The Magic Lock Box
There is a magical lock box of intrinsic value, and it accrues credit every time a crypto ecosystem grows or gets used. This magical lock box has nothing to do with any assets “price”, as matter of fact, the value of the contents of the lock box, and what the lock box can be sold for, are often dizzyingly different numbers, this is the type of value opportunity we seek to take advantage of as investors. Crypto is unique in the sense that it is much easier to estimate the value of the contents of this lockbox without doing too much work and while still being reasonably accurate; unlike when, say, looking at a traditional stock. All we have to do is look at a tokens “ecosystem of value”.
The”ecosystem of value” idea is appealing on several levels. If I own Bitcoin, I own this lockbox that receives a few units of value every time someone interacts with this ecosystem. A new webstore starts accepting Bitcoin as payments? Ching-ching, I get some value. Someone starts using Bitcoin for the first time? Ching-ching, I get some value. You can feel the weight of the lockbox increase, from the sheer number of things happening within the ecosystem. A large or growing ecosystem of value suggests a weightier box than, say, an ecosystem which has stagnated. In crypto, growth is impossible to hide, or fake.
This is unlike a traditional market, where a company may open a chain of stores across the country. The fact the stores were opened tells us very little about the growth or intrinsic value of the company, because the expansion was likely financed with debt. Compare that with most crypto assets where expansions to the ecosystem and code are carried out with grass roots in mind. Most feature improvements to a crypto assets native code are volunteer driven, and even large industry level interactions have a heavy grass roots component in conception and deployment. The fact that Bitcoin can not take out a bank loan, is a feature, not a bug. There is no debt hiding anywhere to cripple our analysis of intrinsic value.
There is a dark side however, and it is the impermanence of value accrued in our lock boxes. Although my magical box is locked at all times, coins have a way of disappearing from it when growth begins to slow and the ecosystem begins to shrink; as it will from time to time. Remember that asset prices can continue to moon, even as coins are no longer being added to the lock box (growth and interactions within a tokens ecosystem die down). But as Ben Graham teaches us, prices will always tend toward value over the long term. For what is the accumulation of lockboxes held by all token holders in an asset like Bitcoin, but Bitcoins own intrinsic value as a whole?
Intrinsic value also needs to be unlocked however. Size of the ecosystem, growth, etc. mean very little if users are not engaging with the ecosystem in meaningful ways. It is perfectly possible to have a large ecosystem with low engagement numbers. This would suggest a phantom or “skeleton” ecosystem which looks robust from afar, but is non-operational close up. Several “layer 2” scaling solutions have been adopted on an industry scale, across protocols, but they garner very few users. If these solutions put out their own tokens, they would be very unwise investments.
Frauds such as “Bitconnect” had massive ecosystem growth, but I would argue real engagement numbers within the ecosystem were probably very low. What are “real” engagement numbers? Things like user to user transfers, grass roots adoption by merchants and industry level adoption in mainstream enterprise. From the user to the enterprise level, engagement is a key metric of value.
Without unlocking intrinsic value, the credits we receive in our lock box as the ecosystem expands are worthless, because the expansion is artificial and in name only; like a ghost city with really tall skyscrapers. An active ecosystem of value is the only means to create long term intrinsic value for a crypto asset. One without the other only fills our lock boxes with (light as air) monopoly money. As long as the infrastructure in the ecosystem is growing and being used, we will satisfy Graham’s incessant search for intrinsic value.