How much is any cryptocurrency worth?

As much as someone is willing to pay for it. No more. No less.

The same is true of stocks and bonds for that matter. Prices are determined in an auction market where every happy buyer’s price meets the price of a happy seller. One of the most famous quotes is that of Benjamin Graham, the so-called father of value investing: “In the short run, the market is a voting machine but in the long run it is a weighing machine”. Or as Art Cashin paraphrased Bernard Baruch: “The market is a perception market. When it believes two plus two equals five, it will pay 4 ¾ all day long”.

There is of crouse a difference between stocks, bonds. and cryptocurrencies. Stocks and bonds have both a price and a value. The price is what people are willing to pay and the value is what each share of stock or each bond is worth. Companies who have issued stock usually have revenues, earnings, and dividends. They have a track record of how revenues and earnings and dividends have grown over time and these indicate the value regardless of what price investors are willing to pay for a share of ownership.

Bonds have a coupon, a maturity date, and a credit quality. These determine the value of the bond.

Cryptocurrencies have no revenues. Cryptocurrencies have no profits or any other means to determine value. Even gold has a value. “The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine and to process; and that it cannot be created by political fiat or caprice…,” said Henry Hazlitt.

This explosive curve in cryptocurrency values is all driven by what investors are willing to pay. It reminds me of this piece of recent history as related by Jason Zweig in The Devil’s Financial Dictionary:

“On February 29, 2000, hedge-fund manager James J. Cramer [yes the CNBC guy] gave a speech in which he urged investors not “to be constrained by that methodology” of trying to buy companies that have actual profits or physical assets. Money-losing but fast-growing Internet companies such as Digital Island, Exodus Communications, and Mercury Interactive, he said, were “the only ones that are going higher consistently in good days and bad.” Saying that investors who seek to buy stocks valued at low multiples of their earnings or BOOK VALUE “have already gone astray,” he added: “You have to throw out all of the matrices and formulas and texts that existed before the Web. You have to throw them away because they can’t make money for you anymore. . . . If we use[d] any of what Graham and Dodd teach us, we wouldn’t have a dime under management.”

Only a few days later, the BUBBLE burst. Digital Island, which had traded at $148 per share, fell to $3.40 by the time it was taken over in May 2001; Exodus Communications went bankrupt in September 2001; Mercury Interactive’s shares stopped trading on NASDAQ amid allegations of improper accounting. By the end of 2002, $10,000 invested in these new-era stocks would have been worth a grand total of $597.44. New eras were also declared in 1720 and 1844, among many other times. There will be at least one more during your investing lifetime. When someone tells you the old rules no longer apply, remember what the great investor Sir John Templeton said: “The four most expensive words in the English language are ‘This time it’s different.’”[1]

Jason Zweig, The Devil’s Financial Dictionary

So, what are cryptocurrencies? Essentially they are unregulated legers. The best analogy I have heard compares block-chain to a bank ledger. When you go into the bank and deposit a $100 bill, the teller (at least in the old days there was a teller) takes the bill and marks it into your account as a deposit. Your bank account is your ledger. Leaving the bank, you go to the grocery story. When you swipe your debit card at the grocery store for $80, the grocery store does not physically collect four $20 bills from the bank. The computer-driven banking system adds $80 to the ledger (account) of the grocery store and deducts $80 from your bank account ledger.

Blockchains are essentially ledgers. When person A sells bitcoin or another cryptocurrency to person B, it works the same way as the bank account ledger. There is, however, a very big difference in my analogy. Bank ledgers are supervised by government regulators to monitor that the ledgers are accurate.

There is no oversight of cryptocurrencies. That means there is a potential one day for ledgers to be corrupted and cryptocurrencies stolen from the holders. Scott Sagan said that, “Things that have never happened before happen all the time.”[2] I understand the assurances cryptocurrency advocates make for their products, but the fact is that there is no oversight and there is no regulation.

We have seen a $10 billion hedge fund lose potentially $100 billion in a matter of days. We have seen the GameStop surge inflict billions of dollars of damage on hedge funds. We went through the dotcom bust. We have seen a little tiny strand of 23 pairs of amino acids inflict millions of deaths on humans whose DNA contains over a billion pairs of those amino acids during the pandemic.

After the dotcom bust in 2000, I remember seeing a bumper sticker that said “Please God, Just One More Bubble”. Would it really be a surprise to see the cryptocurrency craze unwind like those dotcom stocks I mentioned? I don’t think it would be a surprise at all.

Cryptocurrencies has even less “value” than did those internet stocks that Cramer liked so much. They are blockchains. Blockchains are essentially highly encrypted computer algorithms. They do not have revenues and are simply computer code. Maybe the person who had the bumper sticker will get their wish, at least with cryptocurrency.

Mike Adams
President & Principal

[1] Zwieg, Jason, The Devil’s Financial Dictionary, PublicAffairs; 1st edition (April 11, 2017).
[2] Sagan, Scott, The Limits of Safety, Princeton University Press; 1st edition (January 9, 1995).