In the long term, currencies that are accepted more widely as a medium of exchange and that hold their purchasing power better over time should see their prices rise, relative to currencies that don't have those characteristics. Standing alone, currencies have no cash flows and cannot be valued, but they can be priced against other currencies. Currency: A currency is a medium of exchange that you use to denominate cash flows and is a store of purchasing power, if you choose to not invest.Consequently, commodities tend to be priced, often relative to their own history, with normalized oil, coal wheat or iron ore prices being computed by averaging prices across long cycles. While that value can be estimated by looking at the demand for and supply of the commodity, there are long lag and lead times in both that make that valuation process much more difficult than for an asset. Commodity: A commodity derives its value from its use as raw material to meet a fundamental need, whether it be energy, food or shelter.With stocks, this takes the form of comparing pricing multiples (PE ratio, EV/EBITDA, Price to Book or Value/Sales) across similar companies to form pricing judgments of which stocks are cheap and which ones are expensive. At the same time, assets can also be priced, relative to each other, by scaling the price that you pay to a common metric. What assets share in common is that these cash flows can be valued, and assets with high cash flows and less risk should be valued more than assets with lower cash flows and more risk. Those claims can be either contractually set (bonds or debt), residual (equity or stock) or even contingent (options).

A business that you own is definitely an asset, as is a claim on the cash flows on that business. Cash Generating Asset: An asset generates or is expected to generate cash flows in the future.To understand the distinction between value and price, let me start by positing that every investment that I will look at has to fall into one of the following four groupings: Not everything can be valued, but almost everything can be priced. You can only price it and trade it.Īssets, Commodities, Currencies and Collectibles The reason for the divide, though, is that the two sides seem to disagree fundamentally on what bitcoin is, and at the risk of raising hackles all the way around, I will argue that bitcoin is not an asset, but a currency, and as such, you cannot value it or invest in it. Unlike its biggest cheerleaders, I don't believe that crypto currencies are now or ever will be an asset class or that these currencies can change fundamental truths about risk, investing and management. Unlike Jamie Dimon, I don't believe that bitcoin is a fraud and that people who are 'stupid enough to buy it' will pay a price for that stupidity.

As I have noted with my earlier posts on crypto currencies, in general, and bitcoin, in particular, I find myself disagreeing with both its most virulent critics and its strongest proponents.

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