The price of an asset today (stocks, real estate, etc.) is based on the supply/demand relationship of that asset. It’s not based on the discounted future cashflow. That’s why a financial market can easily crash 50% without any change in expected discounted future cashflow.
The Bitcoiners believe the demand for Bitcoin will grow, therefore it’s price will rise. It doesn’t need to generate cashflow. You can sell a bitcoin for $20k today without any cashflow.
The Bitcoiners seem to believe that if and when fiat currencies end, the replacement for them will be Bitcoin, therefore the demand for Bitcoin will rise and with it the price. It all hinges on that. Cashflow is irrelevant to the discussion. It’s more like a barrel of oil, which has no cashflow but has a utility, i.e. Bitcoin has no cashflow but if it replaces fiat currency then it does have a utility (as a medium of exchange).
This can be true in the short run. Benjamin Graham said: “ In the short run, the market is a voting machine but in the long run, it is a weighing machine.” So, in the long run, the market share price tends to follow the earnings of the underlying business, especially for well-known companies, with a decent level of stock liquidity.
Earnings determine the fair value of a company. What is the fair value of Bitcoin? Can anyone estimate the fair value of BTC?
Yes, just like people bought Pets.com stock at its IPO for a price of $11 per share in the dot.com bubble – just to fall to $0.19 on the day of its liquidation announcement. The same happened with eToys, Kozmo.com, UrbanFetch and many other companies that were bought at stratospheric prices, even though they were not generating any profits/cashflow. People had high hopes for those companies. Only hopes, not real earnings! This is how life-time wealth gets evaporated!
If and when? Is this the right way for people to invest their hard earned money? If and when ?!
Having said all that, I’m not an expert and I am not qualified to give financial or investing advice.
Having said that, it’s a fallacy to compare oil with Bitcoin, because oil has some utility. One can burn it to cook food. But what can one do with Bitcoin? I think Munger described BTC accurately when he compared it to turds. Actually, no. Even turds can have some utility. It can be used as a fertilizer to help grow food. So, I disagree with Munger. BTC is not like turds. BTC is worse than turds.
So, once again, I don’t like oil. I like companies that satisfy the following conditions:
They produce products and services that people need now, and are likely to need for the next 20 years.
They have a durable competitive advantage. Things like cost leadership, high switching costs, network effect, intangible assets such as brands and patents, legal requirement etc.
They are unlikely to be disrupted by technological advancements.
They’re offered at a reasonable price.
Let me share with you some examples, from my watchlist: Procter and Gamble, Colgate-Palmolive, Waste Management, Johnson and Johnson, Flowers Foods, AptarGroup etc. (This is not a recommendation to buy any of those companies, by the way – they’re mere examples from my personal watchlist.)
I believe those companies satisfy the first three conditions but may not necessarily be satisfying the fourth condition at this moment in time.
Imagine someone buys those companies when they’re offered at a discount and then holds them for life. I think he is likely to make handsome money.
Compare that to holding BTC for 20 years (assuming it will still be there after 20 years)!
I would not buy them, not even for $1. I believe investing needs discipline. I’ve seen people deviate from their investing strategy, with dire consequences.
Benjamin Graham, said that “the investor’s chief problem—and even his worst enemy—is likely to be himself.” I think he is pointing to succumbing to emotions, such as greed or fear.
Finally, I’m not a qualified to give financial/investing advice, so take what I write on this forum with a grain of salt.
Yes, because I don’t believe in hopping from one investment method to another. I’ve seen enough people do that to be convinced that it’s not the wise thing to do, no matter how tempting the situation is. One of the worst things that can happen to an investor is for him to make a lot of money by implementing the wrong method, because he will be bound to repeat it in the future. It won’t work, every time. I prefer to stick to the tried and tested method of buying great businesses at a reasonable price.
I answered it. Let me repeat. It’s very difficult to estimate the fair value of a barrel of oil. That’s why I avoid it, because I can’t estimate its fair value.
Anything without predictable future cashflow is dismissed by me, immediately.
Now, answer me this please. BTC is sold for $24,437, as of this writing. Is this the fair value of BTC? Or is it the $64000 that it was priced at in November, last year? How do you know whether BTC is sold at a discount or at a premium at its current price? Is there a way of knowing?
I don’t really care what the fair value of Bitcoin is.
All I’m saying is that the fair value of something is not, as you said, the discounted future cashflow.
One of the other definitions of fair value is just the market price, which is based essentially on supply and demand.
In terms of what I think the fair value of BTC or some stock is - I don’t really care and that’s not my point.
The only point I’m making is that if something doesn’t generate any cashflow that does not render it worthless, which is your position. You applied this to BTC and concluded it was worthless. Please correct me if that is not what you said.
That is too narrow a definition of where value comes from.
And don’t change the discussion to some other point…just to repeat…I’m not here saying that Bitcoin has a specific value of x…I’m just explaining that your understanding is incomplete.
talking about fair value here is a tweet from Brian which explains well
but for btc its like reserve currency of internet (maybe of the whole world soon). whenever you wanna launch a coin you provide liquidity with btc on exchanges (Cex + Dex), also look at the longterm holders chart, it tracks the wallets that haven’t moved there btc for more then a year + institutions and real companies holding. you can pretty much estimate how much its locked permanently and how many people are actually interested in this asset class
its not just bunch of code, what it takes a whole bank and its crew to do in in the span of days it does that in seconds
you wont have to wait for companys earnings every quarter and having doubts if the company is lying because if the project is using open and immutable ledger( Blockchain) to keep the data. it will be available to anyone any time of the day and untempered.