[AlexandrB]

> One argument seems to be that cryptocurrency is purely speculative, which is apparently a dirty word. What about the stock market? What about any kind of investment?

Most other assets represent ownership of... something. A company, a commodity, property. Cryptocurrency is closest to either a fiat currency without the government backing that typically tries to stabilize those. Or to more exotic and abstract financial instruments like credit default swaps or shorts.

Basically what's missing is the ability to even guess at the "true" value of cryptocurrency. There's no P/E ratios to consider because the only thing Crypto "produces" is Crypto transactions. It's also impossible to even guess at a floor or ceiling for the price of a cryptocurrency. The only thing that determines their price is human sentiment - a very fickle input.

Because of this, it's likely that cryptocurrency is vulnerable to market manipulation. Both through large transactions and through marketing. See also: the ample evidence of wash trading in the NFT space. In these kinds of situations my feeling is that if I'm not the one doing the manipulating then I'm the sucker on the other end.

[sowbug]

> human sentiment - a very fickle input

Ordinary accounting principles already have a concept for this: goodwill. If a business's valuation exceeds the net of its tangible assets minus liabilities, then that intangible asset is called goodwill.

Goodwill is neither a strange concept nor inapplicable to virtual currencies/assets. Instagram's value as a business entity (yes, I know it's owned by Meta) clearly exceeds the value of the source code, real estate, office furnishings, accounts receivable, etc. A competitor could duplicate everything Instagram does, but the competitor wouldn't be as valuable as Instagram. That difference in value is goodwill. In the tech industry, where we give new names to old things, we call it network effects. The Instagram network is an intangible asset that has real value, which you can't derive solely from Instagram's tangible assets. That company had to build a product and become extremely lucky that it caught on and became popular. Instagram is valuable because its users think it's valuable. If you aren't an Instagram user, you probably don't see its benefit and might have trouble understanding why it's a $XX billion business entity.

Same with successful virtual currencies and assets: they're valuable because of the network effects. Bitcoin is valuable because its users think it's valuable. That's true of any valuable network, and it's true of Bitcoin.

[webmaven]

> A competitor could duplicate everything Instagram does, but the competitor wouldn't be as valuable as Instagram.

You left out IP other than source code, specifically all the User Generated Content they have.

[sowbug]

Doesn't matter. The competitor could have a (legal) real-time mirror of all the UGC, but no users would interact with it -- they'd give their likes and comments to the real Instagram. Nobody would visit the competitor's app to post new UGC, either -- people post on Instagram for the likes and comments.

The value is in the network, not the IP.

[lupire]

Goodwill is an accounting euphism for "losses that haven't been declared yet".

[aqme28]

> Basically what's missing is the ability to even guess at the "true" value of cryptocurrency. There's no P/E ratios to consider because the only thing Crypto "produces" is Crypto transactions. It's also impossible to even guess at a floor or ceiling for the price of a cryptocurrency. The only thing that determines their price is human sentiment - a very fickle input.

Interestingly, this isn't really true anymore. Most of the newer defi currencies represent a portion of ownership in some protocol that is actually returning profits.

E.g. Maker is a lending platform for DAI. You can borrow DAI by depositing other currencies as collateral. The interest you pay to borrow is then converted by Maker into a sort of "stock buyback" against its Maker token.

The Maker token has a P/E ratio, as do many other coins. https://www.tokenterminal.com/

To your point though, the P/E ratio for most of these is denominated in other cryptocurrencies, not in USD.

[DerArzt]

As a layperson who doesn't know a whole lot about investing, this sounds like a ponzi scheme.

The way that I am interpreting this is that if I were to invest in one of these (i.e. Maker) then the returns that I would see are there purely because other people are investing in it.

That is close to what most stocks do, but at least with stocks in a company the value is not driven by the mechanism by which it is traded alone, but also by the decisions and profitability that the stocks are backing.

[aqme28]

> The way that I am interpreting this is that if I were to invest in one of these (i.e. Maker) then the returns that I would see are there purely because other people are investing in it.

That's the opposite of what I'm saying. The returns are from other people using the platform, not from investors in it. For Maker, using the platform means borrowing. For Uniswap, the returns are from a small % fee on trades. It's exactly analogous to a traditional company.

[lupire]

But what is the platform used for? Converting energy into human comfort, or just another layer of financial engineering?

[kravens_last]

> But what is the platform used for? Converting energy into human comfort, or just another layer of financial engineering?

This is essentially the "problem" at heart of all crypto "currencies". There is no real world use case that imparts human value, apart from its utility as a speculative vehicle to grow wealth.

Every new DeFi application is a new layer to lock in current adapters who would've otherwise already cashed out. Crypto as a currency is a concept dead in the water because of the perverse incentives of finding every corner of arbitrage between non distinguishable (and frankly worthless) alt tokens/coins.

The entire world of crypto is nothing else but an experiment of how much one could financialize a fully non-regulated, intangible, and imaginary "good" based on nothing but greed.

[JaimeThompson]

>this sounds like a ponzi scheme.

If it was a ponzi scheme they would be spending millions on advertising and use fear of missing out to get more people to invest.

Wait....

[meragrin_]

> ownership in some protocol

But what is the value of the protocol?

> actually returning profits

Are there actually profits if the protocol is worthless?

[aqme28]

>But what is the value of the protocol?

Wish I knew! Investing would be a lot easier.

> Are there actually profits if the protocol is worthless?

Nope, therefore these protocols are not worthless?

[selestify]

> Price to earnings (P/E) ratio. Calculated by dividing the fully-diluted market cap with the annualized protocol revenue. Shows how a project is valued in relation to its protocol revenue.

That's misleading. Revenue is not earnings. For something like Uniswap, you also have to look at how much of earnings is given to liquidity providers versus spent on token buybacks.

[xadhominemx]

Plus all the revenue is generated from cryptocurrency trading. It’s all circular.

[throwaway4good]

Sure,

For example crypto.com offers 12% pa. on your USD account.

https://crypto.com/eea/earn

P/E just like normal company ...

[aqme28]

What are you talking about? APY on a loan is not P/E.

[lupire]

They are saying that financially, P/E on a stock (really, E/P) you buy is the same as APY on a deposit/loan, since both are the return on invested capital, and you can cash out your principal later.

Oh course their are subtle details that cause volatility and risk of collpase based on how the company/bank/borrower uses the money you put in.

[throwaway4good]

It is a return.

And it is not loan, it is a "stake".

An example of the mumbojumbo obvious fraud that is out there.

It has nothing to do with a company making money by producing useful products or services that has actual real world value.

[MisterBastahrd]

When you stake, you are using your own money to guarantee that transactions on a network will process successfully. If something happens and they don't, you lose that bag.

Staking is just a very stupid loan that you give out without having any real insight into the people who borrowed from you.

[aqme28]

I mostly agree with you, but how does crypto.com's marketing relate to what I was talking about in the parent comment?

[survirtual]

For Bitcoin and other PoW coins, the value is built into the name for minting: Proof of WORK. Less abstractly, today we can think of this as proof of energy consumption / production. In other words, it is sort of crystallizing energy into abstract & transmissible value. By holding a coin, you hold that value / solidified energy.

It takes a certain and increasing amount of energy to generate 1 coin, which binds the value of the coin to physics. This is actually a very good thing, especially given it does not care where the energy comes from. If nuclear, solar, window, hydro, and thermal were our dominant energy sources, it would work in that just as well and without bias. Indeed, it actually has active market incentives to utilize clean and renewable energy sources — something the previous financial mechanisms grossly lack.

Existing banking institutions consume more energy in unmeasurable ways, and they DO care where the energy comes from: oil. They want oil. It’s called the petrodollar for a reason.

[thatjoeoverthr]

Work isn’t value. It’s cost. It’s not crystallized; the capacity to do that work is spent and gone. If you mine and sell a bitcoin, your profit is the revenue -minus- that work.

(Not anti-crypto, just contesting this point.)

[bitxbitxbitcoin]

Good point. I try to identify the work/value that goes behind the USD. All the manhours and energy put into civic duties (military, government, etc). Also largely in the past and similarly uncrystallized, but somehow people find it to be more cyrystalline.

[lupire]

You're right that a lot of waste is miscounted as value -- this is why GDP is not the same as quality of life (even ignoring uneven distribution or logarithmic utility functions.), and part of why "purchasing power parity" and "cost of living" is different in different places.

[ttul]

Except that, in practice, because crypto mining can happen anywhere there is electricity, people exploit weak governments to get their electricity from the cheapest possible source. And to the extent that crypto miners are competing for scarce electricity resources, they increase the cost of electricity for other uses, crowding out, for example, its use for heating and light.

These are not good things.

[ARandumGuy]

> This is actually a very good thing, especially given it does not care where the energy comes from. If nuclear, solar, window, hydro, and thermal were our dominant energy sources, it would work in that just as well and without bias. Indeed, it actually has active market incentives to utilize clean and renewable energy sources — something the previous financial mechanisms grossly lack.

Bitcoin incentivizes mining using the cheapest source of electricity, not the greenest. Bitcoin miners are more then happy to move their mining rigs to places with cheap coal electricity.

The fact of the matter is, we need to not only move to producing more green power, we need to reduce the global power consumption. Green power still has negative environmental impacts, and there's practical limits to the amount of green power we can generate. Crypto mining is actively hindering efforts to reduce global power consumption, by consuming every spare bit of power it can.

Global warming is an existential threat to human civilization, and will likely negatively impact billions of people, if not everyone. Reducing power consumption is not optional. Bitcoin and POW cryptocurrency are making it harder to do that, and that should be enough to oppose them.

[deprave]

So I can pay my utility company $100 a month for energy I consume, or pay $40000 for a bitcoin representing energy someone else consumed? Got it.

[bitxbitxbitcoin]

Yes. How many ways do you have to reliably monetize a portion of that $100 that goes to the utility company, though? At its core, proof of work (not Bitcoin's anymore because of ASICs), allows that.

[lupire]

I dont need to monetize it, I can keep the $100 and not buy the energy. And it's not "reliable" if I get rug pulled (extemely common) or someone else has a more effcient mining setup (extremely common).

Maybe if I'm stuck on inefficient resistive heatong in winter, mining makes sense.

[Scoundreller]

That’s how much it would take to produce another one. Most cost a much smaller fraction of that.

[nightski]

This is just one person's opinion, but even with PE ratios, profitability, or any financial statement you can read determining the value of a company's stock (not the same as the company itself) is almost as hard as bitcoin.

If you can reliably price a stock based on any measure of company value then you could be very rich very fast.

There is a reason they say don't stock pick just buy an index fund and hold.

[mbesto]

> If you can reliably price a stock based on any measure of company value then you could be very rich very fast.

What you're saying is already true and already is happening. The global financial services industry is a $20T industry.

> There is a reason they say don't stock pick just buy an index fund and hold.

Yes for the common retail person sure, but someone has to purchase stocks to put them into an index. Those are professionals who evaluate PE ratios, profitability, and financial statements.

[lowdest]

>Yes for the common retail person sure, but someone has to purchase stocks to put them into an index. Those are professionals who evaluate PE ratios, profitability, and financial statements.

This is not what an index is. You are describing a fund, but an index fund explicitly does not evaluate PE ratios, profitability, and financial statements, they buy everything in the index according to the market cap. Some proprietary indices are privately curated in the way you describe, but in common use the "index" means all of the companies, rather than a curated subset.

[mbesto]

> they buy everything in the index according to the market cap

You're splitting hairs. I guess I should have clarified. What I meant was that at some level the companies are being valued based on PE ratios, etc. So while the index funds may not be analyzing the underlying securities themselves (other than determining their weighted value), someone is, such that their market cap drives them being in the index (SP500 for example). Point still stands from the parent comment.

[willturman]

A share of stock is a fraction of the cash flow of a company. A share represents a tangible thing which can valued according to any number of mechanisms.

Cryptocurrencies represent nothing but transactions and the ledger of those transactions (which they are exceedingly wasteful and clumsy at achieving).

[nightski]

You would be correct if the only thing that drove the price of a stock was current cash flows.

What you are leaving out is growth. Stock prices include expected growth of future profits which by no means is a science.

Not to mention all kinds of other things can affect a stock price such as global macroeconomic conditions, interest rates, etc...

[dataangel]

Satoshi actually had a theory for Bitcoin pricing. He thought it would behave like gold, where over the long run the price converges to the cost of mining it. The cost to run the miners is a floor on the price, because if miners mine unprofitably eventually they go bankrupt.

[SketchySeaBeast]

So, assuming it's around that long, what happens in 2140? Infinite value?

[barnabee]

Miners still receive it from transaction fees, so no. Although the economics of keeping the network secure in the face of no new bitcoin being created and many txns happening in side chains or rollups (or not happening at all) are untested.

[luciusdomitius]

Not really. Historically, no global currency since the Byzantine Solidus (whose practical dominance vaned with the Fourth Crusade in 1200-something) has lasted longer than 80-100 years. So, Bitcoin isn't even trying to do so.

[toss1]

Hmmm, thinking out loud...

That means that the total cost of all the mining divided by the outstanding value of BTC should approximate the floor.

Except when it doesn't. When it becomes unprofitable to mine, all of the miners turn off their machines, and the network dies, it'll go to zero.

Complicating factor is the miners who have free electricity, e.g., setup hooked up to their own solar farm or natgas flare. For them, the cost of mining is the capital investment over their output, so they'd keep their machines running as marginal cost of new energy is essentially zero, but the employees to keep it running? If we're down to very few mining machines running, how quickly does the difficulty scale downwards — fast enough to keep it running?

[atlantas]

To be fair, P/E ratios, financials and stock market regulation didn't prevent this:

$PTON (Peloton) is -77% in the past year

$ZM (Zoom) -67%

$CLOV -82%

$HOOD (Robinhood) -70%

$ROKU -71%

$TWLO (Twilio) -59%

$DOCU (Docusign) -52%

Bitcoin is -28% over the same time period. Ethereum +51%.

[ok123456]

>P/E ratios to consider because the only thing Crypto "produces" is Crypto transactions

The 2008 crash showed that most of those signals are highly manipulated. Bond ratings can be colluded on. Just a few short years later most of the dust settled on that, it happened again with the LIBOR rate. Traditional markets can be systematically manipulated when the fiduciaries don't act in a very fiduciary manner. (It keeps happening!)

[dogman144]

For what it's worth, with an older financial background, the gold standard of P/E ratios were made up at one point as well.

Financial statement analysis and GAAP are much softer indicators than gen pop tends to think. It comes out of a period before behavioral economics took hold, for instance.

> guess at the "true" value of cryptocurrency

How I do it is this:

It's understood today that the Internet fundamentally changed "something" inherent about how we access, interact with and move information. There was a cambrian explosion of availability, and we overtime determined there was some form of "value" to it. It's worth remembering that how to value it had no real peer to compare to in terms of competing information networks - would you price an internet company, or infrastructure like you would a book publishing company or news org? That valuation and how to invest in it broadly took the form of Internet companies, or data-rate charges from infrastructure owners. It's challenging to price the actual data in the network. Arguably, PII/customer data is so valuable because that's easy to price. It's tied to a discrete individual. But for raw information packets, that's more challenging to do for many reasons. So we know this information has value, but we can't easily price it like we can other commodities (1 piece of timber == $$, 1 TCP/IP packet == ?).

Financial transactions are also a form of information. But they didn't experience a correspondingly large boom relative to the full impact on information by the Internet. This is because financial transactions need to be provably discrete, and TCP/IP and related design concepts aren't a good fit for it (yes, packets in transit are discrete, but what I'm referring to goes beyond that). So, we've seen huge explosions of financial activity where it was a simpler financial tx -> internet packet like in heavily digitized financial exchanges, paypal, venmo, and the large uptick in tap-to-pay smart devices. However, we're still entering payment details manually in many payment settings, and the digitization of current finance still ends up requiring a significant amount of manual settlement behind the scenes. This is because it's challenging to prove that "1 digi-buck" is in fact a discrete digi-buck I own and I alone.

So, that's the value that cryptocurrency solved: how to send provably discrete financial data, without relying on a manual, centralized settlement system that's possibly corruptible (what cryptocurrency people would call trustless settlement). It moves the value proposition from the external parties around the internet (ISPs, companies, consumer data) directly into the data transacted, itself. And puts a price on that data.

In my mind, I think of what the Internet did to information, and what cryptocurrency does to financial information, then there's a clear value prop. Edit: the big unknown though is how the tradeoffs between a good-enough service like venmo vs. bitcoin impact user decisions. Digitized finance that's just "good enough" might be good enough for quite a large chunk of the population, and it'll be a long time before we see me paying you for beer in btc.

Hope that helps but also would love to hear counters.

[eric-hu]

Fascinating explanation (though I’m already bullish BTC). No counters but a question: What’s stopping BTC lightning from being the rails you pay a buddy for a beer on?

[dogman144]

- Assuming it's A vs. B platform choices, then network effects: you'll actually have to get users to jump from Venmo, to LighteningMo. Hard stuff if there aren't compelling reasons

- Assuming LN is the infra that the Venmo of 2050 uses: I think you'd need a compelling reason for "Venmo" to drop (edit: or integrate LN into) their underlying infra, which is where I understand Plaid and inside baseball platforms b/t TX processors have very strong holds, and jump over to a blockchain stack.

- The volatility. It has to smooth out. I'm not going to be the next bitcoin pizza guy.

[eric-hu]

I think the second case is most likely. I don’t see crypto displacing any fiat or even financial rail system completely, but just taking a sizable share. I’ve seen very reasonable use cases in Southeast Asia in remittance. Western Union takes a ridiculous cut, and I wouldn’t be surprised if similar use cases are in Africa and South America as well.

[dogman144]

Ya would agree as well, some cross-protocol, side-chain/SWIFT/Plaid/blockchain hybrid except for greenfield areas where it might take off natively.