# Analogizing & Valuing Cryptocurrencies By [jessekao.eth](https://paragraph.com/@jessekao) · 2021-10-05 --- (Originally published on Medium on June 22, 2021) Each token is extremely different from the next in both function and tokenomics, which is part of the reason why valuing and comping each is so difficult. Moreover, the structure/architecture of each cryptocurrency is not exactly like anything we’ve seen before, but there are some similarities to elements we have today in our IRL world. The way I see it,\*\* cryptocurrencies can be analogized/divided into different categories including (but not limited to): commodities, foreign currencies, and stocks.\*\* 1\. **Commodities.** Everyone’s heard of the analogy that Bitcoin is like “digital gold”. There’s a finite supply; you need to invest capex (CPU) and spend resources (electricity/bandwidth) to mine it; its purpose is to hold value and allow you to pay for things, but it is pretty difficult to transact in (takes 15–20 minutes to validate a transaction). All of this is just like regular gold (in society today, you could theoretically exchange gold for a good/service/fiat — just need to find a counterparty that accepts it). One wrinkle in this analogy is the “Layer 2” Lightning Network. Like I said, crypto isn’t exactly like anything we’ve seen before, but still “digital gold” is the best analogy there is thus far for BTC. Therefore, many Bitcoin bulls think BTC will one day reach gold’s current market cap (~$11T), which would equate to a fully diluted PT of ~$525k. Nevertheless, since it is a commodity whose sole purpose is to hold value, BTC will be valued and trade based on sentiment (the adoption of BTC as a form of payment/value and its continuing ability be transferred from peer to peer). As more countries and companies start to adopt BTC, the value of it will increase; and the same is true vice versa. 2\. **Foreign currencies.** Some people liken ETH to a consumable commodity, but I would actually describe Ethereum more as a foreign land/country with ETH as its currency. Ethereum has a different purpose than Bitcoin and that is to enable smart contracts. As such, there are so many cool things being built on Ethereum ranging from decentralized exchanges to virtual worlds like ZED (digital horse racing) & Decentraland — much like how these things could be built and exist in another country. In this analogy, I view gas fees as taxes. Users pay these taxes so that the network can validate the users’ transactions. The network (somewhat like a government for this “foreign country” — and yes, there’s voting too!) uses these gas fees to pay miners (in proof-of-work networks) / validators (in proof-of-stake networks), much like how governments pay workers/companies/organizations to keep society running. There’s a saying that the true test of currency is if you can pay taxes with it. So in the case of smart contract networks like Ethereum, Polkadot, Solana, & Cardano, the value shouldn’t be determined based on fees (“taxes”) generated, but rather it should be determined based on the “GDP” of the “country” and the value of the things being built on it. The more appealing and useful the products/applications are, the more the currency (e.g., ETH) will be worth. However, in this analogy, I’m not sure what some L2 scaling solutions (like Polygon aka MATIC) would be considered as. Perhaps they’re like futuristic, societal international space stations where different “foreign countries” can connect to since Polygon does seek to be an “internet of blockchains” to scale/connect several blockchains. Moreover, on a personal note, I would like to see more things on the networks be priced in their “native currencies” like ETH or MATIC. ZED’s digital race horses seemed to follow this trend at first (denominated prices of the horse in ETH instead of USD) up until their most recent horse drop. However, I’m not sure we will ever reach this point unless we physically live in a place whose government accepts crypto as legal tender. A person will always denominate things to the currency that he/she/they can purchase food/shelter with. 3\. **Stocks.** Several tokens are actually like stocks, whether it’s through financial interest or governance (voting) rights or both. As such, your typical valuation metrics can apply like P/E ratios, dividend yield, etc. For example, QUICK (the token for QuickSwap DEX), pays a dividend that reinvests itself. QuickSwap uses 0.04% of the trading volume (collected from the 0.3% fee it charges per trade) to purchase QUICK tokens in the open market and distributes those tokens to QUICK holders staking their tokens. At the time of writing this (evening ET of 6/21/21), the last 24 hour trading volume on QuickSwap was ~$256.6mm, making the rewards to QUICK stakers over $102k. With 135k QUICK tokens staked with a ~$500 token price, the APR is currently 55% based on 6/21/21 prices and last 24 hrs of volume. Not a bad return (that gets paid throughout the day) assuming the DEX does not collapse. On the other hand, UniSwap’s token (UNI) currently only allows the tokenholder to participate in voting/governance issues, but has a “switch” that will turn on fees to tokenholders at a later decided date. Therefore, tokenholders are paying for the right to vote on UniSwap decisions and a TBD future dividend. * * * As I said earlier, the function and tokenomics of different cryptocurrencies are unlike anything we’ve seen before. There are obviously other categories like stablecoins that I did not touch on in this article. While there are similarities to things in our world today and I try to make those comparisons, the dynamics are still a bit different; and it will be extremely interesting to see how the world reacts to it. **_Disclaimer:_** _At the time of publishing (6/22/21), I have long positions in BTC, ETH, MATIC, DOT, SOL, and QUICK. I may trade in/out in the next 72 hours. This article/memo is not a directive to purchase/sell anything and is for informational purposes only. The information here is presented as-is without guarantee of veracity. Any forward looking statements cannot be relied upon and actual results may differ materially._ --- *Originally published on [jessekao.eth](https://paragraph.com/@jessekao/analogizing-valuing-cryptocurrencies)*