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> While I fully agree that most cryptocurrencies are grossly overvalued... Could you please explain what “overvalued” even means in this context, and how one m

by danhak 9y ago

> While I fully agree that most cryptocurrencies are grossly overvalued... Could you please explain what “overvalued” even means in this context, and how one might go about determining fair value for cryptocurrency? I’ve yet to receive a straight answer on this.

raiyu 9y ago
Think of it this way. Let's say that to get 1 Bitcoin I could just install an app on my computer, and within 1 second get a Bitcoin. Then everyone in the world can make as many bitcoins as they want, there are no limits on the number of bitcoins, and the process to get more doesn't increase in difficulty. So now we have bascially infinite bitcoins so the value of them is zero, because why would I buy one, when I can just make one at any time. The opposite of this is where Bitcoin derived it's value. First there is a fixed number of Bitcoin, so you can't simply make more past a point. Secondly, the effort required to mine Bitcoin increases over time. This effort requires real world currency exchange. I need to buy a powerful computer and then pay a lot of electricity, cooling, space. So effectively my mining operation costs $x. Now as time goes on to get the same number of Bitcoins I need to increase my spend because the computational needs increase as well. Effectively, I'm exchanging my USD to equipment and energy, which are giving me Bitcoins. A reasonable value for Bitcoin would be to calculate the total amount of hardware and energy invested in mining and there you have a decent floor value. You can then extrapolate this for the future, since the total amount of Bitcoin to be created is known, you could say that multiplying that out you get a total amount of value. To say that they are overvalued would mean that the total current dollars invested in mining bitcoin is far less than the current total market cap of said coins. If you look at the price of Bitcoin 2014 to the start of 2017, you see a gradual increase in price, which would be explained by the amount of money going into mining and with some markup. In 2017 you see a 20x increase, but that isn't matched with a 20x increase in spend for minting Bitcoins, so the increase is irrational.
- walrus1066 9y ago
  I don't think the value of an asset is derived purely from scarcity, or the effort required to make it. What if the asset itself has no use? If I spend 1000 hours making a really bad doesn't, it'll have a value of zero, even though it's unique and a lot of work was put into it. I haven't created value, I've destroyed it, I.e. All that time and nothing to show for it.
  - raiyu 9y ago
    I'm not asserting that scarcity or effort alone create value, but without those two components you won't have value. So not everything that is limited is valuable, however everything that is valuable is limited. Just imagine if someone figured out how to engineer gold out of thin air, the value of gold would drop instantly.
    - danhak 9y ago
      > I'm not asserting that scarcity or effort alone create value, but without those two components you won't have value. That's literally exactly what you asserted: > The opposite of this is where Bitcoin derived it's value. First there is a fixed number of Bitcoin, so you can't simply make more past a point. Secondly, the effort required to mine Bitcoin increases over time.
- sobani 9y ago
  > the effort required to mine Bitcoin increases over time. Not necessarily. The effort required is based on trying to create blocks every 10 minutes. If the price increases, mining becomes more profitable, thus more effort will be put into mining, which means the blocks will start to be created quicker, leading to an increase in difficulty. The reverse is also true: if blocks take too long, the difficulty decreases. If you take a look at a difficulty graph [0] you can see that it decreases at times. Compare with a price graph [1]. You can see that significant price decreases also cause minor difficulty decreases, but it's not a 1:1 correlation due to mining efficiency improvements. [0] https://bitinfocharts.com/comparison/bitcoin-difficulty.html#log https://bitinfocharts.com/comparison/bitcoin-difficulty.html... [1] https://bitinfocharts.com/comparison/bitcoin-price.html#log https://bitinfocharts.com/comparison/bitcoin-price.html#log
baq 9y ago
i'll bite: they're selling for more than $0.
Cyberdog 9y ago
"Overvalued" means "I don't think it should be worth this much" in this case. The fair value for cryptocurrency, just as with everything else, is determined by the market(s) (at least, when it is unadulterated by government obstruction and price-fixing and such). So to determine the fair value of a bitcoin, go to the exchange of your choice and look at the price. If you don't like that price, try a different exchange. You might not want to pay that price right now, and that's okay, but that's what the fair value is right now.
- danhak 9y ago
  This is circular logic and not really what I was getting at. Productive assets are valued based on expectations of future cash flows, independent of market value. You’re incorrect in saying the value of everything is determined by the market. To quote Warren Buffett, “price is what you pay, value is what you get.”
  - Cyberdog 9y ago
    Isn't the expectation of future cash flow factored into the current market value of something? I "overpay" for Apple laptops because I know I'll be able to quickly make my money back by doing productive things with them.

by danhak 9y ago

raiyu 9y ago

Think of it this way. Let's say that to get 1 Bitcoin I could just install an app on my computer, and within 1 second get a Bitcoin. Then everyone in the world can make as many bitcoins as they want, there are no limits on the number of bitcoins, and the process to get more doesn't increase in difficulty. So now we have bascially infinite bitcoins so the value of them is zero, because why would I buy one, when I can just make one at any time. The opposite of this is where Bitcoin derived it's value. First there is a fixed number of Bitcoin, so you can't simply make more past a point. Secondly, the effort required to mine Bitcoin increases over time. This effort requires real world currency exchange. I need to buy a powerful computer and then pay a lot of electricity, cooling, space. So effectively my mining operation costs $x. Now as time goes on to get the same number of Bitcoins I need to increase my spend because the computational needs increase as well. Effectively, I'm exchanging my USD to equipment and energy, which are giving me Bitcoins. A reasonable value for Bitcoin would be to calculate the total amount of hardware and energy invested in mining and there you have a decent floor value. You can then extrapolate this for the future, since the total amount of Bitcoin to be created is known, you could say that multiplying that out you get a total amount of value. To say that they are overvalued would mean that the total current dollars invested in mining bitcoin is far less than the current total market cap of said coins. If you look at the price of Bitcoin 2014 to the start of 2017, you see a gradual increase in price, which would be explained by the amount of money going into mining and with some markup. In 2017 you see a 20x increase, but that isn't matched with a 20x increase in spend for minting Bitcoins, so the increase is irrational.

walrus1066 9y ago
I don't think the value of an asset is derived purely from scarcity, or the effort required to make it. What if the asset itself has no use? If I spend 1000 hours making a really bad doesn't, it'll have a value of zero, even though it's unique and a lot of work was put into it. I haven't created value, I've destroyed it, I.e. All that time and nothing to show for it.
- raiyu 9y ago
  I'm not asserting that scarcity or effort alone create value, but without those two components you won't have value. So not everything that is limited is valuable, however everything that is valuable is limited. Just imagine if someone figured out how to engineer gold out of thin air, the value of gold would drop instantly.
  - danhak 9y ago
    > I'm not asserting that scarcity or effort alone create value, but without those two components you won't have value. That's literally exactly what you asserted: > The opposite of this is where Bitcoin derived it's value. First there is a fixed number of Bitcoin, so you can't simply make more past a point. Secondly, the effort required to mine Bitcoin increases over time.
sobani 9y ago
> the effort required to mine Bitcoin increases over time. Not necessarily. The effort required is based on trying to create blocks every 10 minutes. If the price increases, mining becomes more profitable, thus more effort will be put into mining, which means the blocks will start to be created quicker, leading to an increase in difficulty. The reverse is also true: if blocks take too long, the difficulty decreases. If you take a look at a difficulty graph [0] you can see that it decreases at times. Compare with a price graph [1]. You can see that significant price decreases also cause minor difficulty decreases, but it's not a 1:1 correlation due to mining efficiency improvements. [0] https://bitinfocharts.com/comparison/bitcoin-difficulty.html#log https://bitinfocharts.com/comparison/bitcoin-difficulty.html... [1] https://bitinfocharts.com/comparison/bitcoin-price.html#log https://bitinfocharts.com/comparison/bitcoin-price.html#log

baq 9y ago

i'll bite: they're selling for more than $0.

Cyberdog 9y ago

"Overvalued" means "I don't think it should be worth this much" in this case. The fair value for cryptocurrency, just as with everything else, is determined by the market(s) (at least, when it is unadulterated by government obstruction and price-fixing and such). So to determine the fair value of a bitcoin, go to the exchange of your choice and look at the price. If you don't like that price, try a different exchange. You might not want to pay that price right now, and that's okay, but that's what the fair value is right now.

danhak 9y ago
This is circular logic and not really what I was getting at. Productive assets are valued based on expectations of future cash flows, independent of market value. You’re incorrect in saying the value of everything is determined by the market. To quote Warren Buffett, “price is what you pay, value is what you get.”
- Cyberdog 9y ago
  Isn't the expectation of future cash flow factored into the current market value of something? I "overpay" for Apple laptops because I know I'll be able to quickly make my money back by doing productive things with them.