December 13, 2018

Finance Professor: Cryptocurrencies May Be Overpriced

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According to Professor Wang Chun Wei, a Ph. D finance lecturer at the University of Queensland in Australia, Cryptocurrencies are very likely to be overpriced. This means that the actual market capitalization should be much smaller than its current $220 billion value. The financial expert conducted a study that delved into the propensity of investors to buy Digital Assets on the motivation of the ‘resale option value’ that assures higher prices in the future.

There Are Three Categories Of Cryptocurrencies

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The study does not treat all Digital Assets as the same. The professor of finance categorizes them in three different classes which include mainstream legitimate Cryptocurrencies, joke Cryptocurrencies, and Scams. Legitimate ones are the native Tokens of top-notch Blockchain platforms such as Monero, Bitcoin, Ripple, Bitcoin Cash, Cardano, ZCash, Dash, Litecoin, just to mention but a few. The most common characteristic in this category is that they are all listed in leading Crypto exchange platforms such as Bitpay, Coinbase, Binance, Huobi, etc.

The second category is for joke Cryptos. They do not have a particular aim in the market such as easing the pressures of international payment hitches. Examples include Theresa May Coin, DogeCoin, Jesus Coin, etc.

Lastly, according to Prof. Wang, scam Tokens include the infamous BitConnect and many others that are connected to fraud ICOs.

The Technical Aspect Of Heterogeneity In Crypto Markets

The study reveals that the problems of overvaluation start from scam and joke Tokens. For instance, DogeCoin has a market cap of over $400 million, BitConnect peaked at $2.7 billion at one point. Instances like this exert upward pressures in the hole market as it serves as a factor for attracting investor participation. The end result is an overvalued market.

The report expounds on the aspect of heterogeneity in the market which is the difference of opinion. This is the reason why despite differences in perceptions, the price goes up as some people continue to invest in the projection that the resale option value will be higher than the initial value. This is why some joke Coins and even the mainstream Tokens never crash abruptly despite all the criticisms. Meanwhile, heterogeneity can change to homogeneity when scams are exposed this causes the price to slump or even crash as the prospects of resale value options are dashed.

A resale value option is a motivation by a Crypto investor to purchase a digital asset in the hope that it will surge in price and yield positive returns on investments.

Another causal factor of overpricing is overbidding on the intrinsic value of Digital Assets due to lack of shorting mechanisms.

The Mainstream Cryptocurrency Prices Are Also Driven By Speculation

The study also researched about seven largest Cryptocurrencies such as BTC, ETH, XRP, EOS, ADA, XLM and LTC. They all showed an indication of being impacted by the resale value option. Meaning that many people buy them to sell them later for a profit.

The Research Raises More Questions Than Answers

The research methodology of determining the resale value option by using turn over appears to be flawed as they are other underlying factors that come into play such as publicity, institutional investments etc. Secondly, everyone knows that Digital Assets’ values are driven by speculative motives.

Lastly, Cryptos have an intrinsic value also as they are mined using expensive resources such as powerful computers, chips, power, etc.

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