This article will tell you important points about crypto currency and there are four specific points that I would want to cover that will help you develop a holistic understanding of what cryptocurrencies are and what are some of the existing good cryptocurrency and why these are good cryptocurrency.
Concept of bubble and intrinsic value
The first concept is that you must understand the concept of bubbles and intrinsic value right? So these are very hi-fi finance terms. So place do not worry about it. You just simply need to understand these things for examples. So in 2008, you must have heard that there was a financial crisis that was a housing financial crisis.
Now if you go and ask your investment banking freinds that, hey , why did financial crisis happen? They would say that ok, you know what? There was a housing bubble it burst and Banks collapsed because of it now that’s a very super Complex financial definition.
But the keyword that you need to pick from that conversation is that there was some kind of bubble or housing bubble or real estate bubble that was forming on.The story behind it is very elaborate. But the simple explanation is that banks, commercial banks, they were giving loans to anyone literally anyone on the road to go and buy houses. Why? Because the bank believed that the housing prices will always go up.
It will never come down. So in case the borrower of the loan is not able to repay the loan to the bank . The bank can sell off the house and make money. So that was the simple philosophy. It was called as subprime crisis. So subprime mortgage crisis. But essentially the simple dynamics were that the banks ended up giving loans to people who could not afford to pay the banks back. And the housing asset as a result collapsed and the bank’s had to take a lot of hit, financial hit, ans the 2008 crisis happened.
The simple three word answer to why did 2008 financial crisis happened, because the real estate bubble burst. So it’s a four word answer. So essentially there are these bubbles that are created in different asset classes in economics, and you need to be wary these bubbles are forming and in which asset class these bubbles are forming.
So there have been amazing financial stories around it. I’ll probably make a dedicated article on this that what was tulip bubble, tulip mania. In nineties there was a dotcom burst. Agni burst, why? Because the bubble burst. In 90s, there were companies that thay did not have any business model at all, like zero business model, but they were internet based. So they were going to investors, pitching them lucrative dreams and raising millions.
So this is a concept that was covered in the peter Thiel’s book also, which is called a zero to one. So give it read you will understand this concept of bubble more, that why did nineties crisis happened. So the first key point that I’m trying to conclude here is very simple, that in any economy, there are certain asset classes, be it real estate, be it stocks, be it small caps, be it debt, there will be certain bubbles forming here and there. So you should be away from these bubbles right now.
How is this applicable to cryptocurrency? So there are four and a half thousand cryptocurrencies right now. Now, of course, many of them will be in a bubble, right? So you don’t need to go and invest your money in 50, 60, 70 cryptocurrency. You just simply need to pick some good fundamental crypto currencies where the intrinsic value is high.
You need to invest in cryptocurrencies where the intrinsic value is high. Now all assets have some intrinsic value. Now, the intrinsic value is super easy to understand, agian, very complex financial concept, but I’ll explain it in a very simple manner. So let’s say that ITC stock is trading at two hundred and ten, and that is the market price.
Is this the intrinsic value? No, this is the market value. Intrinsic value is the present value of expected future cash flows. But essentially what is happening is that you have a business called as ITC that is generating cash flow in year one, let’s say, it generates hundred crores, in year 2 generates 200 crores, it year 2 it generates 300 crores. You need to discount it back and that gives you intrinsic value. So that’s slightly complicated financial model. Don’t worry about it. Now the intrinsic value of any asset can be estimated.
That ITC’s intrinsic value should be exactly this amount. No, it doesn’t work that way. Intrinsic value is a subjective term. People come up with their own definition and analysis and estimations of these intrinsic values. But you as an investor need to have a sense that which assets, whichever assets, be it cryptos, stocks, whichever assets you are investing your money in, it should have a certain intrinsic value.
If it does not have intrinsic value, than you are ingesting in a bad asset. Now let me help you understand my top three cryptocurrencies that I feel have strong intrinsic value. What is the exact amount that is very hard ascertain because this is an evolving technology. Now , why do I think these crypto currencies have some intrinsic value?
Now, the first famous cryptocurrency that has intrinsic value is bitcoin. Now bitcoin. Some key points about bitcoin. So the first key point that you need to understand about bitcoin is that bitcoin was envisaged, or bitcoin was imagined as a replacement of currency. So it was seen as something that could replace what is called as flat currency.
So flat currency means that you have INR, you have Singapore dollars, you have US dollars. All these are government backed currencies. So bitcoin was seen as a replacement to this currency. So it was, so bitcoin is essentially a cryptocurrency and it is one of kind. It is seen as a currency, a right measure to compare bitcoin is with gold.
Now, if I ask you that, what according to you, makes gold valuable, right? I’m essentially asking that what gives gold intrinsic value, intrinsic value? You would say that gold has been in existence for years, centuries. And the things that makes gold valuable iss the scarcity that there is a finite supply of gold. And because of the fact that there is a finite supply of gold, gold becomes very valuable. It has been 8n existence for centuries now. Even fiat currencies used to be gold backed.
But what that means is that if the indian government wanted to print, let’s say, 1000 crore, than they needed to have that much amount of or that much worth of gold in their reserve, and only then they could print this money. But then we moved away from this standard, we then moved away from this standard, we moved away from the gold standard. And that is where the problem emanated from. So the believers of bitcoin.
That the believers of bitcoin believe in something called as decentralization of currency, that bitcoin is not controlled by anyone. There is a finite supply of bitcoin. That is what gives intrinsic value of bitcoin. Because , number one, there is a finite supply of bitcoin. There are only twenty one million bitcoins.
Number two, the process of mining. So there is a process called as mining of bitcoins. These twenty one million bitcoins have to be mined over a certain time period. Now the mining process is very extensive.it is very time consuming.
It involves solving a lot of complex mathematical equations. So this mining process is tough. So it’s not as if it’s money lying on the road, you just go and pick it. It’s a complex method. It again makes the bitcoin have intrinsic value.
The third thing that gives bitcoin power is the network. This is called as block chain network.