Today, publicly traded stocks on NYSE saw their largest point decline in history, an event that focuses the mind on one thing: what’s the real value of an asset? So much of what we bake into a price has psychological roots—goodwill, brand recognition, perceived momentum, etc.—that when the day of reckoning comes, owners of those assets frequently find themselves undone by their own beliefs.
We’ve seen this recently: BHP went from a high of $35 a share in 2014—roughly the height of the mining boom—to the depths of $15 a share just eighteen months later. Yet if BHP had gone into voluntary liquidation, and paid its creditors off, distributing the remaining funds among its shareholders, each of them would have received more than that ultra-low share price, because BHP holds vast assets in mineral rights and mining operations that have value to one of their competitors.
The market eventually prices assets correctly—the key word being ‘eventually’. A market tries to price an asset by getting it wrong repeatedly for ‘longer than you can stay solvent’. That’s how it works for known quantities like industrial or service sector businesses.
So what about these weird, digital beasts known as ‘cryptocurrencies’? What does this ‘magic internet money’ have to do with anything as tangible as a mine? How can we compare one asset to another?
On the face of it, Bitcoin—the archetypal cryptocurrency, proposed in a 2008 white paper, then ginned up out of computer code just a few months later—is backed by nothing other than itself. Bitcoin true believers make the same claims for ‘fiat currencies’ such as US and Australian dollars. But both of these currencies are implicitly backed up by the full faith and credit of those nations—and by a long history of careful management of those currencies by the US Federal Reserve and the Reserve Bank of Australia. Our state currencies are real, not simply because people believe in them, but because prosperous nations will defend them.
Who defends Bitcoin? It’s argued that Bitcoin needs no defence, that its mathematical foundations in cryptography (hence ‘cryptocurrency’), transparency and verifiability mean that you can always check the Bitcoin books for yourself—and it’s almost impossibly difficult to ‘cook’ those books.
So Bitcoin needs no defence, and it has a legion of believers—doesn’t that mean it has value? After all, an asset is worth what someone is willing to pay for it—and people have been willing to pay up to AUD $23,000 per Bitcoin as recently as mid-December. Recently, however, there’s been a huge crash in the Bitcoin price, hovering near AUD $9000 as of this writing, erasing the last year’s gains.
True believers scream ‘HODL!’ (Hold on for dear life) on Reddit, but a lot of folks—who got into the market at its highs, and have seen nothing but losses accrue—must be wondering how low it can go. If Bitcoin truly is backed by nothing at all except some clever maths, does it have any real value? Can the value of Bitcoin go to zero?
I’d argue the answer is no—and the reason is actually fairly obvious: Ask most folks if they’ve heard of Bitcoin, and they’ll say yes. They may not know exactly what Bitcoin is (beyond ‘magic internet money’) and they may know nothing about cryptocurrencies or how a ‘blockchain’ works (that’s the technology that makes Bitcoin open and transparent and verifiable), but they’ll have heard of the currency itself.
In marketing terms, Bitcoin has pervasive brand awareness. That awareness took years to build, has reached nearly every corner of the planet—and is worth motza.
How much? Any global brand conducting a global marketing campaign to bring a new product to market would expect to spend at least hundreds of millions of dollars over the course of that campaign—over several years, costs could well run into the billions.
Consider what Apple has spent to make the iPhone the most desired technical object on Earth: that figure that easily runs into the billions, and money well spent. This brand investment turned Apple into the first a trillion-dollar corporation.
Bitcoin wouldn’t be worth as much as Apple, but its brand awareness has spawned an ecosystem of products and services that use Bitcoin, merchants that can accept Bitcoin, exchanges that will convert Bitcoins into AUD or RMB or what have you, and all of that infrastructure required investments of labour and capital. All of this investment can be counted as assets in Bitcoin’s ledger.
Bitcoin is a globally recognised brand with a global ecosystem of applications. Is that worth a hundred billion dollars? Probably not. Is it worth ten billion? That seems at least within the realm of possibility. Without making a call on any ‘floor’ for Bitcoin’s price, I’d like to point out that the closer the trading price of Bitcoin comes to the price of the assets I’ve just listed, the more likely it is that the market will respond rationally, pricing that into the price of Bitcoin.
The ride from here to there is guaranteed to be a roller coaster.
Mark Pesce is an inventor, writer, entrepreneur, educator and broadcaster with 35 years working in technology.