Consider the chart below, showing the price of the cryptocurrency Dogecoin:
As you may know, Dogecoin was created as a joke and rather plainly has no value. And yet, in the past year it has appreciated 22,624% and has an alleged market cap of $78 billion. How can that be? CNET asked its founder:
What problem did Dogecoin solve?
"I don't think it solves anything," he says. "If anything, it exists as an educational tool. It's a reminder that we can't take this stuff seriously.
"I hope people see Dogecoin and say, I'm not going to put all my money into this. Because right now there's a dog on a coin and it's worth half a billion dollars."
This is, obviously, a cautionary tale that suggests cryptocurrencies aren't actually worth anything. But it's really just a tiny part of a cautionary tale that encompasses the entire cryptocurrency space. It would be one thing if Bitcoin were unique and somehow had a good story to tell about its value. But even if that story were true, could it also be true that literally any old somebody can start up a new cryptocurrency and suddenly become a millionaire? Or hundreds of somebodies?
This is the tell, and it's hardly a subtle one. There is no rational economic system in which this can happen. Whatever problem cryptocurrencies allegedly solve, it was solved long ago. There is no conceivable way that hundreds more cryptocurrencies could be created literally out of nothing—no capital, no labor, no intellectual development, no raw materials—by anyone who felt like doing it. This could happen with a collectible item that suddenly gets hot, but not with any form of money.
The total value of all cryptocurrencies in existence is about $2 trillion. This is roughly the value of Denmark. That is, you could supposedly buy the entire country of Denmark by swapping it for all the cryptocurrency in existence. That's in theory. In practice you probably couldn't buy Pitcairn Island—though I suppose you could ask them. Just don't bother asking the Danes unless you want to get slapped upside the head with a delicious pork roast.
The cryptocurrency space is kind of like where in the 19th century every US bank would issue it's own paper currency, except more imaginary.
At least with tulips, you'd have a nice flower.
Crypto is hot with tech hipsters with too much money.
To think, I could have sold my Beanie Babies at the peak and moved into Dogecoin.
You should have waited for Kitty Currency.
I figure most of the people investing real money in crypto "currencies" (they are in no way, shape, or form currencies) know all of this but figure they will ride the wave. As long as they are not the last ones out they come out ahead. Of course all of them can't be right.
You were close, but miss the point.
There is also no value in whether or not the Dodgers or Angeles win tonight's game.
Yet, people will bet on it.
Bitcoin may be a way to exchange value, but much of crypto is just a bet. The value is in how many people will join in on the bet.
That's it. But that's all it ever had to be.
This is, obviously, a cautionary tale that suggests cryptocurrencies aren't actually worth anything. But it's really just a tiny part of a cautionary tale that encompasses the entire cryptocurrency space.
I am not a fan of crypto but like any financial asset it is not worth nothing. It is worth whatever someone else is willing to pay for it. I get that the story around Bitcoin is b.s. but the story around a lot of assets is b.s. As long as someone (the market) is willing to pay you X, it is worth X.
People buy Dogecoin or Bitcoin for the same reason they buy Apple or Amazon or Tesla or any other stock. They believe the price will rise (or with dividends, at least they'll get a positive return). Some assets are high risk and highly volatile, and others are relatively less. Crypto is certainly on the high side and not for everybody. But it's tradeable, potentially lucrative, and worth whatever the going price is.
I don't think Drum would argue with you on that, nor I. He's said before that he thinks cryptocurrencies are basically collectibles - IE assets that appreciate in value because people think others will want them later.
...cryptocurrencies are basically collectibles - IE assets that appreciate in value because people think others will want them later.
Fair enough. I just think that's true for all financial assets. What Kevin thinks Dogecoin reveals about Bitcoin, I think crypto reveals about other assets.
You could argue that there is some intrinsic value in other assets like equities, but it's mostly myth that some rational analysis of intrinsic value determines the asset price. Asset prices are set in the market, which operates on emotion more than on any rational basis.
Emotions can be somewhat predictable or somewhat unpredictable, which makes some assets (like stocks) more attractive to investors and some assets (like crypto) more attractive to speculators.
The value of equities certainly has an emotional element to it, but they do also have intrinsic value. An equity share is a claim on the earnings of a company. If a company pays dividends, you get a piece of them. If the company sells itself to someone, you get a piece of the sale price. Even if a company does neither, they theoretically could, which gives some basis for valuing the firm. There is a rational, analytical component to valuing equities.
Bonds are even more straightforwardly assets of determinable worth. You get the interest payments and you get principal repayment at some point in the future. All of that is discounted by default risk and inflation risk. Those risks are quantifiable even if there isn't certainty in the calculations.
None of that is true with cryptocurrencies. There is literally nothing on which to calculate an intrinsic value. It's all an emotional assessment of the likelihood that people are going to want to keep buying something that has nothing whatsoever behind it.
I agree, the value of equities has some intrinsic element, along with having an emotional element. That may be even more true with dividend stocks and bonds, which generate income.
I happen to think the emotional / nonrational element plays a bigger part in setting the price of a stock than the intrinsic element.
Markets move up and down in random ways. Economic fundamentals may shift a few percent at times. But equity markets shift 10 to 20% regularly, and halve and double or more in cycles that have little to do with intrinsic value. Sometimes the economy and markets move in the same direction, and sometimes not. Today the market made a strong move up after a terrible jobs report. You can rationalize why bad economic news is good news for stocks, but the unpredictability of how the market reacts to what's happening makes it hard to argue that rational analysis is what's driving prices.
Optimism and pessimism, fear and greed, are generally what drive prices. Emotions and moods drive human behavior, and humans determine the value (i.e., price) on any given day.
Replying to Joseph Harbin (to whom I can't directly reply):
"I happen to think the emotional / nonrational element plays a bigger part in setting the price of a stock than the intrinsic element."
Really? Maybe for the average or small investor. Hypothetically, if I like Apple products, and I think Tesla's look cool, and since I'm not really savvy enough to really pick big winners, they're both good bets and I get an emotional high from owning a piece of a product I believe it. But how much of Tesla and Apple stock is owned by people who get the emotional attachment, and how much is owned by other huge shareholders and institutional investors? For Apple it's almost 60%. For Tesla it's about 50%. I doubt Calpers bought into Apple (hypothetically), because of an emotional attachment, and my guess is the big investors drive stock price a lot more than the emotional investors. I could be wrong though.
it's tradeable, potentially lucrative, and worth whatever the going price is. Until it isn't. FIFY
In the face of evidence that cryptocurrencies have value (people and companies willing to pay for them), maybe you should reconsider your gut reaction to them.
Maybe the world has a strong demand for liquidity and cryptocurrencies fill that need. Maybe the world has a strong need for assets that are scarce (and therefore maybe immune to inflation) yet easy to hold and transfer. Maybe collectables, and therefore cryptocurrencies, fill the bill.
Maybe some people are more willing to chance that a new crypto coin will gain acceptance due to their greed and some other people are willing to follow with solid desires for a good store of value. And maybe this results in the coins being a store of value in the end.
Bitcoin is special because its mix of users has shifted from the early greed driven users to those that need a store of value that is easy. The greedy ones move to new coins and take their chances, but the huge volume of users remaining with Bitcoin to park some of their wealth long term makes it robust.
Maybe you've thought it through and you have some insight you haven't shared but it's been ten years with gut wrenching downturns that should have killed Bitcoin. This hasn't happened and unless you share an explanation for the resilience, you're just whining that it doesn't make sense to you.
This is why restaurants can’t find workers... they are all taking their benefits and buying crypto currency. I’m rather liking the fact that restaurants can’t find people to work at their crappy places. Why should I care about this? We need a few more months of staying at home anyway. And NYC can drop dead!
https://nypost.com/2021/05/07/nyc-eateries-cant-compete-for-staff-with-unemployment-benefits/
“New York City restaurants have been burned by a shortage of workers who say they’re better off collecting COVID-relief bill-enhanced unemployment checks — leaving some eateries unable to open at the newly expanded 75 percent indoor capacity Friday, owners told The Post.”
Invest in the dog thing! Work is overrated!
They are lying. A extra 300 isn't much there. The economy is booming in terms of income. They simply can't find cheap labor because the labor market is structural too tight for their wages.
Yeah, owners told The Post.
I go to Moneyness to read someone who takes money seriously.
http://jpkoning.blogspot.com
I doubt very much that the Danes have delicious pork roast. Scandinavian cuisines don't rank that high.
Cryptocurrencies have the value people are willing to pay for them, that is they have socially assigned value. But it's still virtual because that assignment is based entirely on the assumption a person will ultimately be able to return that value into a local, governmentally established real currency.
What is different about the virtualness of cryptocurrencies is that they can be translated into any other currency, like the wild card in a card game.
This is an interesting effect in that it may help homogenize distinctions between national currencies and have some kind of ameliorating effect on economic fluctuations.
Is crypto partly responsible for why the economy isn't more tanked than it is now?
Elon Musk and Mark Cuban are clearly smart people. But I can't help thinking about a remark an old boss made about a colleague: "He's got a lot of intelligence but it's all one kind."