The Idea Of Value In Crypto

Summary

• The idea of value has been continuously evolving in the world of cryptocurrencies.
• More and more models are being proposed that aim for better linkage between adoption and value.
• The continuing fall in cryptocurrency prices is gradually unearthing more interesting opportunities.

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The crypto market has been hitting new lows over the past year and the recent plummet in price hasn't helped. Everything is a stark reminder of the volatility and speculative nature of cryptocurrencies. However, that hasn't stopped progress. Many emerging solutions are using blockchain in an interesting manner and adoption is slowly moving forward. The landscape is rapidly evolving and the face of crypto will quickly change over the next few years. Current protocols are getting improvements to address shortcomings (e.g. rootstock for BTC), while competing technologies spring up to target crypto needs. Just this year alone, the number of USD stable coins has been multiplying like rabbits (e.g. Gemini dollar, Stronghold USD, USD Coin, True USD, and several others). Meanwhile, corporations have been announcing partnerships with private and public blockchain solutions on a regular basis. But a question that often comes up is “What is the value of a digital currency”?

Looking for value:

The simple answer is "value is arbitrarily defined". In the current state, a cryptocurrency’s value is pure speculation and is guaranteed only at the time of transaction. While arguments based on supply and demand, scarcity, store of value, etc. have been made, it doesn’t change the fact that there is a general lack of intrinsic value for a significant number of digital assets. At one point, some have tried arguing that the cost of mining could serve as a baseline indicator of value for mineable currencies; however, that has been shown to be false in the current bear market, where miners have been reportedly scrapping mining rigs. Security tokens aside, many believe that the current coins and tokens don’t carry the same sense of ownership and/or returns that equity, loans and other assets may offer. To address this problem, ideas from other areas have been re-purposed to create economic models, or tokenomics, for crypto assets. These tokenomics were meant to theoretically craft an economic system that would create value as adoption increased.

Generating intrinsic value:

Tokenomics are continuously evolving, and there are interesting ideas being proposed and implemented in order to create value. Solutions have long since expanded beyond the idea of “this token/coin is good for smart contracts and transactions”. Moreover, there are more and more solutions that have started pegging some aspect of their ecosystem to fiat prices as opposed to pricing everything solely in their native currency. Below are two high level examples:

1. A secondary stable token is paid out to node holders that provide relevant services. The secondary token can be exchanged for tradeable currencies at a pegged fiat price.
2. Storage of data costs a given fiat value that is to be paid using native coins. Coins are redistributed to storage nodes. Only a single coin is used.

The first case has a clear yield that scales in line with adoption. In contrast, the second case has a more dynamic system, with the main token's value being affected by speculation, adoption levels, available liquidity, and other factors. Further elaboration would require discussing project details and provide additional context, which is beyond the current scope. More importantly is the fact that models are being created to give cryptocurrencies some form of value that scales more predictably, relatively speaking, with adoption. Identifying such systems may lead to interesting value propositions and opportunities. However, whether a coin is necessary or not is an entirely different issue and will largely depend on the problem being solved.

Final remarks:

The idea of value has evolved significantly from what it once was in the world cryptocurrency, and it’s important to keep this in mind. Novel economical models are being defined, and refined, to better link adoption to value. While still highly speculative, it provides a far better idea on how value can be generated in the long run. With the pull back in market prices over the year, along with the recent plummet below $4,000, interesting opportunities have been emerging. Even with solid tokenomics, cryptocurrencies will still likely be extremely volatile, and there’s no guarantee on which ones will survive the eventual cull, so the risk factor is certainly worth bearing in mind. Lastly, many seem to believe that adoption will be the next big driver of a crypto bullrun. At that point in time, viable ecosystems with solid economic models will likely stand out readily from the crowd.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Of the mentioned cryptocurrencies, I/we may have some BTC dust sitting around on some exchange.