What is Value
- Introspective Investor
- Aug 21, 2024
- 4 min read
Updated: Aug 26, 2024
Value is both complex and extremely simple. The noise in the world generally creates complexity. Noise creates volatility in asset prices and some assets will go to astronomical heights and trick the general public into thinking there’s value. This concept happens continually throughout history in the tulip mania, various US housing bubbles in South America, technology internet stocks in 2000, 1920’s America, and many more.
Value
Value of anything is directly related to the return received. For a company, house, or any capital investment value is the sum of all future cash flows. Economics uses a term called utility to describe return on products/services bought. Utility is the difference a customer will pay between services. It explains the reason customers purchase an iPhone over an Android or choose Dominos over Pizza Hut. The value of anything needs to be tied to a return. A customer purchasing a nice holiday sweater isn’t expecting future cash flows but is respecting a return of feeling good for a certain period of time from this sweater. Branding matters for utility purchases. Other times, customers will choose a product that is the most cost efficient. In this case branding doesn’t matter, but the amount saved does.
Capital investments are different than consumer purchases with utility. Capital investments are solely based on the sum of all future discounted cash flows. This applies to the stock market and applies to all economic businesses.
Crypto Value
Today, we are experiencing a plethora of new enterprises creating decentralized apps on web 3.0 that operate via transactions in their own coins. The concept of web 3.0 is exciting because companies can leverage faster more secure transactions in their operations. Much like oil created massive efficiencies in production and natural resources continue to increase efficiency, crypto networks will in some form impact the efficiencies of computer networks. This makes crypto valuable to a point. But there are so many more unknowns that are overlooked by the general non-financial public.
What crypto will provide value? Or will real-world companies just create their own blockchain for their operations?
What will the true value of that crypto be? Just because something has application in the real world, doesn’t make it high value. Take oil for example, the price of oil in 1863 was $62 per barrel. Oil didn’t reach that level again until 1979, 100 years later.
Oil Value
Oil is arguably the greatest commodity in human history, yet the “value” according to price of oil only increased by 100% since its modern day use in industry. I’m aware that supply was not fixed during that time and if supply was fixed, the price increase. Putting into perspective the current crypto environment, place yourself in 1870 and confidently declare that you’ll put all your money in oil because it’s a commodity (unknown to be so abundant at the time) that will change the world. 50 years of confidently holding oil until retirement, you would sell your barrels for $20, or at a 67% discount from purchase in 1870.
Oil wasn’t valuable to hold as a commodity, oil was valuable to the companies (like Standard Oil) that drilled, refined, transport it, and sold it. Standard Oil was only valuable because there was a market for this black gold called oil that industrial companies and consumers wanted. Oil made production more cost efficient and cash flow rich while consumers enjoyed the progressing nature of fast travel and modern-day amenities.
Oil creates massive amounts of value (cash flow) for companies, oil is not valuable independently.
Airline Value
Airlines is another example of an industry that changed the world but with relatively little value to the investor because the cash flows are so poor. The sheer economics of airlines are bad. The fixed costs are ridiculously high and each flight has a capacity for the amount of revenue possible. This fixed capacity naturally creates a slim gross margin (10.3% in 2019)! The net income is worse, net income of airlines is usually negative. The last ten years, Delta and American Airlines had negative income margin. Airlines destroy value for investors but are highly utilized by the public. The only reason airlines exist is from government support. This is ironic as maybe crypto will succeed do to its utilization but only with government (or company) support.
Currency Value
Currencies value is based on the utility to hold value and be universally accepted to execute transaction. Entities do not hold currency for the sake of holding currency, currency (or some hard asset) is held because there’s a belief the user can purchase products/services. Currency must be universally accepted (The United States used Tobacco at one point) as a transactional vehicle. Second, the price of a currency is based on scarcity (inflation) and transaction volume (velocity). Inflation is a complex issue because there’s multi facets to inflation. Inflation can occur against the products/services in an economy (CPI), inflation can occur against the basket of companies in an economy (S&P 500 price), or inflation can occur against another countries currency (USD exchange rate.)
The crypto value proposition is that it’s a fixed supply but everyone will use it. The two contradict one another. Fixed supply will drive the price up, but use (velocity) will drive the price down. If everyone “holds” crypto so the price increases against the USD, then where is the value? The true value in Web 3.0 is the utility as a commodity, not as a cash generating asset. Web 3.0 will be highly utilized at some point, but this doesn’t mean there’s investment value.
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