Curmi & Partners

How do you value Crypto?

By David Curmi

The arrival of Crypto on the financial scene has generated significant interest, and a lot of hype. Returns have been spectacular, albeit with significant volatility, and it appears that Cryptos are becoming more mainstream. A few weeks ago, the European Investment Bank offered its first digital bond on the Ethereum blockchain. This market has come a long way. I do not profess to be an expert in Crypto generally, nor do we as a firm deal in Cryptos, however as an observer I follow some of the developments that have taken place and often wonder what the real value and demand/supply dynamics of this market are. Additionally, it appears that traditional investors, in which I would class myself, are now not asking whether to include crypto currencies in portfolios but how much to include. This leads to questions like how do you treat Crypto? Is it a currency, a commodity, or perhaps even a tech stock?

Citi Research published an interesting piece recently, covering these questions. Through their analysis, they attempted to understand the correlation, particularly of Bitcoin, to other assets traded on public markets. Not unsurprisingly their conclusion was not definitive, but it did point to interesting behavioural links particularly to the way tech stocks trade and to some cyclical commodities.

When asking Crypto investors about the attraction of the underlying asset, perhaps the most common reply remains that crypto currencies will replace underlying national currencies. Whilst this still seems very farfetched to my mind, there are more reasons to believe that this thinking is gaining traction, and the pandemic has perhaps enforced this idea. With governments, through central banks, pumping significant amounts of money into economies, it is not outlandish to believe that there must be a price to this spending spree. Perhaps it could be inflation of some form, or a devaluation of a currency as a result. In this respect, crypto’s characteristic as a store of value, is comparable to that of gold which traditionally has also held these attributes, albeit somewhat loosely. But as cryptos become more mainstream, their use grows, thus legitimizing their concept and possibly even increasing their value as a result. The widespread recognition and acceptance of crypto as a means of payment will be a watershed moment, in many ways. It is quite likely, however, that this process of joining the mainstream will bring with it greater oversight by governments. Currently, the somewhat anonymous nature of cryptos could promote suspicious activity but as their usage grows, governments are likely to pay more attention. The risk of regulatory intervention will also grow. This will take away some of the gloss of owning such an asset.

Without an income stream in the form of a dividend or interest payment attached to it or an underlying profitability, the issue of valuing Cryptos turns to how to assess future value. This is where it gets tricky. The value of each crypto is wholly dependent on their being an underlying demand for it but the driver for this demand is currently more speculative than fundamental in nature. Perhaps this is expected until such time that cryptos join the mainstream. But as mentioned earlier, joining mainstream brings greater risk of regulation. Ultimately the belief, by crypto bulls, that underlying demand will continue to grow is key. And the army of bulls has recently gained high profile supporters such as Tesla and PayPal. Its widespread demand is therefore intricately linked to its widespread use as a means of payment. The attraction of using a Crypto in this way is indeed that it is instant and low cost. There are no banks involved and transaction costs are non-existent. Operating outside the banking system also gives consumers a sense of independence from the banking system, where trust has waned following the financial crisis, various scandals, and the introduction of busloads of regulation that has swamped banks. Looked at in this way it is not difficult to see that crypto is on an irreversible pathway to replacing many traditional transactions that were executed through banks.

Yet, all this does not solve the issue of what is the value of crypto. Despite the attempts, even by the likes of Citi, to provide some scientific backing to what the real value of Crypto is, it remains an elusive target and mixes hype with speculative assumptions that lead to wide variances in valuation outcomes. Notwithstanding this, the point of no return appears to have passed. Cryptos, despite all the controversy they create, are here to stay and the question remains when, not if, they are widely accepted as a means of payment and a store of value. As a person with an investment background, my search for a dependable scientific valuation for Crypto remains elusive. The volatility that has so far been witnessed, though decreasing, is likely to remain a key feature of this market, leaving it only open to those who can stomach the risk for such severe price movements.


The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.