Bitcoin: A completely new asset class?

Every investment that we look at has to fall into one of the following four groupings:

1. Cash Generating Asset
2. Commodity
3. Collectible
4. Currency

Bitcoin “moderately” fits the 3 traditionally listed characteristics of currencies:

1) Store of Value
2) Unit of Account
3) Medium of Exchange

Yet, it struggles to adequately fit all of these roles primarily as the result of its volatility, which hinders its use as a store of value and medium of exchange. If we think about it as a commodity, it is certainly driven by supply and demand. Yet it is not really an “input” for any particular industrial use. There is no “required” floor value like you would see with something like cobalt (you can argue the costs required to mine a single Bitcoin are its floor value, yet those costs are artificially inflated and could correct if it becomes too prohibitive as miners drop off from network and difficulty adjusts downward).

Here’s the tricky part. While it is NOT a cash producing asset like a company is, it does provide a service in a similar vein. It targets three major markets outside of its use case as a store of value or “digital gold:”

1) Remittances
2) Payment Solutions
3) Microtransactions (longer-term goal, as obviously isn’t feasible now)

If one were to think of Bitcoin as a fintech company with characteristics of a currency, it becomes kind of an odd entity to classify. Theoretically, we could argue there is value based on certain market penetration of one of those above markets. We could also argue that the Bitcoin network must have a certain market value to match a required level of utility value in its network.

A lot of this work is in its infancy, but I strongly encourage you to read the book “Cryptoassets” by Chris Burniske & Jack Tatar. There is a section in there dedicated to valuing Bitcoin and cryptocurrencies. Here is a free article by Burniske that gives you a glimpse into the idea of identifying the utility value of a network-based off adoption curves (which essentially act as the discounted cash flow model of cryptocurrencies at this point in time):

https://medium.com/@cburniske/cryptoasset-valuations-ac83479ffca7

It also opens the door of relative valuation metrics such as market cap to transaction volume (usually on a rolling basis). The issue with ratios like these, naturally, is that it is tough to say what is and what isn’t a fair multiple while this is a much easier task in equities because we can take any multiple with stocks and flip it to find a more intuitive metric (e.g: earnings yield). We have plenty of data to support what is and what isn’t fair in equities, but none in cryptocurrencies.

All of this is to say, this is just the beginning of a long road for identifying what exactly cryptocurrencies are. I hope your views aren’t solidified yet — mine certainly aren’t, because there is plenty still left up for interpretation.