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Speculative Versus Utility Value Of Cryptocurrency: A Reminder From Deutsche Bank




With Deutsche Bank suggesting that the recent rise in cryptocurrency prices may be directly attributable to instability in those tokens’ values, now is a good time for everybody, especially newcomers, to take a step back and think about what they expect to gain by buying these digital assets.

Seasoned veterans of cryptocurrency trading and the blockchain space in general are doubtless aware of the gulf between the utility values of digital assets and those tokens' market values.

For folks who have entered the cryptosphere more recently, a brief explanation: the prices of cryptocurrencies have been bouncing all over the place lately but, generally speaking, the most prominent digital assets are worth a lot more today than they were when their blockchains launched. In almost all cases, this increase in price has more to do with what people are willing to pay for these virtual currencies than what anyone is able to actually do with them (besides selling them, of course). For instance, some Ethereum developers anticipate that blockchain technology will one day become the basis for an economy of digital micropayments, but for now, such a system is nothing more than science fiction.

While the distinction between market and utility value has been remarked on many times before, it bears occasional repeating, especially with so many relative newcomers throwing money at cryptocurrencies without fully understanding the risks involved in doing so.

In a recent interview on January 9, Ethereum founder Vitalik Buterin related an anecdote about making a bitcoin payment to which he attached a transaction fee worth $6. After several hours of waiting for the payment to process, he gave up and used his credit card instead. He articulated his concern, saying that he worries:

"About the possibility that the growth of the amount of interest in the technology will outpace the technology's ability to scale enough to meet the demand … When cryptocurrency is inferior to credit cards for just simple payments and buying stuff on the internet, I really kind of deeply inside feel and know that the space has kind of lost its way to some extent."

A little more than a week later, Deutsche Bank circulated a message to its clients informing them that one of its strategists and his team had become aware of a correlation between the prices of cryptocurrencies and the CBOE Volatility Index, colloquially known as Wall Street's "Fear Index."

According to the bank's analysis, the relative predictability of the stock market has led more risk-tolerant investors into the cryptocurrency market, where their purchases have driven prices up. In other words, the instability of virtual currency prices may be a major contributing factor to the overall increases in their values.

The takeaway here is that these researchers have joined the ranks of market watchers who believe that the prices of cryptocurrencies are being propped up more by the money-making opportunity that people see in trading them than by any concrete utilitarian value that these digital assets currently offer.

Plenty of the folks buying up these tokens already know that this might be the case, but if this perspective sounds new to you, you might want to take a deep breath and reconsider that big virtual currency purchase that you've been psyching yourself up to make. As they say, caveat emptor.

Adam Reese

Adam Reese is a Los Angeles-based writer interested in technology, domestic and international politics, social issues, infrastructure and the arts. Adam holds value in Ether, Bitcoin, and Monero.

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