gold, it’s futile to do so in a pure demand-supply oriented market (though technically every market is demand-supply oriented, the difference is that there are perceived intrinsic values with the rest).

So why is gold’s value not accurately quantifiable?

It doesn’t offer a fixed return No cash flow, dividend, or revenue

That’s honestly about it.

Finding Bitcoin’s Value

Once again, Bitcoin’s value can be derived better through qualitative analysis – just like gold. In an age where seizing gold is still an option to governments, Bitcoin is the only legitimately permissionless medium of exchange. With proper OpSec, Bitcoin is unseizable from an entity.

Quite honestly, the value propositions of Bitcoin basically revolve around the fact that it’s the fiat antithesis. Rather than watching the value of your money erode year on year, while simultaneously running the risk of having your liquid assets frozen by unreasonable governments and money-thirsty banks, you can instead see the value of your money rise (at least so far) and nobody has control over it other than you.

Just to list them out, Bitcoin’s value mostly stems from:

Permissionless payments/value transfer

Unseizable financial asset

Historically gains value over biennial cycles (from low to high to low)

Hedge against poor governance and monetary practices

Allows one to revolt against financial monopoly and crony capitalism

Trying to quantify any of the above factors is futile. It’s impossible to assign a number, or a value, to said benefits which are qualitative in nature. And hence, attempting to “value” Bitcoin based on a financial model will never be truly accurate. Some may even say that, in this day and age, the combative features provided by Bitcoin make it priceless. The irony in this is that bitcoin can be, and only be, priced.

Pricing bitcoin is simple. It’s just a function of the amount of money buyers and sellers are willing to come to a consensus at for buying/selling their bitcoin. Essentially, bitcoin’s value is not quantifiable but its price certainly is (based on demand-supply).

Numbers Only Make Sense With Context

Churning out formulas and charts around every ounce of data in one’s possession is a wasteful exercise. Data is valuable only when it is capable of adding some context to an argument. Valuing Bitcoin is more spectrum-like. There are a lot of theories as to how one would arrive at a “fair value for bitcoin”.

I think on-chain data serves as a great indicator for network economics and general sentiment. Ratios like NVT and Coin Days Destroyed do a great job of using data to depict a specific picture. NVT helps one understand how much the network is being utilized relative to market cap; Coin Days Destroyed paints a picture around hoarding and accumulation of bitcoin.

Fundamental Perceptions of Bitcoin’s Value

From my eyes, this a perspective issue, or a philosophical issue. Nic Carter hit the nail on the head with his recent blog post, ‘A most peaceful revolution‘, citing that Bitcoin is not a technological innovation as much as it is a political revolution against the status quo of societal conditioning and pump-heavy economics.

Bitcoin’s value lies in its ability to allow users to organize in a way they see fit. Yes, this does open up the network to those involved in illicit activity, but it’s not as though these same actors haven’t been serviced by the traditional financial system for the last hundreds and thousands of years. Everything has flaws; nothing is perfect. There are no real solutions – only trade-offs.

The stock to flow model put out by Plan B makes some sense because it models Bitcoin price rather than trying to arrive at a fair value or intrinsic value. At the same time, this market feels incredibly dynamic, and trying to forecast how the mismatch between demand and supply will look in the future seems far fetched.

Individual perception varies from person to person, but this is more in-line with the broader narrative surround bitcoin. It shouldn’t be viewed as stock, bond, or any other financial asset we typically encounter, simply because Bitcoin’s characteristics are radically different. The closest thing it can be compared to is gold, but even gold has a differing value proposition in today’s economic and political climate.

If you think anything here is incorrect, misinterpreted, or you just want to have a conversation about these topics, feel free to get in touch over Twitter!