Blog 5: What is value? Traditional versus Crypto
I am a person that likes logic. I hate it when I cannot get my head around an event or a concept. I trust my brother (@Exyle) unconditionally, but for me his absolute conviction in the success of Steem was difficult to comprehend. A month ago, I decided to buy some Steem and get to grips with the project. It is not easy! I bought my Steem @ 2 USD, they went straight up to 8 USD in a week, came back to around 3 USD and now hover around 6 USD. And that in a month. How can that ever be logic?
Value is a complex animal. To begin with it is dependent on:
- Circumstances. In my first blog, I gave the following example to explain this:
The value of a can of coke for me right now behind my computer is completely different from the value of the same can of coke for me if I walked for a day in the dessert without any water.
- People. Various people attach different values to an object under the same circumstances.
A personal situation, emotions or past experiences can influence people enormously in attaching a value to a house for instance.
The disappointing conclusion can only be that it is extremely difficult, if not impossible, to truly understand value as it has a dynamic nature.
With that in mind, lets revert to theory to explain traditional financial value. I will try not to make it too technical.
Time has an impact
A basic rule is that the value of receiving one € today is higher than receiving one € tomorrow. Why?
You can invest that one € a day earlier and start earning a return on it. If you put – for instance – that € on your saving account @ 2% interest it is worth € 1,00005 a day later.
This is known as: The Time Value of Money
Cash Flows are key
One step further. How to determine the value of an asset, like a company or a project?
The value is the sum of free cash flow that asset generates through time until eternity. These free cash flow streams need to be discounted to the present value, because they will be received in the future (The Time Value of Money).
Off course it is impossible to exactly forecast the free cash flows an asset will generate until eternity. A forecast is normally based on assumptions, analysis and believes.
Risk needs to be incorporated
If you have two assets, both forecasted to exactly generate the same future free cash flows. Only one is far riskier than the other. Which one has more value?
The answer is the one with the higher certainty of generating free cash flows. A 95% chance on one € tomorrow has a higher value than a 75% chance on one € tomorrow.
The more certain a forecast of future cash flows is, the lower the discount rate will be. A lower discount rate translates into a higher value.
To sum up
Hopefully, this was not too technical and makes it clear that valuation is not science. It is always very subjective.
Nevertheless, I believe that the better the input, based on hard work (analysis), the better the estimation of value.
I still did not start investigating if I can somehow relate all those traditional value concepts to crypto. It will be a real challenge for me.
Next blog will really be on this subject.
If you have any question on the above, let me know.
Hope you enjoyed it and all the best,
Yeah it's very hard to justify how some of these crypto's are valued
Found ya through your brother - following and showing some love! Love to talk about finance and crypto as well
It sure is!
Perhaps traditional value concepts need to be adjusted to this never seen before "new world" of cryptocurrencies on a blockchain.
In the end internet companies could also be valued with traditional methods, so for the time being I stick to those! ;-)
In Canada, the dollar bill is backed by mortgages (National Bank).
The value of the property is held fairly steady based on the governments assessment (MPAC is the organization for us). So ... since the government controls the valuation of the properties and the dollar is backed by valuation of those same properties, in a very basic sense, the government is controlling the value of their own currency. But then, they are also allowed to control how many bills they print and put into circulation.
Cryptocurrencies generally are backed by intellectual property. As you mentioned, this is tough to estimate a value. But unlike fiat currency, they specify in their white papers how many coins will be generated and at what frequency.
I tend to invest my money in the fiat markets (conservative) but chose to build some Ethereum miners to generate my own supply of free cash flow that I can play in the crypto markets with.
Thanks for the insight on how this works in Canada. A steady property market seems beneficial to me. In the Netherlands we have large swings in property prices and in the end this only results in uncertainty.
Intellectual property is a huge part of the value as most cryptocurrencies do not generate a flow of cash (cryptocurrencies) yet. The difference between a security and a utility is also very interesting. Marketcap, etc.. as well
To be continued...
We all have 24 hours in a day. Time is the ultimate coin. If we were dead and some all seeing entity could wake us from our slumber and offer us an hour of life, how much would we pay? Alt Coins and Stocks have no real value. The alt coin market could crash tomorrow and the Sun would still shine the Sky would still be blue.
Steemit's value is not because of it's position on an Alt Coin chart. It's true value is because unlike 99% of the rest of all alt coins it is built around the shared experience and collected knowledge of the world. It has actual dimension. People connect through Steemit, it becomes a part of real life, people share their Art, their Creativity etc with each other, they meet up in the world, new friendships and collaborations are formed. It has a value that will probably last beyond Alt Coins themselves.
Could not agree more on time. That is a real precious thing. Still learning about Steem, but for sure it has dimension.
In terms of two projects and your risk calculation, in this specific analysis, the analysis of the value of Steem, are you considering competing crypto based projects like Viuly (A direct competitor to DTube?) Or are you comparing it to existing social media platforms like Facebook and Tumblr?
Hi! My intention is to compare it to traditional businesses / revenue models, so for Steem that would mean comparing it with existing social media platforms.
Looking forward to it!
welcome to steemit family
Many thanks!
Came here because your brother mentioned you in a post, good post my friend, i just started getting interested in the finance world and your posts might help me.
Good to hear!