As a value investor, I'm always trying to find the value of the assets before investing. In stock market, we could use discounted cash flow method to do the valuation, but I got confused with the valuation in 2017 (the year I first heard bitcoin), during that time, the valuation of bitcoin was insane to me. But in late 2019 I realized the value of cryptos (not all of them), and in this article, I will do general analysis of the value of cryptos (focusing on why they have value), and in the next article, I will pick a crypto and do the valuation using regular valuation method.
The value of blockchain
Firstly, I want to clarify that blockchain is not equal to cryptos, but they are closely related. Specifically, blockchain is a kind of technology which cryptos are based on it, but some blockchain applications do not need tokens (cryptos).
The basic idea of blockchain is decentralise, so is there any real value we could achieve through decentralisation?
The answer is yes.
The biggest problem that blockchain could solve is trust. It could bring revolution in many area such as:
logistics
IoT
finance
social media
Anti-counterfeit
...
Please note that decentralisation can not solve all problems, and we do need centralisation in certain area.
The value of cryptos
Cryptos (tokens) are incentives of blockchain projects, and this is a brilliant idea because token economy could redefine many industry, such as social media platform: traditionally, you use those products to share your life or networking, and those product generate revenue through advertisement (which you could not share), but platform like read.cash allows everyone (not only 'powerful users') to earn reward through their activities.
Cryptos are similar to stocks (but not identical), so the value of cryptos depend on each blockchain project.
This is an straightforward but important conclusion because some people may treat cryptos as 'gold' and think their value come from the fixed total supply (scarcity). That is absolutely wrong because bitcoin already shows that feature, given its strongest consensus among all cryptos (because of its first mover advantage), so if you want to buy 'digital gold', then bitcoin is the best choice. Do not buy altcoins just because they have fixed supply!
From my perspective, the value of cryptos can be categorised in the following area:
value store (digital gold)
in our fiat system, the currency does not have intrinsic value but backed by faith and credit of the government, which usually aim to keep inflation at around 2%. But during recessions, authorities could issue fiat money to save the market and boost economy at almost no short term cost, which would cause high inflations and the depreciation of our fiat money, thus, we need a method to hedge this risk (inflation). Traditionally, that asset is gold.
is crypto has value store feature?
yes.
which one?
bitcoin.
why?
consensus.
it does not means that other cryptos do not have value, but only bitcoin can be treated as gold (at least in the near future). In other words, even if bitcoin do not have any real applications (in fact, it has), it still has 'intrinsic value'(consensus) as long as the supply limited to 21M. For most cryptos, their project has to generate commercial values, otherwise, they are worthless.
so I treat bitcoin like 'gold' (although not identical), where as other cryptos like 'stock'.
infrastructure (public blockchains)
public blockchains (or consortium blockchains) play an important role in blockchain industry because they support other blockchain applications. The value of public blockchain not only come from its performance (such as tps), but also come from its ecosystem. Actually, this is my favorite sector in crypto market (bitcoin is the first public blockchain).
specific applications
blockchain technology can apply in many area (as mentioned above), and there are many crypto projects exploring the potential possibilities of blockchain (such as defi), but be careful of the risk (really high) if you want to invest in altcoins!
Conclusion
Blockchain is a revolutionary technology, and cryptos are valuable assets. Altcoins could have extremely high return and high risk at the same time: they may become totally worthless (the value depend on the project). Thus, be careful when you want to invest in altcoins, do your homework (although it could not eliminate the risk, but could reduce it) before invest!
Top coins are unlikely to become worthless, such as bitcoin, BCH, ETH, LTC, etc. and among those top coins, bitcoin has lowest risk because of the strongest consensus.
it does not means that other cryptos do not have value, but only bitcoin can be treated as gold (at least in the near future). In other words, even if bitcoin do not have any real applications (in fact, it has), it still has 'intrinsic value'(consensus) as long as the supply limited to 21M. For most cryptos, their project has to generate commercial values, otherwise, they are worthless.
so I treat bitcoin like 'gold' (although not identical), where as other cryptos like 'stock'.