Flawed Cryptocurrency Valuation Models Harming Industry

Michael Casey, the co-founder of Network Effects Media, senior advisor for MIT’s Digital Currency Initiative, and a long-time crypto industry insider, said late last week during an interview with Cheddar that the valuation of digital assets is putting the entire industry in jeopardy.

His feeling is that the valuation models being used in the cryptocurrency markets is “all just a bit backward.”

Upon being asked to elaborate, Casey explained that the creation of cryptocurrencies and blockchain technology was specifically meant to move away from centralized third-party entities.

However, the way these assets are being valued remains close to traditional market operations, which could spell ruin for the cryptocurrency revolution if it continues.

One telling observation from Casey is that based on the way cryptocurrencies are being valued in fiat currencies, most participants in the cryptocurrency markets these days are looking for an exit into fiat.

For such investors, cryptocurrencies have little to do with holding for the long term, and everything to do with making a quick profit and getting back into fiat currency.

According to Casey, this has misaligned the function of blockchain and cryptocurrencies since investors are only looking for profit, not trying to find a better way that eliminates the need for the traditional centralized powers that be.

To further emphasize, in a recent interview on CNBC, the CEO of Bitpay, Stephen Pair, said that much of Bitcoin price is only due to speculation, and has no relationship to actual real-world usage of the cryptocurrency.

Is Network Value Equal to Fair Value?

Unfortunately Casey didn’t delve into how users should value digital assets, but there have been many others in the industry speaking on the subject.

One of the more popular methods of valuation is the use of Network Value. In many circles, Network Value is being used to determine what the fair value or true value of Bitcoin and other altcoins is.

Tom Lee of Fundsrat Global Advisors is one such proponent.

He recently told his clients that Bitcoin is fairly valued at $13,800 to $14,800.

He based the price target mainly on the number of active BTC wallet addresses and how much BTC is being transferred. He also factored in the immutable, borderless and censorship resistant qualities of bitcoin and the deflationary characteristic of the leading digital currency. 

It isn’t only Lee who speaks of the Network Value.

Recently Anthony Pompliano mentioned during an interview on CNN that even though prices are down this year, the network behind Bitcoin is growing:

Bitcoin network is about $4.6 billion as of late, and the market cap is $74 billion. That’s very similar to Mastercard which does about $11 billion worth of transactions and is valued at about $180 billion. So from a value perspective, it’s right there on par with Mastercard.

He went on to say:

[Bitcoin] is the most secure transaction settlement layer in the world, so it’s got to be worth something.

Further confirmation of the solid cryptocurrency fundamentals came from Joseph Lubin, the co-founder of Ethereum and founder of ConsenSys, this past October on CNBC.

During an interview on the CNBC “First On” segment Lubin was clear that despite the “bust” in cryptocurrency prices this year, cryptocurrency fundamentals are “booming.”

He pointed out that the blockchain ecosystem is as strong as it’s ever been, and that falling speculative interest in cryptocurrencies hasn’t had a negative impact on the true believers in the revolutionary technology.