Tag Archives: cryptocurrency valuation

Introduction To Cryptocurrency

Cryptocurrencies are like stocks. None of them have any inherent value. The only reason they’re worth money is because people have enough faith in their percieved value to trade real money for them, which isn’t so crazy, because money has no real inherent value either. Money, stocks, and cryptocurrency are all just tokens we assign a value to on faith.

The value of these tokens is based on two things: scarcity and the reputation of the person issuing them. For example, the U.S. government says, “We’re putting 10 trillion dollars into circulation. You can trade 1,000 of them for a cow. The more stable our economy is, the more our dollars will be worth. Trust us.” IBM says, “We’re putting one billion stocks in circulation. You can trade ten of them for a cow. The more profitable our business is, the more our stock will be worth. Trust us.”

 

Note: The video above says stocks represent ownership of assets in a company, which isn’t always true.

 

These promises are worthless until someone actually accepts these tokens as payment for real-world goods. Bitcoin was just an empty promise until people started accepting it as payment. Once other people saw that happening, they said, “Holy cow! This is worth real money!? Let’s buy and sell it too.” The more demand there was for it, the more money people would pay to get it, and the more it became worth, just like stocks. So you can think of Bitcoins like stocks in Bitcoin Incorporated. It’s even sold on cryptocurrency exchanges that work like the stock market.

The difference between cryptocurrencies and stocks is that there is no Bitcoin Incorporated. There’s no head office, CEO or profit margin because there’s no product being sold. Bitcoin is like a stock in a company that doesn’t exist. There are just a bunch of servers all over the world owned by volunteers, which run programs that were originally invented as a way to back up digital files in multiple locations simultaneously and securely.

Hospitals and big businesses used this technology so they could guarantee they’d never lose important records, and those records could never be tampered with. So employees couldn’t go back in and cook the books to cover up their mistakes or hide fraud. The system works sort of like Utorrent. There are a bunch of people all over the world running a program that allows their computers to collaborate with each other to write chains of data. Unlike torrent programs though, the data isn’t copied. Each server just shares the responsibility of creating and hosting a set amount of data.

The value of a Bitcoin isn’t backed by this data. The data is the money. So a Bitcoin mining machine is like a money printing press, but no matter how many mining machines are online, they collectively only create a set amount of data every day, which is distributed between all the printing presses. Ultimately, the Bitcoin printing presses will produce 21 million bitcoins, and then they will stop producing new ones. I’ve heard the number 21 million is supposed to reflect the amount of gold in the world, which is, in theory, should make Bitcoin the gold standard of cryptocurrency. The last bitcoin will be generated sometime around the year 2040. This system makes inflation impossible, but while Bitcoins are still being created, the more miners there are, the less each person gets to keep.

 

 

If this sounds ridiculous, think of Bitcoins like digital diamonds. Diamonds have no inherent value either. They’re just common rocks. The only reason they seem scarce is because DeBeers has a monopoly on the diamond supply and only lets out a few at a time. Plus, they’ve hyped up the value of diamonds so much that people believe they’re worth money.

 

 

If DeBeers flooded the market with all the diamonds they’ve hoarded, the price of diamonds would plummet, and your warehouse would become full of stupid, worthless rocks. Bitcoin miners can’t flood the market with Bitcoins and crash their value like DeBeers could with diamonds. They can’t split or reverse split a number of Bitcoins it has issued like IBM can. They can’t print 10 trillion more Bitcoins tonight and crash its value like third world countries sometimes do with their money supply. A foreign country can’t overthrow Bitcoin and crash its economy like America did to Iraq. In a crazy, turbulent world, cryptocurrencies like Bitcoin will always be stable… as long as the internet exists. That’s more than most currencies can boast.

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The Most Important Factor In The Value Of Cryptocurrency And How It Applies To Steemit.com

If you haven’t heard of Steemit.com, it’s a blogging platform that pays you to post blogs with the site’s proprietary cryptocurrency called STEEM.

 

 

I made an account in August 2016, and one of my first posts was “An Introduction to Cryptocurrency and Steemit for Minnows.” It explains what cryptocurrencies are and what gives them value, but after reading a post today by the user, aaagent, titled, “My journey through the Matrix and how I found the red pill (gold, crypto, politics, economics, & geopolitics),” it made me realize I didn’t stress enough the most important factor in why/how cryptocurrencies gain value, which is:

 

How many people accept it as payment for goods and services

 

There are hundreds of different types of cryptocurrencies, and they each have a gimmick. Some are centralized. Others are decentralized. Some have more transparent histories. Others are more secure and untraceable. DogeCoin is just a generic coin that isn’t backed by anything and has a joke for a name. STEEM is backed by the popularity of its social media platform, which is a cool gimmick, but ultimately won’t determine whether or not STEEM succeeds or fails.

 

 

Even if Steemit becomes a great site, people will stop investing in STEEM eventually if they can only spend it on one or two websites. Even if the Steemit admins never make another improvement in the social media platform, if they focus all their energy on getting businesses around the world to accept STEEM as payment, the price will go up and never come down.

Compare STEEM to Bitcoin and Gold. Most of the people who buy Bitcoin probably don’t understand how it works. All they know is that a lot of people accept it as real money. Therefore, it must be real. It’s like gold. Gold is useful in the real world, but most people won’t use gold for anything other than buying things with it. Very few people know why gold is so universally accepted, and they don’t need to. All they need to know is, they can buy anything with it, anywhere in the world.

This leads me to the number one reason I haven’t invested money in buying STEEM yet. Steemit practically forces you to keep your STEEM tokens locked up in Steem power, and it takes months to turn your power into tokens and sell them. The official reason Steem power exists is the admins want to keep timid investors from crashing the price in a panicky sell-off.

This is true, and it works, but it also makes the price of STEEM look stable on paper, which impresses speculative investors. The problem is, if everyone’s STEEM is locked away, then nobody is buying anything with it. The fewer people who spend STEEM, the fewer people will accept it as payment… because they’ll have nowhere to spend it… because nobody else uses it. When intelligent investors realize they can’t use STEEM for hardly anything except selling it to speculators, they’ll probably stop buying it, which will make its price go down until it dies a slow penny stock death.

When it took two years to power down your account, I had zero faith in Steemit, but I knew the program was in its beta phase. So I used it hoping the problems would get fixed. When they lowered the time to three months, it restored some of my faith. However, it’s all for naught if more businesses don’t start accepting STEEM as payment for real-world goods and services. If anyone can share some links to articles of STEEM catching on with merchants, it will make me more of a believer.

You can use this concept to predict the future of other cryptocurrencies too. Dogecoin is doomed to fail, because it’s not based on anything, and nobody is seriously trying to convince businesses to accept it. However, it is popular, and if a profitable business ever accepts it as payment, its value could spike.

There will always be a real-world need for hard-to-trace currencies like Dash and Monero on the darknet, but the value of privacy-centric currencies are likely to stay pegged to the size of the black market. It is possible another Bitcoin could break out of the black market though. So investors should keep an eye on which currencies are growing in popularity there.

The cryptocurrencies with the most potential are ones like Etherium, Zcash and Ripple, because they’re designed with business in mind, and they’re focused like a laser on getting their currency into circulation, unlike Steemit, which is more focused on manipulating the appearance of its value.

That’s harsh, but I’ll be fair, Steemit did take a step in the right direction by lowering the time it takes to power down your account. If they just do a little bit more to improve the circulation of STEEM, I’ll put my money where my faith is.

 

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