Speculate in high-risk speculative assets (similar to gambling) and then invest back in assets that you believe are stores of value.
Written by: polynya
Compiled by: TechFlow TechFlow
This article, written by cryptocurrency analyst polynya, explores the question of why most crypto assets are wildly overvalued. The article emphasizes that although the cryptocurrency market has experienced rapid growth, this is mainly due to their function as an alternative or speculative store of value rather than actual productivity. Polynya pointed out that the value of a large number of crypto tokens is inflated and the lack of real product-market fit behind the products has led to value inflation and a disconnect with reality throughout the industry.
Cryptocurrencies have found most product-market fit by serving as alternative or speculative stores of value. This is why Bitcoin still dominates the market, even after 15 years. Ethereum has also shown currency properties since 2020. Together, the two account for over 75% of the market share (excluding stablecoins), and are even higher in terms of liquidity. We also see a lot of demand for tokens like XRP and ADA.
Cryptocurrencies have been subject to a variety of theories over the years – with fanciful theories about imminent global economic collapse not uncommon. Ironically, the global economy is actually very resilient, with economies continuing to grow and productivity reaching new highs year after year. This has led to greater demand for alternative stores of value such as BTC or ETH. Cryptocurrencies have been riding high on demand for the currency.
This creates a new economy based on BTC and ETH. The problem is, productivity in this new economy is very limited. This is to be expected when the vast majority of value comes from simple holding and speculation.
Here, speculation becomes key. You'll find 70 cryptocurrencies with a market capitalization of over $1 billion. Many tokens have been around for years but have negligible product-market fit. They have been transformed a dozen times but have still failed to find any useful purpose. The product-market fit potential of new tokens is clearly very limited for the foreseeable future, yet they are overhyped to the tune of billions of dollars. The end result is that tokens that are only supposed to be worth a few million will likely one day be worth billions of dollars, while hundreds of apparently worthless tokens are still worth millions. , this is because of the huge speculative premium coming from the backbone of the industry, which is the store of value. There is also the small issue of people mistaking infrastructure as a driver of demand rather than currency and speculation, but I've discussed this multiple times on my blog.
To be clear, there are some assets in the crypto space that are actually productive, but they are few and far between, and for the most part, they are undervalued relative to value stocks.
So what's the solution? There are no solutions to this, it’s just the nature of this industry. Speculate in high-risk speculative assets (similar to gambling) and then invest back in assets that you believe are stores of value.
Of course, all assets have a demand cap. We've already seen Bitcoin's exponential growth end in 2017, with growth rates declining since then, barely keeping up with the Nasdaq. Bitcoin’s diminishing returns will continue until the market for alternative stores of value and related monetary properties approaches saturation. This will result in the market cap of these heavily overvalued tokens slowly declining to almost zero after years of sideways trading.
For now, however, the crypto market remains the craziest, most out-of-touch, and most uncontrolled casino market in the world, one that may be around for longer than most people think.
