A key question in assessing the fair value of cryptos lies in clarifying their use-case: Are they more like commodities with a store of value (such as gold), or currencies that allow for more efficient transactions?
As the popularity of bitcoin and other cryptocurrencies climbs and the market develops, analysts from Deutsche Bank have turned their attention to the question of valuation.
The analysts addressed the argument that bitcoin’s use-case as a global decentralised currency which allows for fast transactions serves to increase its value.
And they say there’s a breakdown in the logic. Here’s Deutsche Bank (emphasis ours):
While there are many misconceptions, there is no direct positive relationship between the absolute value of one coin of cryptocurrency and its technological edge (convenience).
Rather, when the price of a coin surges like Bitcoin has, a negative relationship develops as the currency becomes inconvenient for payments/remittances.
So aside from doubts around bitcoin’s transactional capability, its volatility and sharp price rises makes the use-case for payments more difficult.
Or put another way, why would someone use their bitcoin to buy, say, a house, if they believe the price of bitcoin is set to rise another 20 times from its current valuation?
In assessing the merit of cryptocurrencies as a store of value, Deutsche Bank said they don’t stack up compared to precious metals, such as gold.
“Cryptocurrencies do not have underlying value like precious metals. The value of cryptocurrencies such as Bitcoin that have pure distributed systems is not guaranteed by an issuer because there is no issuer,” the analysts said.
“The value of a cryptocurrency is thus based entirely on the belief that it can be exchanged for goods or sovereign currencies.
“Here, the valuation of the exchange rate between sovereign and cryptocurrencies is vital.”
The analysts said that on one hand, cryptocurrency exchange rates could reflect their relative advantage as a convenient payments system.
But they concluded that assessing fair value based on convenient payments is impossible, because most market participants aren’t using cryptocurrencies to buy goods and services.
“This mechanism is not functioning at present because, rather than for payments/remittances, currently the main reason to trade and own cryptocurrencies is speculation (to take profit from price increases).
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