Intrinsic Value Does Not Apply To Cryptocurrencies
Why The Statement “Crypto Has No Intrinsic Value” Is Incorrect
Price and value. Terms we use and often misuse.
Money has a price, although fiat money (national currencies) has a price decreasing in perpetuity.
Money that deteriorates in value today due to mismanagement and an expansive monetary policy of negative interest rates that produced unacceptable inflationary pressure.
With the current inflation levels, the middle and lower classes experience difficulties in sustaining pre-pandemic living standards.
Fiat currencies are the Central Bank currencies, with the dollar holding the status of the world’s reserve currency, used for most international trading and sustained in reserves by central banks.
In assets like stocks, commodities, and foreign exchange, we focus on the price negotiated in stock exchanges, but that’s not the only price.
Models determine and record different prices for stocks and assets.
One of these models is Intrinsic Value, a term often used by economists to describe a critical (but not realistic) point against cryptocurrencies.
Price / Value Terms In Finance And Intrinsic Value
In the corporate or financial realm, we encounter way more prices than the price of a stock trading at a stock exchange. Analysts, economists, or accountants may consider for their work some of these prices as well:
Issue price: The IPO price of the stock made available to the public.
Stock premium: New stocks offered to the company's investors and the public at a price higher than the par value. We calculate the premium by subtracting the par value of the share from the issuing price. (par value = price assigned by the company)
Share discount: The opposite of the above. A new release of stocks offered to previous investors and the public at a discount from the par value. (Currently, companies are prohibited from issuing stocks at a discount in most markets).
Market price: the current price traded at markets (the price a buyer and a seller settles a trade, the equilibrium value)
Market Value: The stock price multiplied by the number of company shares
Book Value Price: The total "own funds" value (In the Balance Sheet: the excess of assets over liabilities and subordinated liabilities) divided by the total number of stocks.
Price to Book Ratio (P/B): A company's capitalization divided by its book value.
Liquidation price: During bankruptcies, each stock will usually represent a lower than the market price. Liquidators, during this process, sell assets while trying to fulfill all of the company's obligations. The capital (cash) that remains from the liquidation procedure, is divided and paid back to shareholders, marking the liquidation price.
Hidden value: Balance sheet items reflected at a lower than the actual price (e.g. land, equipment, or premises owned by the company not evaluated in current prices.)
- Intrinsic Value:
Intrinsic Value, as a stock valuation model, performs fundamental analysis and value calculation of an asset measuring multiple recorded indicators such as cash flows (DCF model, inflation-adjusted) combined with the overall company financial performance (earnings statement). Intrinsic value differs from the stock price. The model is extended by adding market volatility and the beta indicator that counts it.
Quantitative analysts produce fundamental analysis reports in stock markets.
(The formula of Intrinsic Value (Forbes))
The application of this model is limited to assets where fundamental analysis applies. In asset classes beyond company stocks, the model is not valid.
There are more indicators and price terms (relative price, commercial price, present value, future value, etc.).
The issue here is the use of terms by financial analysts while addressing the public without further analysis or details.
"Cryptocurrencies Have No Intrinsic Value" - A True Statement But Irrelevant By Default
How often have we encountered news titles such as this one?
Maybe some analysts refer to intrinsic value with a philosophical expression of the term.
What these analysts want to express is not clear immediately. They will follow up to the lack of intrinsic value remarks with an unspecified value that cryptocurrencies don't possess.
According to analysts such as Andrew Bailey, cryptocurrency holds no value at all, so we can assume all these that throw the term "intrinsic" out there do it to sound more convincing and professional.
Utilizing an abstract term to strengthen their anti-crypto opinion probably means these individuals struggle to find logical arguments.
However, in both financial and philosophical terms, this notion is irrelevant.
As explained above, the intrinsic value model extracts values from these two corporate statements:
Cash Flow
Earnings (Income Statement)
The model of intrinsic value does not apply in this field.
The philosophical question may apply when discussing the value each cryptocurrency produces for our societies, but in this case, why not mention it as a social value instead?
Intrinsic value is specified and precisely explained as a financial term.
The production cost of PoW cryptocurrencies delivers a fundamental value in price discovery. So, it seems there is at least some value after all since cryptocurrency mining is a lucrative business.
The Cost Of Mining Bitcoin
Regarding Bitcoin, we acknowledge a production cost appropriate to its market price.
Mining facilities are for-profit organizations operating the Bitcoin network and profiting from mining new Bitcoins each Bitcoin block includes. Also, miners profit from the fees of each transaction to a lesser extent.
We can analyze the cost of mining operations as follows:
Hardware cost (ASIC machines and peripherals)
Facilities cost (buildings, warehouses)
Electricity cost (the most significant variable)
Other costs (wages, interests, taxation, etc).
The cost varies depending on the location of the mining facility, and the mining operations are selling part or whole of the cryptocurrencies mined to cover their expenses and generate profit.
If the argument against PoW cryptocurrencies like Bitcoin described its production cost but used the term of intrinsic value instead, then these points are inaccurate.
Proof-of-work cryptocurrencies behave like industrial assets and contain the vast cost of production, hence the high electricity requirements.
We can't calculate the intrinsic value of the product of the mining procedure.
We also can’t calculate the intrinsic value of fiat currencies or commodities or any other asset class that doesn’t provide accounting details, such as an income statement and cash flows.
The mainstream media popularized the remark that “Bitcoin has no intrinsic value”, and later used by cryptocurrency critics often.
Buffet proponents promoted an inconclusive statement that cryptocurrencies have no inherent value while attempting to increase negativity against the cryptocurrency market. However, intrinsic value can only be used in a philosophical argument, not in a pragmatic analysis of assets outside the stock market.
Such statements like “Bitcoin has no intrinsic value” are irrelevant, offering no purpose to investors but only increasing confusion.
We can not compare corporations and large regulated institutions with cryptocurrencies unless these cryptocurrencies operate under the strict management and control of a private company. Still, we will calculate the intrinsic value of the company, but not the product (the token or cryptocurrency).
Categorizing Bitcoin (BTC and Bitcoin Cash)
We can’t consider Bitcoin in its BTC version as an alternative to the dollar or EUR currency either, since it works terribly for this reason (high fees and transaction speed).
A scalability debate in Bitcoin that ended in 2016 produced a fork in August 2017, with two chains splitting (BTC and Bitcoin Cash).
Bitcoin cash is the blockchain that moves closer to materializing the Bitcoin whitepaper targets (P2P Electronic cash).
The side of the blockchain that kept the brand name of Bitcoin (BTC) is the one that supported a different route (Digital Gold and side-chains for scalability).
Side-chains such as the Lightning Network and Liquid have failed, in the last eight since inception, to materialize into working products that can attract global adoption, despite the robust marketing campaigns in favor of the centralized LN integration by the government of El Salvador.
On the other hand, Bitcoin Cash scales on-chain, and offers low fees and instant transactions (with 0-conf and removal of RBF technology). Transactions with Bitcoin Cash are permissionless, instant, and virtually feeless (fees less than $0.01).
Yet, neither Bitcoin Cash accomplished global adoption as a payments network. Its community suffered two splits (2018,2020) that shrank and reduced its influence and market share in the cryptocurrency domain.
To categorize Bitcoin, the BTC side of the 2017 split followed the path of promoting Bitcoin as digital gold. The BTC community widely advertised it as a store of value, with payment features ignored and set aside for a future launch of the Lightning Network. A strategy that worked to boost the price of BTC as it was sold as a high-risk, high-reward asset to funds and accredited investors with ETFs, ETPs, trusts, and various other regulated methods.
Bitcoin is more relative to commodities in this sense, with an inherent mechanism of reducing the supply of new assets every four years (210,000 blocks).
Bitcoin Cash also contains a similar mechanism but is focused on promoting the digital cash (P2P electronic Cash) features of Bitcoin and develops to accommodate mass adoption as a payment method.
Conclusion
We measure stocks and assets according to supply and demand, or as Adam Smith described it, "the invisible hand that moderates the economy".
A free market also requires a small degree of regulations and supervision to prevent manipulation and assure the quality of products.
We require transparency and independent auditing to establish trust regarding companies' financial statements.
In the future, we should expect smart contracts and DeFi to eliminate the need for supervision and auditing, as the rules of decentralized smart contracts are precise and tamper-proof.
Economists construct fancy terms, which we can misunderstand or misuse when thrown out to the public without further explanation. Even financial analysts are confused when they meet a term without following proper analysis.
Such is the case of intrinsic value. A model that calculates a fair price for stocks, but we can't integrate it into the valuation of cryptocurrencies.
Intrinsic value for cryptocurrencies doesn't exist as a concept.
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