on July 6, 2021
What is Bitcoin worth? What is the true value of Dogecoin or Ethereum? And what on earth is an NFT, and why do people suddenly want them?
These are questions without real answers. Or, at least, the answers are somewhat nebulous. The market decides how much certain cryptocurrencies are worth. Consumers place arbitrary values on NFTs. Because of this, these investments are volatile and unpredictable. Just this year, we’ve seen the value of cryptocurrencies swing wildly up…and plummet down just as quickly. Some people have become “cryptocurrency millionaires,” while others have lost just as much.
Why the wild swings?
It has to do with the very nature of these companies (if “company” really is the right word). They are built on arbitrary standards, rather than anything tangible. Not long ago, investing in a company was a lot more straightforward. In many cases, a company either designed or manufactured a product, and that product was purchased by consumers. John Deere makes tractors, and people buy them to plow fields or spread fertilizer. Nestle makes food and beverage products, and people purchase their products in grocery stores or gas stations. Alternatively, a company could provide an array of offerings. Cargill, for instance, dabbles in food products, fertilizer, seeds, and more. It also mines raw materials and manufactures them. And then there are stores like Walmart or Target, which manufacture their own proprietary goods and provide brick and mortar marketplaces.
Regardless of what these “traditional” companies did, it was easy to point your finger at their goods and/or services and say, “This is what this company does. They offer value because they provide X, Y, and Z.”
With Dogecoin or Bitcoin, we don’t have anything nearly as tangible to point at. What service is cryptocurrency providing? What value does it have and why? The answers to these questions could vary from day to day and from person to person. In reality, we don’t really know what they’re worth. They are nothing like John Deere, which sells X number of tractors in a given quarter and makes X dollars in profit. Instead, these cryptocurrencies are worth something because people say they are worth something, and that’s…something.
The social media challenge
In between Dogecoin and John Deere are companies like Facebook, Twitter, and Snapchat. They provide a service, but it’s exceedingly difficult to pin down how much they’re worth. How do you put a price on free entertainment? What is the value of sharing posts or liking photos? In the early days of these companies, it was difficult to quantify their worth. Lately, however, these social media companies are making very real profits through paid advertisements. That is something an investor can put their finger on and understand.
But what about the other big asset these companies have? I’m talking about, of course, your DATA.
Personal data is enormously valuable and difficult to translate into dollars. How much is it worth to know someone’s age, gender, income level, and political affiliation? How does Facebook price that information? That’s where things get sticky and investors are forced to guess at a social media company’s true worth. Is it as nebulous as cryptocurrency? Not quite, but it’s definitely less tangible than tractors!
All of this is to say: part of me longs for the simple, pre-internet days of investing, when a company was a company was a company. There was never any mystery about the goods or services offered. Either they sold their goods/services and made a profit…or they didn’t. Call me old fashioned, but there’s something comforting in that simplicity. Do you agree?