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> How can something be overvalued, if it's only value is derived from the price people are willing to pay for it? Usually when someone's saying something is ov

> How can something be overvalued, if it's only value is derived from the price people are willing to pay for it? Usually when someone's saying something is overvalued, what they mean is that they think there is good reason to believe that what people are willing to pay for it now is significantly more than what they think people will be willing to pay for it at some undefined point in the future. Or, in a nutshell, that they think it's a fad. I think it's generally a fairly safe bet to assume that, when there's a buying rush on something, the market price will end up being quite a bit higher than what it will be once things start to stabilize. That's a fairly intuitive implication of supply and demand, and I think the only real way around it is if there's some other force that's constantly working to push the price up. For example, the price of land tends to appreciate because the supply of land is approximately constant, but the number of people who want land is always growing. Bitcoin maybe has that with its deflationary design. But a counterweight to that feature is that nobody really needs Bitcoin for anything. So, like land, the supply is pinned, but, unlike land, it's entirely possible for demand to plummet all the way to zero.

eof 8y ago
By your definition, something could be both under valued and over valued at the same time.
- bunderbunder 8y ago
  Absolutely. Take the US real estate market in 2007: You could argue that, hindsight, it was overvalued if you needed to be worried about what it would be worth 2 years later, but, 10 years later, prices were even higher. Might also be different values to different people if they have differing levels of ability to exploit it. But, in the narrow case of cryptocurrency, I'm pretty sure it's (currently) got very little value outside of its exchange rate.
JumpCrisscross 8y ago
> Usually when someone's saying something is overvalued, what they mean is that they think there is good reason to believe that what people are willing to pay for it now is significantly more than what they think people will be willing to pay for it at some undefined point in the future This is a mis-understanding of the term "value," at least in the context of investing. Value is the benefit you receive from holding an asset. If you buy an undervalued bond, the interest and maturity should pay you more than the price you paid for it. Same with stocks and dividends, derivatives and cash flows, et cetera. Currencies seem like an exception until you consider how FX traders make money. Currencies give you access to borrowing and lending in their respective economies. Their relative values are enforced by market factors like the carry trade. Bitcoin doesn't have this because, like gold, it does not natively support interest rates.
- jaredklewis 8y ago
  Honest question: what about stocks that pay no dividends but appreciate? It seems like they provide no value to the holder until sold.
  - bunderbunder 8y ago
    They hold some minimum value in that common stock holders are entitled to a share of the liquidation value of the company, should it go under. That said, they're (usually, at least) in line behind bond holders, and most companies are trading a high multiple of their liquidation value these days, and companies tend to take on a lot of debt right before they go under, so to a reasonable approximation, the amount of that value that a common stock holder can expect to see is 0.
dionidium 8y ago
> unlike land, it's entirely possible for demand to plummet all the way to zero. Not really the point, but land can clearly go to zero [0] (and below). Just ask St. Louis or its peer cities how well their giant land banks are working out. [0] "Zero" here means the land is worth less than whatever amount justifies the obligations that come with owning it (e.g. taxes, maintenance, etc).

eof 8y ago

By your definition, something could be both under valued and over valued at the same time.

bunderbunder 8y ago
Absolutely. Take the US real estate market in 2007: You could argue that, hindsight, it was overvalued if you needed to be worried about what it would be worth 2 years later, but, 10 years later, prices were even higher. Might also be different values to different people if they have differing levels of ability to exploit it. But, in the narrow case of cryptocurrency, I'm pretty sure it's (currently) got very little value outside of its exchange rate.

JumpCrisscross 8y ago

> Usually when someone's saying something is overvalued, what they mean is that they think there is good reason to believe that what people are willing to pay for it now is significantly more than what they think people will be willing to pay for it at some undefined point in the future This is a mis-understanding of the term "value," at least in the context of investing. Value is the benefit you receive from holding an asset. If you buy an undervalued bond, the interest and maturity should pay you more than the price you paid for it. Same with stocks and dividends, derivatives and cash flows, et cetera. Currencies seem like an exception until you consider how FX traders make money. Currencies give you access to borrowing and lending in their respective economies. Their relative values are enforced by market factors like the carry trade. Bitcoin doesn't have this because, like gold, it does not natively support interest rates.

jaredklewis 8y ago
Honest question: what about stocks that pay no dividends but appreciate? It seems like they provide no value to the holder until sold.
- bunderbunder 8y ago
  They hold some minimum value in that common stock holders are entitled to a share of the liquidation value of the company, should it go under. That said, they're (usually, at least) in line behind bond holders, and most companies are trading a high multiple of their liquidation value these days, and companies tend to take on a lot of debt right before they go under, so to a reasonable approximation, the amount of that value that a common stock holder can expect to see is 0.

dionidium 8y ago

> unlike land, it's entirely possible for demand to plummet all the way to zero. Not really the point, but land can clearly go to zero [0] (and below). Just ask St. Louis or its peer cities how well their giant land banks are working out. [0] "Zero" here means the land is worth less than whatever amount justifies the obligations that come with owning it (e.g. taxes, maintenance, etc).