What is the worth of the existing Cryptos in the market as a whole?

A basic look at some "fundamentals"

The market capitalization of all cryptos is presently about $3 trillion,

Given, that global GDP is approximately $85 trillion, the outstanding market capitalization is 3.53% of global GDP.  The total number of original or virgin coins mined so far is about 18.7 million coins, out of the “maximum” of 21 million can be theoretically mined.  That’s about 90% of the world’s supply of coins, if the original ceiling of 21 million is respected. [More on this later.] Yes, 90% of all virgin coins have already been mined.

Presently US GDP in current Dollars 23,174 billion, while actual currency in circulation in the US is about 2202 billion, or 9.5% of GDP.

If we consider 21 million coins to be mined a year from now, and the global GDP to be 100 trillion, a global currency equivalent to 10 trillion [10% of GDP] would be sufficient to service the global economy as a currency. 

This implies, the price of each mined coin would have to rise to $476,191.  [See below for calculation].  But since cryptos are not the only currency, the actual required would be much less, depending on its rate of adoption of all cryptos as a currency, which rate is currently zero.  Or Zilch.

Presently, we have 3.5% of global GDP outstanding as original coins, when adoption rate is virtually zero.  Most the outstanding coins are being used as speculative asset only.

So here is the basic equation.  You need $10 trillion of coins in value, to service a global economy of $100 trillion.  Roughly 19 million coins have already been mined.  A total of 21 million can be mined [a bit less actually because some get lost as unclaimed orphaned records].

The market cap of 21 million coins needs to $10 trillion to service a global economy of $100 trillion.  What would be the value of such a coin?

On the other hand, the market capitalization of all cryptos today is $3 trillion, and the outstanding number of original Coins across all species of such coins is 18.7 million.  Therefore, the existing price of each such coin is:

In other words, the value of each coin can triple from its present level of $160,428, if the cryptos were the only currency. 

[The price of each crypto on the bourses is a function of total original coins mined by it, and held in the system, divided by outstanding coins in its system, and this varies significantly from system to system.  The price of the original coin across all cryptos is what should concern us, and as usual, this is not actually disclosed to the public in a straightforward manner.  It can only be calculated from the total market capitalization of all cryptos, across all traded coins. The calculations above are for the original coin across all cryptos].

Currently, currency adoption rate is zero.  So going forward, on a purely valuation basis, the price of each mined coin could triple.  [Caution: Not that it will.]

The cryptos are hardly used as a currency as such.  Hence the “value” in the current price from use-as-currency is virtually zero.  The price of the coins today reflects their inherent speculative value.  None of it comes from any other use-value.  As of today, they are purely digital tulips; their owners prime target-market for high risk-hedge funds.

It is clear therefore, that the price of cryptos going forward will be more a function of their adoption rate as a currency, than “value-per-coin” demand for them, if they are the only currency.  The price surge purely on value requirement is at the top of the range already.  Taking both factors into account, the coins are probably over-valued, rather than undervalued, as of today.

This analysis would be valid, if, and only if, there was a credible probability of some of the major economies adopting the coins [all coins across all cryptos] as the only currency that could be used as a digital currency. 

Assume for a moment that India adopts the original 21 million coins as its only currency.  What would that imply?

Firstly, the Reserve Bank would have to buy enough of the 21 million coins outstanding to meet the country’s demand.  How many?  What price?

Now, India’s GDP is roughly $3 trillion.  So, RBI would have to shell out $334 billion to buy 1.87 million coins, to meet India’s primary currency demand. [Currency is circulation in India as percentage of the GDP is 14%.  I am assuming this demand is 10% in the long term.]

Do you see any Indian Govt., even digital-crazy Modi’s, willing to pay $334 billion upfront for the privilege of using the crypto coin as its currency? 

The market capitalization of Mastercard today is $345 billion, and that of VISA $475 billion. These come with in-operation global payment systems. 

Which central banker will shell out $345 billion for a currency that cannot even be used as a currency today, being too volatile, too expensive in terms of energy costs, and beyond sovereign Govt. control? 

Those that believe such an exit door for their investment may exist live in a fool’s paradise.  My bet is India could have a full-fledged digital currency, with or without a nonce-mining-based compensation scheme, up and running at a small fraction of the cost of $345 billion required for buying existing cryptos. 

Virtually the same considerations apply to all major countries.

It is possible that some time into the future, there may be 50 countries around the world, with tiny economies, who might band together, like the EU, and say we want basically only a payment system, with no monetary control.  They might band together, and buy some coins to get their digital currency going.  But in value terms, these countries would hardly account for more than 10 to 15% of global GDP, if that.  And in value terms that just 1 to 1.5% of their GDP. And for that exit, the coins today are again grossly overvalued.

Over and above this, there are two considerations to keep in mind. 

The first is that there is no real cap of 21 million on the coins that can be mined.  It is software encoded cap, that can easily be set aside.  Sure, the whole ecosystem will argue this will never happen; their livelihood, and wealth, depends on the cap remaining in place. But trust me, there is no such cap.  Especially when a few growth hungry sovereigns join the system; if that ever happens.  The caps are credible only until no major sovereign adopts the coins as its currency.

The second major consideration is technology itself.  Blockchains are very secure, the nonce [use once only] based hash tables [basically index tables] ensures coins can’t be spent more than once by an owner. But the current system of compensating networks with newly minted bitcoins for nonce tokens, is horribly expensive in terms of energy costs that the system imposes on miners. 

Is it sustainable in a real currency payment system after all the 21 million coins have been mined? It will take years to wean away miners from current practices, to a fee-based compensation, and when that happens, will the enthusiasm for such system sustain for independent operators?  I have my doubts. Today the whole horribly expensive system is sustained by the speculative increase in scarcity value of the underlying coin, that gullible speculators pay cash for.  This cannot sustain going forward.  And when it ceases, the running costs will be killing.

Last point.  We are at the cusp of a breakthrough in quantum computing. Entangled qubits are the best, and the most secure nonce tokens, that mother nature makes.  Tinker with one, and the entangled pair’s wave function collapse instantly.  So, when quantum computers come along, this whole business of block chains will undergo a quantum transformation.  What that means for cryptos, I don’t know, but it’s not something good.

Intrinsically, the monopoly that cryptos hold over coin mining, and the upper limit of how many such coins can be mined, is fictitious.  The mining schemes are replicable, the upper limit in software, is scalable.  The real scarcity value of coins will eventually be zero in my view.

Would you buy a purely speculative asset today, whose story has been in the markets for 10 years, that can at best triple in value one or two years hence, with zero cash return, 3 to 5% real cost of carry, and whose value could drop by 80 to 90%, if the “exit” that everybody is banking on proves elusive?

Based purely of the maximum theoretical value, and the probability of the coins becoming a currency in any major country, my call is the coins are horribly overpriced as of today.

What of the technical charts?

Well, the biggest of the cryptos, the Bitcoin, is at a double top at $65,000.  It has had a dream run up since March 2020, from $10k to $65k.  It can linger here for a while, even as long as the first half of 2022, but its upside from 65k is limited.  The risk reward ratio, for runup from 65k, to 100k, in my view is not worth losing half your capital.  It is such a volatile asset.  The reliability of payment systems governing such assets, is highly suspect, and the risk of getting entangled in them, is incalculable. 

I wouldn’t buy the stuff no matter what the upside from 65k, given the runup it has already had.  Also remember the “fundamental” prices.  The valuation is already stretched beyond any reasonable assumption regarding the system’s utility as an actual currency.