Do digital assets have value?

Aug 29, 2021
“They have no intrinsic value. That doesn’t mean to say people don’t put value on them, because they can have extrinsic value. But they have no intrinsic value,” Bank of England Governor Andrew Bailey said. “I’m going to say this very bluntly again,” he continued, “buy them only if you’re prepared to lose all your money.”  - CNBC

While there is truth to this statement, it applies to much more than digital assets. For example, it applies to the pieces of paper that governments issue and call "currency" or to the mix of chemicals placed on a canvas and referred to as "art".

What is clear is that a number of active market participants strongly disagree with the ‘you’ll lose all your money’ narratives and to play devils advocate, we wanted to attempt to decipher how and why certain digital assets have value.

For starters, let's categorize digital assets in two categories:  

(1) currencies that facilitate transactions and/or offer a store of value,  

(2) technologies that have a broader use case (AMMs, DEXs, NFTs, etc).

Currencies & transactions

There are a number of competing protocols in this space – the goal is to facilitate transfers faster, cheaper and in a more secure manner than what currently exists. For decades the SWIFT wire system has been the standard in financial markets. If you need to move money across jurisdictions, you send a wire and know that your funds will reliably reach their destination.

Anyone who has transacted in BTC, USDT, LTC, etc knows the days of the wire are numbered. Interface challenges aside, it’s a far superior mode of transaction than a wire. Now if you have a faster, cheaper, more secure way to transact, is that worth something?

A number of developers have created tokens to solve this problem – the values of these tokens depends substantially on network effects. If the technology offers an improvement and thus users are willing to transact in a given token and it becomes widely circulated, it will have value. Increasingly, these types of tokens’ utility is to facilitate transactions, but may not always represent value beyond the transaction.

Everything else (!)

Everything else is where we think things get more and more interesting. Teams of developers, as is common in the technology space, are determined to solve big problems. Whether it’s decentralizing organizations, while still offering deep corporate governance, like DAO’s or removing the need for brokerage firms to provide liquidity – AMM’s.

Delving deeper, we can examine a token like Uniswap. Uniswap is a decentralized exchange and facilitates the trading of digital assets, very similar to a bank. However, Uniswap does this in a far more efficient manner. To look at it another way, Uniswap and Coinbase have similar trading volumes, but Uniswap has 38 employees vs the 1200+ at Coinbase. So take the UNI token, which allows you to participate in the earnings, governance and growth of a trading platform that functions far more efficiently than one of its major competitors. Do you believe that token has some value?

In summary

Don’t get caught up in the headlines. Value means different things to different people. Innovation that disrupts will always face pressure from those being disrupted.

Keep doing your homework and decide for yourself what has value - here is a great post that attempts to consider digital asset valuation in a traditional finance sense by applying P/E ratios.

Finally, we'll leave you with Camilla Russo’s interview with Arca’s CIO Jeff Dorman, which is a must-listen.

“The Bull Market is Intact for the Next 10 to 20 Years; We are in a Secular Shift:” Arca’s Jeff Dorman
Listen to this episode from The Defiant on Spotify. In this week’s episode, I interview Jeff Dorman, chief investment officer at Arca, an investment management firm focusing on digital assets. Jeff has been valuing assets for the past 20 years, from investment-grade bonds, to high-yield debt and eq…

Avicenna capital

crypto / fintech / macro research

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