Are Cryptos really worth something ?
As told in the 1rst episode, one of the (many) mistakes i did back in 2017 was missing out the difference between cost and value. Cost corresponds to the price for which the seller is willing to let go his item and a buyer to pay for it. In opposition, value is what benefits the cryptocurrencies is bringing you. I.e. what you can do with it.
Are Cryptocurrencies really that disparate from dollars or others currencies ?
The answer is no !
For the record, when i use the term fiat money or fiat currencies, it’ll refer to the dollar, euro, pound, etc…
The main reason, for the use of a commodity, is because people trust it. It’s all based on intuition or emotional thinking. This can apply to gold (in the first place) and to any fiat currency.
There could be several reasons backing up this logic : difficulty to mine gold and shortage of stock, confidence it the ability of the government to protect its currency or pay back his debts, etc.
Then people start using it as a mean to exchange goods and service : it gains value (because you can do something with it).
When people trust a commodity and give it value, it becomes a currency.
By ressemblance Cryptocurrencies have intrinsic value because of the same reason that fiat money in general : faith. To understand why people have faith in the blockchain, go there.
Now the real question : how do you estimate how much a cryptocurrency is worth ?
You’ll tell me that knowing the value won’t mean having gains. And i’ll give you that. A bitcoin has the same value (use) when it was at 100 $ or 50 k$.
Forecasting the future, especially in the crypto-world, is a hard task. Since the price is only based on what others are willing to pay, it’s nearly impossible to define how much money it’ll cost in the future.
Oppositely to other form of investment such as real estate (or stocks), you can’t rely on estimations of future rents.
Note that it’s not entirely true since you can have some form of income when you stack your cryptos (we’ll get to that in future articles). 😉
In reality all methods are quite subjectives or theoretical
I’m sure you heard the law of Supply and Demand. If not, it’s simple: if a demand for something exceed the supplies the prices will go up. Yet, if supply exceed demand, the prices will go down.
It can work if there is some level of scarcity : like a fixed amount of cryptocurrency (like Bitcoin for instance). However there is an infinite amount it won’t : more cryptocurrencies can still be created and more projects launched … Therefore, i don’t think this law will give you enough insight.
You could also estimate demand on a cryptocurrency using the following questions:
- What is the history of the currency?
- Is there a hack history ? especially lately?
- Does it consistently generate results?
- How great is the team running the project ?
- How much is there hype around it and is there potential for improvement?
All these factors determine how trendy the currency is and therefore at what price people are willing to pay for it at the time. It only work for the present : if a crypto’s popularity declines, so will the price.
I suggest you to don’t try to estimate future prices. I won’t lie i will be happy if the prices continue to go up. But if they don’t and crash, i won’t mind at all . I am already using them as a source of passive income (called staking) and maybe it’ll be an occasion to buy more.
I don’t think just buy cryptocurrencies and keep them forever (hodl) hoping price will skyrock is a great strategy. After all it’s based on hope and speculation : thinking people will buy at a greater price someday without knowing why.
I rather prefer to be pro-active :
- Buy frequently, each monday, some cryptocurrencies using the dollar cost averaging method. Meaning, each time you invest, the same amount in your investment portfolio with little regards to prices.
- Stack the crypto i want to keep. Stacking is simply send some coins to an exchange to gain interest on it. I use Nexo but there are many other services you can use
- and recently i started trading.
This methods suit myself really well but they may not correspond to your needs. As always, think for yourself. Never buy something because someone told you it’s nice to!
See you next time
The purpose of this series is to share the knowledge i gained and the mistakes i made along the way in the cryptocurrency universe. With hope, maybe you can avoid doing the same errors. But if you still do, no worries, it’s part of the learning curve. Sometimes you need to fail multiple times to advance. Have a growth spirit and more important be kind to yourself! 😀
Disclaimer : With honesty and integrity, i won’t hide any mistakes or loss i had. Nor that i inflate my successes. I’ll try to stay the most explicit with you. I’m just sharing my experience, it doesn’t constitute an investing advice in any way.