Just a few basic microeconomic assumptions and a reduced money flow (DCF) framework will help make cryptocurrency buying and selling decisions.
I’m not a crypto expert and positively not a crypto “brother”. I haven’t got a robust opinion about whether cryptoassets are undervalued or overvalued, in regards to the way forward for money and commerce, or a couple of fad that we’ll all look back on with amusement. Nevertheless, I imagine that crypto investors can apply a logical evaluation framework that enables them to make sensible and informed crypto investment decisions.
By applying a reduced money flow (DCF) model, counting on microeconomic principles as inputs, and using gold and other commodities as guides, we are able to define a price range at which we are able to expect an affordable, risk-adjusted return over a time period given time horizon for a particular cryptoasset.
Because crypto asset prices are directly observable, using a DCF valuation framework we only have to estimate a future price or range of future prices for a given crypto asset that we are able to discount back to the current on the required cost of capital. The net present value of our expected future price would equal our estimated intrinsic value today. By comparing with spot prices we are able to make our purchasing and selling decisions. Admittedly, some elements of this future price estimation process involve a high degree of uncertainty, but others might be reasonably estimated with modest effort.
For example, we all know that profit-maximizing firms produce in the long term only when marginal revenue exceeds the marginal cost of production. Therefore, the marginal cost of mining a crypto coin sets a minimum price around which the availability fluctuates. In the case of cryptoassets, the variable costs are fairly easy to estimate – computing costs/energy consumption, taxes and transaction fees – and since computers might be turned on and off quickly, mining activities might be quickly adjusted to cost fluctuations. In fact, we are able to see this fast response function at work once we contrast hash rates with spot prices or estimated mining profitability.
Accounting for pre-determined “halvings” within the mining algorithm and estimating future variable costs related to cryptoassets is comparatively easy and simple. Additionally, crypto miners are prone to require an affordable return on their physical capital investment over time, so we also need to incorporate an estimate of the long run cost of hardware in addition to other capital and glued costs. With estimates of variable costs, fixed costs, and the assumed required capital cost for miners, we are able to calculate the worth range at which a crypto asset shall be mined, thereby establishing the worth floor at which we expect it to trade.
Estimating the worth ceiling of a crypto asset, or the extent to which the actual price could exceed the worth floor, is harder since it is determined by demand, which introduces a high degree of uncertainty. But all investing involves uncertainty, and investors use various logical approaches to take care of it.
For example, we are able to evaluate different demand drivers that influence cryptoasset owners by valuing them as money. Like gold, cryptoassets are generally divisible into smaller units, countable and fungible (unit of account), utilized by some to hedge against inflation (store of value), and used to purchase and sell goods (medium of exchange). Therefore, cryptoassets generally meet the factors for outlining money, which allows us to measure the demand of a cryptocurrency based on its value as money and, particularly, its utility in these use cases.
As a store of value, the worth of a crypto asset can rise if confidence in fiat currency collapses or fears of inflation or hyperinflation increase. As a medium of exchange, a crypto asset can increase in value the more it’s utilized in domestic and international trade as a method of shopping for and selling goods and services. We could include a requirement component based on the attractiveness of their anonymity – useful for each legal and illegal purposes – and we could even include our expectations about how central banks might use cryptoassets to diversify their holdings in the long run.
The value of a crypto asset in these different use cases would influence the demand and due to this fact the worth of the crypto asset itself. Presumably, the sum of the advantages of a cryptoasset exceeds its costs and cryptoassets would live on.
The point is that, as with all investments, there are some assumptions to be made about future conditions, and as with gold, a number of the key assumptions relate to potential demand. Unlike gold, which has an extended history and due to this fact provides some sense of what demand from different users will reasonably seem like, cryptoassets lack an extended history of use and demand; Its history as money remains to be being written.
However, that is where the investor’s individual assumptions come into play: their personal risk tolerance, their investment goals, objectives and wishes, and ultimately their personal determination of the potential risk and return of whether a crypto asset is a horny investment given their risk and return expectations is. We may all argue in regards to the inputs and assumptions that go into the framework, but in spite of everything, that is precisely what makes financial markets work; the interaction of hundreds of thousands of investors who apply their very own assumptions and expectations to varied investment opportunities, using a logical framework to avoid speculation.
That brings me to my answer to Parker’s unanswered query: “At what cost?” I do not know at what price, but I know the way someone who desires to answer that query could answer it themselves.
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