It has been argued that digital assets have no intrinsic value because they are not tied to cash flows, as in a conventional corporation. The argument is essentially that digital assets are a post-modern investment class where value is merely relative to what other people speculate the value is. That is, the only use for digital assets is speculation.
This seems true if you measure digital assets in relation to the standard of the conventional neo-classical finance, the Benjamin Graham/Warren Buffett thesis of valuation. Buffett famously missed out on investing in technology companies early because they lacked “fundamental value.”
Anthony Morley is a research analyst and founder of Intrinsic Value Company. A version of this post first appeared on Substack. Crypto Questioned is a forum to discuss the ideas and philosophies that drive the cryptocurrency industry.
The problem with discovering the intrinsic value of digital assets is that there is no accepted standard of intrinsic value for digital media in general. Only once we know that, can we know the intrinsic value of digital assets in particular. That is the problem this essay will attempt to solve.
Even the successful digital media companies that came after the dot-com boom show severe inefficiencies and coordination failures including: monopoly concentration, censorship, privacy concerns, the fragmentation and polarization of society, and the mental and physical health issues resulting from gamification and addiction.
These are economic inefficiencies and cultural problems that demand a solution and present an opportunity for economic and social gain. Even though large technology companies have became massively successful, the core problem of their fundamental value remains unresolved.
Let us consider the Benjamin Graham/Warren Buffett model of fundamental valuation. In essence, it says:
Low price/high cashflows = good fundamental value investment
It can basically be assumed that,
Low price = inefficient aggregation of publicly available information
High cashflows = high customer demand / low product supply
Now, let us consider: Why doesn’t digital media fit into this fundamental valuation model?
The product that digital media produces is data, massive quantities of data. Data only becomes valuable when it is limited in supply. But the current fundamental valuation model does not distinguish valuable data from its opposite (neither does the efficient market hypothesis). Therefore, there is no economic consensus on what constitutes valuable data.
The implicit consensus is that valuable data is defined by the market price. But this does not make sense either, because price is only a small subset of all valuable data. Valuable data must also include natural human communication that makes market activity possible. If price is only a small subset of valuable data, then saying it determines what is valuable is circular, if not absurd.
Valuable data is what allows for price coordination to happen in the first place. Because we haven’t come to a consensus about what that means, there is no way to understand how data is limited in supply, and therefore therefore no way the price mechanism can coordinate productive activity.
This may explain why our economy and culture have been so confounding since digital media became predominant; we are still trying to use price mechanisms to coordinate production of valuable data, even though valuable data is what causes price coordination.
Google, Facebook, Twitter all “produce” valuable data to sell. But the valuable data they sell is actually created by their users through extensive hours of uncompensated communication labor. People chat online while technology companies extract rents and earn free profits. In this kind of economy, the actual content of the data does not matter, only price or its quantitative proxies; so price or its proxies will incentivize the production of non-valuable data.
Now, with digital assets, the distinction between the users, the platform and the end product (valuable data) is collapsed. The users are the owners and the marketers. In this kind of economy, the content or value of the communications data matters a lot. Digital assets increase in value depending on the engineering, design and community decisions of the platforms they’re tied to. In other words, digital assets represent a type of platform-specific communication data.
In 1937’s “The Nature of the Firm,” Ronald Coase emphasizes the two forms of coordination admitted by economists, price coordination and internal coordination, within firms. He asks, why isn’t everything organized by the price mechanism? Why do firms exist at all? He answers that there is a cost to using the price mechanism. In many cases, it is less expensive and more productive to coordinate internally.
When Coase was writing, internal coordination would have referred to businessmen in the firm. But in the context of distributed networks, internal coordination is any group of people who collaborate over digital media for a shared goal.
Internal coordination is a function of the norms, manners and virtues that precede economic transactions and makes them possible. The better the internal coordination, the more that a digital network grows, because it doesn’t have to rely on price coordination.
This distinction between price coordination and internal coordination shows that there is another layer in the Benjamin Graham/Warren Buffett thesis given above: Internal coordination is what allows price discovery to exist and what solves for inefficiencies, externalities and market failures. Internal and price coordination are in a reciprocal, equilibrium relationship.
Therefore, if the digital asset space is to compete with legacy digital media companies, it has to compete on internal coordination and objective values. It must be shown why digital assets are an objectively better economic system.
