2 min read

Pricing public goods

What does cryptocurrency represent? It's often treated like stock in a company, but there is no company. Is it just meaningless bits on a computer with no profit being generated? Why are some tokens priced higher than others?

These are crucial questions to understand what you're buying and avoiding ponzi schemes. Some projects issue rewards without generating enough meaningful utility and profit. Their tokens are propped up by hype and trading activity. When things start to slip, everything crashes hard (looking at you Do Kwon).

So how do you investigate and price crypto to determine if it's a good buy? Follow the money.

Token prices rise due to increasing demand and/or decreasing supply. Most tokens are inflationary. Purely deflationary coins might sound good, but it's an odd choice and I'd approach it with skepticism. That leaves demand as the primary cause for price movement.

Now you have to ask why there's demand (or why there should be for new projects). If it's a dApp token that generates profit for holders, that's a clear cause for demand. Just be sure you understand how the profit is generated. Avoid unsustainable plans.

Blockchain tokens like BTC, ETH, and KOIN don't generate profit for holders. You have to do additional work to earn a profit from blockchain tokens.

BTC has demand because it has a limited supply, brand recognition, and it's fairly widely accepted relative to other crypto. In certain countries, it's even treated as a currency and not subject to capital gains when you spend it.

ETH has demand because it provides utility on the most widely used dApp platform. Every other token and NFT is traded for ETH. Gas fees are paid in ETH. If you want to use the most interesting applications in the space and invest in other projects, you almost always need some ETH.

KOIN follows the same logic, with the substitution of mana for gas. People holding this token believe in the importance of a free-to-use alternative to ETH.

Blockchains are public goods (like the Internet), not companies. Tokens are needed in order to use them. That's what drives demand. You price the tokens based on how much usage there is today, the rate of growth, and the potential for future usage.


P.S. Speculation really muddies the waters. Most blockchains don't have usage to back up their price today. The question is whether usage will continue to grow.