Since you want it to be a letter to potential investors, let me start with a thought that I read somewhere way back when: when you hear without a good reason family, friends or people in the street talking about any given financial asset - sell instantly. Sadly, can't remember where it was, maybe somebody can point me to the author...
With that off my chest... I don't think that you can draw a parallel between stocks and crypto. After all, stock value is a function of future cashflows of an enterprise but, in principle, crypto has none. The only similarity that I see is that you can speculate with stocks and crypto but speculation has little to do with value.
So, what do we do? What is value? I like to think of value as an amount of resources that would be required to live comfortably for some length of time. We may put a dollar, euro or Swiss frank number on it for convenience but that's what it basically is.
If we take BTC as an example, in the long run the supply is fixed at 21M BTC. That amount of BTC units will serve as means of exchange and as store of value. If we could say with any degree of confidence what proportion of the total value that exists (or will exist in the future) people will put into BTC, we could divide that value by 21M and we would have known what BTC valuation should be.
I've seen a number of models that attempt to answer this question and I don't have any confidence in any of them.
What I can say is that I don't see any particular reasons for the utility of BTC (thus, its dollar value) to change since January 2017:
- no real increase in transactions per day - it's not more popular: https://blockchain.info/charts/n-transactions
- transactions are not 'free' (or cheap): https://blockchain.info/charts/cost-per-transaction
You may argue that due to increased visibility its future utility is much higher now than back in January. That might have been true if we knew that we are somehow going to avoid a spectacular (and equally publicized) crash.
I don't think we could argue that Bitcoin's utility as a store of value has increased, given the volatility I'd argue that the opposite is true.
As to the altcoins - given where BTC is now (yes, it is a bubble), I believe all crypto are on the same FOMO wave right now. We may discuss why Ethereum, EOS or IOTA are awesome but that's a different discussion. Learning Solidity might be a good investment of your time but I don't think buying ETH is a good way of investing your hard-earned cash at this point in time.
Bottom line - I believe there is a model that can be used to value a cryptocurrency but I don't believe the market told us anything of value in 2017 to go on with. The real question is: how much of new information is hidden in the noise that we see?
What a deep comment @gbalnis!
Please allow me to struggle to add some value to it, not only because of its excellent points; but because we are building, with the post and the attached comments, some really useful discussion in my view.
I've pondered your point about discounted future cash flows from another viewpoint. I've asked myself the following question. If we regard bitcoin or any other cryptocurrency as being just a special type of currency, like the USD or CDN or YEN, why should we expect its long-term price pattern to be substantially different from those that we already see in the Forex market?
My answer to this question is that there may be a temporary, though potentially very major, loss of confidence in fiat currencies to the benefit of certain internationally accepted crypto's. But this process has a near-to-medium-term boundary, even if it might make us who hold the crypto's fantastically rich, assuming that we can either buy goods and services by paying with our cryptocurrencies or we have a viable bridges to cross from our cryptocurrencies into fiat moneys.
So your point about discouraging analogues to stocks is an absolutely major one, from my viewpoint.
Here's an interesting point, to me anyway. I can envisage a massive increase in the absolute number of people around the world who will regard BTC as a relatively safe haven compared to the other monies that are available to them and can afford to pay to get into a certain amount of bitcoin.
The ability to get into bitcoin to, for example get out of Zimbabwe dollars, is something I see as a definite example of utility. But I regard that utility as being a qualitative variable in the sense that it either exists or doesn't exist for a particular individual; but it doesn't have a quantity that allows us to think about this particlear utility increasing/decreasing over time.
Finally, I offer my two cents about the model to value a crypto currency. I argue at https://www.marketstatsanalytics.com/valuingcryptos.html that there are valuation dimensions measured at different levels of measurement (including some ordinal or nominal), and therefore we cannot get to a single-valued variable to measure that value. The closest we can get is a vector , where at each position in the vector there is a single variable or a function of variables that are measured at the same level of measurement.
The upshot, then, is that the valuation is inherently multidimensional, and the sooner we recognize this the more sophisticated will be our investing behaviour, in my opinion.
Cheers!