The Fundamentals of Crypto’s $2T Market Cap
Crypto isn’t magic. It’s math. Two trillion dollars worth of math.
We are still, often, asked incorrect questions about the crypto currency markets, like “but what is the fundamental value?”
You have to unpack the word “fundamental.” That word signals a Warren Buffett view of the world: There are companies out there, they have equity shares well specified by corporate law in a particular jurisdiction, some are expensive while some are cheap, and that bargain-shopping can be determined by a spreadsheet analysis of their cash flows relative to others. It’s so fundamental!
The story of such fundamental truth is anchored in our cultural and social history. We can point to the intellectual tradition of rationalism and classical economics, and talk about the theory of the firm, and its production function. We can point to how these things grew out of governance by religion, and natural rights as granted by a deity, and all sorts of other non-empirical hand waving.
We can talk about supply and demand, and equilibria, and describe some agents in a perfect market with perfectly formed property rights. And some of these agents, surely, will be “good” (i.e., cheap relative to performance) and some will be “bad” (i.e., expensive tulips).
Then we look at the real world and learn that markets are imperfect and deceptive, that humans behave irrationally because of their evolutionary biology programming, that top-down rationalist models don’t square with reality, that some of Warren Buffet’s best investments are in fact political and derive from monopoly market structure, and that the whole machine is careening off a cliff into imagination land.
That doesn’t mean that equities traded on a stock market, as circumscribed by their full supporting human history, can’t be valued relative to each other. On the contrary, they demonstrate that having people agree on a mathematical framework for structuring economic exchange can create that specific economic exchange. But we are living in a system that exhibits complexity, and which appears random not due to some underlying randomness, but because of the exponential interaction of underlying mechanisms. Any math that we put around it is an approximation.
And so the financial models we trade on the markets are not companies; they are beliefs derived from financial models correlated to the promise of legal enforcement. The models represent real world activities, and it is that representation that is being priced, bought, and sold.
Let’s assume that we’ve budged your conviction about what is financially real. Turning to crypto networks, we can see that many of the elements of “assets traded on a stock market” do not apply to them. They are not always companies duly organized in Delaware, but often a global smattering of individuals across the Twitterverse. While some deliver…