Viewpoint: Why Are Most Cryptocurrencies Overvalued?
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Viewpoint: Why Are Most Cryptocurrencies Overvalued?
Speculate on high-risk, speculative assets (similar to gambling), then invest the returns into assets you believe are stores of value.
Navigating Web3 tides with focused insightsAuthor: polynya
Translation: TechFlow
Introduction
This article, written by cryptocurrency analyst polynya, explores why most crypto assets are significantly overvalued. The piece emphasizes that despite rapid growth in the cryptocurrency market, this has primarily stemmed from their function as alternative or speculative stores of value rather than actual productivity. Polynya points out that a large number of crypto tokens are inflated in value, with little to no real product-market fit behind them, leading to widespread valuation bubbles and disconnection from reality across the industry.
Main Text
Cryptocurrencies have found most of their product-market fit as alternative or speculative stores of value. This is why Bitcoin continues to dominate the market even after 15 years. Ethereum has also exhibited monetary properties since 2020. Together, they account for over 75% of the market share (excluding stablecoins), and an even higher percentage in terms of liquidity. We also observe significant demand for tokens like XRP and ADA.
Over the years, numerous narratives have surrounded cryptocurrencies—fantastical theories about the imminent collapse of the global economy were common. Ironically, the global economy has proven remarkably resilient, with continuous growth and productivity reaching new highs year after year. This has actually increased demand for alternative stores of value such as BTC or ETH. Cryptocurrencies have remained elevated primarily due to monetary demand.
This has created a new economy centered around BTC and ETH. The problem is that productivity within this new economy is extremely limited. When the vast majority of value comes simply from holding and speculation, this outcome is entirely predictable.
Here, speculation becomes central. You'll find 70 cryptocurrencies with market caps exceeding $1 billion. Many of these tokens have existed for years yet show negligible product-market fit. They've undergone dozens of pivots but still fail to find any meaningful utility. In the foreseeable future, the potential for new tokens to achieve product-market fit is clearly very limited, yet they are inflated to valuations of billions of dollars. As a result, tokens that should realistically be worth only a few million end up valued at billions; hundreds of clearly worthless tokens maintain market caps in the millions, all fueled by massive speculative premiums originating from the sector's foundational pillars—value storage. There’s also the minor issue of people mistaking infrastructure for demand drivers instead of recognizing the roles of money and speculation, though I’ve discussed this point multiple times on my blog.
To be clear, there are some genuinely productive assets in crypto, but they are extremely rare, and in most cases, they are undervalued relative to traditional value stocks.
So what’s the solution? There isn’t one—this is simply the nature of the industry. Speculate on high-risk, speculative assets (akin to gambling), then reinvest into what you believe are legitimate stores of value.
Of course, all assets have demand ceilings. We’ve already seen Bitcoin’s exponential growth end in 2017, with its growth rate slowing thereafter, barely keeping pace with the Nasdaq. Bitcoin’s diminishing returns will continue until the market for alternative stores of value and associated monetary properties approaches saturation. This will eventually cause these severely overvalued tokens to gradually decline in market cap over years of sideways movement, ultimately approaching zero.
For now, however, the crypto market remains the wildest, most detached from reality, and most unregulated casino-like market in the world—one that may persist far longer than most people expect.
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