Why Tokens Have Value
I would like to have a discussion about why crypto assets have any financial worth at all. Because, you can’t eat them can you? The argument laid out by crypto opponents is that there is no foundation for assigning value to crypto assets, they throw off little in terms of free cash flow and there is not much you can do with them besides trade them for each other. To this camp, crypto assets are most akin to baseball cards or art, they have no value on their own and rely on the “bigger idiot” theory for price appreciation. This observation misses the point completely, crypto assets have value, and a lot of it, precisely because you can trade them for each other (and much more).
Value, for the purposes of this discussion, is going to be defined as financial value. Financial worth is the reason I can trade some Bitcoin for a car (or anything else). We want to understand what gives value (worth) to crypto assets, and we also want to understand why, when speaking of quality crypto assets, there is no need for a “bigger idiot”. This can be done when looking at alternative investments, such as collectibles.
When speaking of true collectibles, the things that go for the largest amounts at auction decade after decade, the main feature of these is that they have reached a point where they are accepted as mediums of exchange. I can trade a rare baseball card for pretty much anything I want, at the right price there will always be a dealer willing to meet my needs. Not because he intends to make a huge markup by transferring it to “a bigger idiot” later, but because he knows that he can transfer it in the future for some value. Collectibles and crypto assets are primarily mediums of exchange. This is the reason they have financial worth.
There are few crypto assets that have reached this “medium of exchange” point, but they are easy to define. These are assets which are still being actively developed 5 years after release; only about 8% of all launched crypto assets today will be here 5 years from now. By this point they have either become mediums of exchange or disappeared from the market.
Ethereum is a great medium of exchange, and it would be hard to argue that it has no real financial worth even though it throws off limited free cash flows. There is no “bigger idiot” when it comes to Ethereum, we can be sure that for the foreseeable future, we will be able to trade Ethereum at some price for other items we may desire. It has become a medium of exchange, even if only in crypto circles. As the mass of things we can trade in exchange for Ethereum grows, so will the foundation of its financial value widen.
Other things that people consider to have value are prime examples of this. Gold is my favorite. You can’t eat gold, and making tools out of gold would serve no tangible purpose. It does have industrial applications, but really, the bulk of gold’s value and the reason that so many people hoard it voluntarily, is because we can be pretty sure that at any point in the foreseeable future we can trade our gold easily for anything else we might need. It is an outstanding medium of exchange, accepted pretty much universally and across cultures.
Gold does have practical applications, but so do crypto assets. You can store your data in a decentralized cloud in exchange for crypto, you can use a decentralized world computer. But, really, like gold, crypto derives most of its value from the fact that we can trade it with others. Trading came first, financial value grew out of it.
I am not trying to complete the argument as I have in previous articles and state that crypto assets have value because they are in fact “money”. After much self-reflection, I have come to the conclusion that crypto assets make inefficient money. They are poor stores of value, regardless of long term trends, crypto assets can lose 50% of their value in terms of fiat in a matter of hours. Or minutes. Because of this they are also poor units of account. The worth of my real assets in Bitcoin right now will not be the same number of Bitcoins in a few hours. Even if my real assets experience no change. The argument I am making is that crypto is a fantastic medium of exchange, and this is the source of any value it may have. Being exchangeable makes you valuable.