[ThePhysicist]

Cool project, congrats! As you speak of the "20B worth of value" I have a question:

I always ask myself what the total monetary value stored in ETH actually is, as the 20B $ is the market capitalization (as far as I understand), which in my opinion is NOT the value. Drawing on my Economics classes (from a long time ago), my thinking goes like this:

Let's assume I create 100 million items of a new cryptocurrency. At first, my coins have no value whatsoever. Now, you offer to buy 1 cryptocoin for 200 $ from me. This would instantly give my currency a market capitalization of 200 $ * 100 MN = 20 BN $! But is my currency now worth 20 BN $? I would say no, as there is probably no way for me to sell the remaining 99.999.999 coins for the same price for which I sold the first coin. And even after distributing a large amount of coins (say 50 % of the total), I would probably not be able to sell my remaining coins for their market value, as my offer volume would rapidly drive down the price of the coins by creating an oversupply (depending on the transaction volume of the currency of course).

Following this logic I always thought that speaking of 20 BN $ of value stored in ETH as misleading, as the real monetary value of the currency (as determined by how much value you could actually extract when liquidating it entirely) is probably much less than that. And given that most people invest in ETH purely for speculation, I would even wager that a single seller who puts a large number of ETH on the market (as compared to the average daily volume) could cause a massive price drop, since there is no "fundamental" value in ETH (contrary to an asset-backed currency or a company stock).

[ruok0101]

How is this different than securities sold on public stock markets? If you hold a large position in a nasdaq 100 stock and drop a large sell order on the ECN's, you are surely going to see a similar (albeit not as dramatic) phenomenon. Does that mean the market cap of stocks shouldn't be used to assess value?

[ThePhysicist]

The public stock market is highly regulated, which makes price manipulation and insider trading more difficult as it is illegal and suspicious trades will be investigated. The ETH market is completely unregulated, hence the risk of manipulation is much higher.

Also, NASDAQ stocks represent the underlying value (as well as future revenue expectations) of a real-world company, hence short-selling your stock to manipulate the price (usually) doesn't make much sense if the fundamentals of the underlying company are good, as investors that are optimistic about the future of the company will happily buy the stock that you sell. Of course there are situations where large funds speculate against companies or even governments, but this is (usually) only possible if there is a fundamental issue in the underlying asset such as a nation in a deep recession or debt crisis.

For ETH there is currently no underlying asset that would have a value in the real world and which could serve as an "anchor of trust" for an investor. It should therefore be much easier to manipulate and speculate against ETH as there is little external information beyond the exchange rate that other investors have as a basis for their valuation. Also, as of now there is no large economic process that depends on the existence and functioning of ETH, hence there would be very little external pressure to keep the currency alive if people started speculating against it.

For most cryptocurrencies, the initial developers / creators are similar to the founders of a publicly traded company in the sense that they possess a large fraction of the shares of the company / number of coins. What's different is that there is little for the "crypto-shareholders" to hold on to their coins in case of a sharp price drop, as there is no underlying asset that their coins represent. Economically, they are highly incentivized to "cash out" as soon as they think that the price has reached its maximum value (and this is what I expect will happen with many crypto-currencies as soon as the market cools down). With shares this is different as ownership of the share allows you to continuously extract value from the underlying company in the form of dividends, hence the incentive for selling your shares is much smaller even if you think that the share price has reached its maximum.

I would therefore be very cautious about long-term investments in ETH, as there is no safety net and no guarantor behind the value. And while this is great for gambling, it does not provide a viable platform to build real world applications on top of (in my opinion).