When evaluating a cryptoasset, it’s important to understand how much of the value is derived from the assets’ utility or usage vs the speculation. Utility is defined as the amount that an asset is used and the advantages to using it vs other similar assets. Speculation is the total potential utility value.
Check out our H2 hedge fund letters here.
Let’s take Bitcoin for example. Bitcoin’s utility value is hard to measure exactly but the following is a conservative method. The utility of Bitcoin can be defined as the amount of resources is takes to sustain the network. This generally means the cost of mining which is estimated at $4000 a Bitcoin (depending on the country.) The speculation component is a far higher percentage of Bitcoins total market capitalization. People speculate that Bitcoin could tap into the $1 Trillion remittance market, which is dominated by Western Union. Bitcoin is a viable alternative because it is faster to transfer and far cheaper in transfer costs. Similarly, Bitcoin is a viable alternative to Gold because it costs far less to store and transfer. Bitcoin has the potential to be an alternative, uncorrelated asset, like a digital gold. Bitcoin has not penetrated the $1 Trillion remittance market or the $7 Trillion gold market, yet there is speculation that Bitcoin could one day take market share.
Ether is a little different. Ethereum is the platform that most new assets and tokens are created on. These assets and tokens use Ethereum as a means of investment and as the protocol layer that the decentralize applications (or DAPPS) are created on. This means that Ether’s utility value is the fact that it is a necessary platform for most cryptoassets that are created. The speculation for this works by Ether increasing the utility value on the protocol layer as more of these applications are created.
The problem is that Ethereum is largely tied to how well the Alternative Crypto market is doing. One needs to go a bit deeper in understanding the valuation of these applications. It can be argued that none of the applications built atop Ethereum are used. They are mostly concepts with good ideas and strong teams but are years away from having viable platforms. We won’t see a decentralized Uber, AirbNb, or Stubhub for several years. This means that even Ethereum, which I would argue has the most utility, is still overvalued based on where its utility is derived from.
All in all, we have a long way to go before cryptoassets are used more than they are traded. Until that happens, the entire markets valuation is mainly from speculation that cryptoassets will be used frequently, even though almost none of them have any true utility value.’
Article by Mick Sherman, Co-founder and CEO of Hercules Tech