Cryptocurrencies / Valuation
The Intrinsic Value Question

Bankers Criticize Crypto, Always Goes Back to the Same Argument: Intrinsic Value

Burgess COMMENTARY
I am doing my best to understand what conventional money and the emerging cryptocurrencies truly are. At university in 1960 I was taught that money was both a means of exchange and a store of value, and that good money was 'backed' by a lot of gold, and less good money by less gold ... but I do not remember learning much about ideas like fractional reserve currencies, and fiat money. Worse, I have experienced the massive loss of purchasing power of money as every currency on the planet seems to be worth a lot less now than 50 years ago ... even including strong currencies like the US$ and the UK pound sterling.
Today I understand better how value is created ... and the difference between value add and value destruction .. and the difference between true net value add and mere value movement. To the extent that money, conventional or a cryptocurrency, enables transactions that produce value add, then that money, in my view, has real (intrinsic) value, and this is not insignificant in scale. After all it is the foundation for the high valuation that has been placed on the financial sector for decades if not centuries!
At the present stage of cryptocurrency emergence, the price of many of the coins is being determined by speculation, an instance of value movement, but there are a huge number of initiatives that are trying to use the blockchain and cryptocurrencies to dream up innovative ways to help make the world a better place. This is value add, and currencies that really do enable this sort of new world order have a really huge intrinsic value.
I am not sure where this would fit into a modern college course in economics or finance ... but it reflects my current world view, and is the basis for a big piece of my optimism for the future!
Peter Burgess ... http://truevaluemetrics.org
Peter Burgess

Bankers Criticize Crypto, Always Goes Back to the Same Argument: Intrinsic Value

Finance experts in the traditional finance industry often attempt to discredit Blockchain projects and open-source cryptocurrencies like Bitcoin and Ethereum. But, without solid logical arguments, a lot of baseless claims from the finance sector have proven to be ineffective.

Go-to Argument

The go-to argument by economists against the idea of the cryptocurrency market and decentralized Blockchain has been their lack of intrinsic value. Some economists and nobel award-winning researchers have claimed for several years that the lack of intrinsic value in Bitcoin and other cryptocurrencies make them vulnerable to massive price drops and volatility.

Intrinsic value

In December 2017, Bruce Flatt, CEO at asset management company Brookfield, which is based in Canada and oversees around $250 bln in assets, stated:

“It [Bitcoin] has no intrinsic value. I don’t know what it is. But it has no intrinsic value in our definition of intrinsic value. If someone else wants to speculate on it or invest in it, it’s for them. It’s not for us.”

However, every single asset, currency, and commodity in the global market such as gold, the US dollar, and company shares also do not have intrinsic value, and the Flatts claims can be applied to any asset in any major stock market globally.

Tom Lee, a strategist at Wall Street-based hedge fund Fundstrat, stated that no asset in the world has intrinsic value. Gold, the largest store of value and safe haven asset in the global market with a market valuation of $7 trln, also does not have intrinsic value, Lee said, as a large supply of gold can be discovered and potentially impact the international gold market.

'There are potentially millions of times more gold underground than actually has been extracted,” said Lee, adding that no asset in the US stock market has intrinsic value because they are built on digital trust. 'If you ask a baby boomer, 'Can you justify the value of anything that's a digital business?' they probably don't accept that Facebook, Google, Netflix, Amazon, Apple, these are the largest companies in the S&P 500 and they're primarily digital businesses built almost purely on digital trust.”

Bubble

On Feb. 20, Cointelegraph reported that Elliott Management, a major hedge fund founded by billionaire Paul Singer in 1977, went as far to describe the cryptocurrency market as a bubble, a fraud, and limitless ignorance of the human race. Elliott Management said:

“But is it not glorious that when the equivalent of nothing attracts priests and parishioners who run up the price, the very willingness of the mob to buy it at higher and higher prices is seen as validation of the thing, rather than an indication of the limitless ignorance of swaths of the human race?”

But, as a hedge fund, Elliott Management failed to acknowledge that the free market operates on the basis of supply and demand. “The mob” of investors in the cryptocurrency market are willing to buy cryptocurrencies at current prices because they see value in them. Both minor and major corrections occur in the cryptocurrency market due to supply and demand, when investors are not willing to meet the price set by the sellers. That is how every modern market operates, and the same model is applied to stock markets as well.

Fear

Cointelegraph also reported that JPMorgan, the largest investment bank in the world with a $400 bln market cap, admitted cryptocurrencies are a risk and a threat against the business model of the bank. The annual report of JPMorgan read:

“Both financial institutions and their non-banking competitors face the risk that payment processing and other services could be disrupted by technologies, such as cryptocurrencies, that require no intermediation.”

Bitcoin and other cryptocurrencies can be considered a threat against the business model of most major banks because the market they target is the offshore banking industry. Open-source and decentralized cryptocurrencies can transfer large sums of money with less fees and efficiently than the infrastructures of large banks.

Good sign

The demonstration of fear and opposition against the cryptocurrency market by large-scale financial institutions and those who fail to understand the technological foundations of cryptocurrencies is an optimistic sign for the long-term growth of the market, as it demonstrates the potential of cryptocurrencies to compete with banks.

On March 14, Europe’s biggest insurer Allianz Global, which oversees more than $620 bln worth of assets, told its clients that Bitcoin is worthless, and that the cryptocurrency has almost zero intrinsic value. The company’s head of global economics and strategy, Stefan Hofrichter said:
“In our view, its intrinsic value must be zero. A Bitcoin is a claim on nobody – in contrast to, for instance, sovereign bonds, equities or paper money – and it does not generate any income stream.”

Hofrichter further noted that the bubble of Bitcoin will inevitably burst, and its demise will not have a major impact on the global economy, adding:
“Bitcoin’s demise would have few spillover effects on the ‘real world,’ since the market for this cryptocurrency is still quite small in size. As a result, we believe that the risks to financial stability stemming from bitcoin are negligible -- at least as of today.”

The claims of companies like Allianz Global that argue a $350 bln market with a daily trading volume larger than most stock markets can fall to zero is illogical, given that like the stock market, the cryptocurrency market also depends on supply and demand. If the demand for cryptocurrencies increases, the value of digital assets increase and if the demand falls, the price drops.

Unbacked and baseless condemnation on bitcoin and the cryptocurrency market by experts without fundamental knowledge in the structure, technology, and economic impact of cryptocurrencies would continue to fuel public demand for the cryptocurrency market.

The views expressed here are the author’s own and do not necessarily represent the views of Cointelegraph.com
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COMMENTS
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Avatar PeterBurgess • 6 minutes ago
I am doing my best to understand what conventional money and the emerging cryptocurrencies truly are. At university in 1960 I was taught that money was both a means of exchange and a store of value, and that good money was 'backed' by a lot of gold, and less good money by less gold ... but I do not remember learning much about ideas like fractional reserve currencies, and fiat money. Worse, I have experienced the massive loss of purchasing power of money as every currency on the planet seems to be worth a lot less now than 50 years ago ... even including strong currencies like the US$ and the UK pound sterling.
Today I understand better how value is created ... and the difference between value add and value destruction .. and the difference between true net value add and mere value movement. To the extent that money, conventional or a cryptocurrency, enables transactions that produce value add, then that money, in my view, has real (intrinsic) value, and this is not insignificant in scale. After all it is the foundation for the high valuation that has been placed on the financial sector for decades if not centuries!
At the present stage of cryptocurrency emergence, the price of many of the coins is being determined by speculation, an instance of value movement, but there are a huge number of initiatives that are trying to use the blockchain and cryptocurrencies to dream up innovative ways to help make the world a better place. This is value add, and currencies that really do enable this sort of new world order have a really huge intrinsic value.
I am not sure where this would fit into a modern college course in economics or finance ... but it reflects my current world view, and is the basis for a big piece of my optimism for the future!
Peter Burgess ... http://truevaluemetrics.org
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Avatar Honp • a day ago The louder the cry, the more I buy. •Reply•Share ›
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Avatar Jason Carroll • a day ago They act as if their fiat currencies have intrinsic value. The value of fiat could easily drop to zero also. And if it does...at least I have my BTC that I can fall back on and use anywhere in the world. 1 •Reply•Share ›
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Avatar eekonomist • a day ago Must be a generational thing, this whole not understanding digital assets. All one needs to do is take a look at the prices people are willing to pay for cosmetic items in popular online games (CS GO, Rocket League, Battlegrounds, etc.) to know that younger people DO value these things. Crypto as a whole may be a bubble in that a lot of these forked currencies must fail, but the sector is real and it will eat up any bank that isn't willing to adapt. Get Blackberry'd. 1 •Reply•Share ›
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Avatar Everywherehere • 2 days ago I hope one day there will be a blockchain based decentralized search engine that doesn't geo limit and a mobile OS that is not controlled by a single entity to compete with powerful centralized players like Google and the likes. Right now most large banks and technology companies are beating down bitcoin in the media just to buy themselves more time to develop their own versions of permissioned blockchains. They will not give up the monopoly without a hard fight. Expect tough times until then. 1 •Reply•Share ›
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Avatar Joe Bender Everywherehere • a day ago this exactly. this is a war. cryptocurrency by irs very nature is an existential threat to the very existence of fiat/credit money. it is time for us to wake up to the fact that they will steal as much of the technology as they can (which by the way we are funding through the crypto markets) then they will regulate crypto currency into oblivion. the weakness of cryptos is the exchanges. w/o them you are left with localbitcoin. at that point cryptos if they exist at all will be penny stocks. the enemy has the guns, the police, the military, the jails and the taxman. it is time for the geeks and cypherpunks to wake up and realize what the stakes are. THEY need the people who run their systems of control. don't go to work for them. instead of hacking crypto hack jp morgan etal. otherwise just be content with being serfs •Reply•Share ›
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Avatar James Silverstone • 2 days ago Its so fake and illegitimate that the IRS is taxing it. Their problem is they didn't think of it and its a cheap way to transfer money without a bank. Try that with gold or stock. •Reply•Share ›
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Avatar Bob • 2 days ago Blockchain is a direct threat to the google model of censorship. 1 •Reply•Share ›
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Avatar Arya Tah • 2 days ago Death play: Banks (2016): you are such a pain in my ass, bitcoin. Does our end fulfill you? Bitcoin (2017): Am just seeing a job done. As you have done with me. Banks(2018): As we have done, I think. You have no bankers supporting you, no billionaires support you, no intrinsic value, no future. We have killed you bitcoin. Bitcoin: (stabs and ends banking monopoly in 2020) ending your nuisance rights a far greater wrong than I ever supported. You would see the whole of mankind crowd in your dark corrupt prison, and leave them dulled beyond reason. Banks (dieing) : You wear your convictions well. It suits you. 1 •Reply•Share ›
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Avatar MoonShot • 2 days ago Intrinsic Value is the one thing Bankster should now a currency like Bitcoin has. •Reply•Share ›
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Avatar Aaron Anderson • 2 days ago Bankers criticizing cryptos is not much different from horse drawn carriage makers criticizing the automobile. 3
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•Reply•Share › Avatar Ana Kris Aaron Anderson • a day ago AGREE! •Reply•Share › −
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Avatar Anwar Taylor Aaron Anderson • 2 days ago Thats a fact. Not to mention, whale oil purveyors criticizing the lightbulb, telegraph operators criticizing the telephone, radio men bashing the rise of TV, and almost everybody laughing at the stupid internet machine those nerds kept raving about in the 90s. its as if irony and self-awareness aren't even things. 2 •Reply•Share ›