How to Value a Cryptocurrency Token

Why "Blockspace" has value, how it is measured - and how Sam Bankman-Fried miscalculated so badly.

Reading Time: 7 Minutes

Hello, and welcome to another preview of my Sam Bankman-Fried book. I’ve found myself spending Sundays in full deep-dive contemplation mode, and letting delivery of these weekly previews get a little late. I’ll do my best to improve that and get back to Sunday morning delivery.

I’ve said that the book won’t have a lot in it about cryptocurrency - but I have to amend that. While I won’t be talking much about crypto technology, the way markets value tokens is very important to the story of Sam Bankman-Fried. One way to understand his blowup is that he thought tokens had some inherent value, and wound up badly surprised when his self-created tokens (FTT, MAPS, etc.) turned out to be genuinely valueless.

Personally, I think he understood this all along and used FTT and MAPS as conveniently fictional “collateral” for loans of customer money to Alameda. But we’ll get to the Sam coins in a future discussion. The below section discusses the underying value and measurement metrics for “normal” crypto tokens - whatever that means.

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What is the Value of a Digital Token?

There are essentially two reasons anyone would need a cryptocurrency exchange like FTX. Almost certainly the largest portion of the demand to buy and sell digital tokens is for purposes of speculating on an increase in its price. According to conventional financial thinking, these increases in price will ultimately be based on demand - but demand for what?

Most analysts of cryptocurrency markets have now converged around the idea that the price of a crypto token is linked to demand for “block space.” “Blocks” here refers to the bundles of transaction data (or other data) that are saved to a blockchain’s history at regular intervals, and which make up the “ledger” tracking the holdings of each address on a blockchain. Bitcoin, for instance, generates a block of transactions roughly every ten minutes.

The reason blockspace has particular value in the current economic-political conjuction has to do mostly with advantages blockchains offer compared to default, nation-state derived financial systems. The value of blockspace derives from a blockchain’s universal reach, compared to the very fragmented landscape of traditional banking connections; the availability of global assets in countries where local currencies are at risk of aggressive devaluation due to mismanagement or political instability; and the pseudonymous and hard-to-seize nature of blockchain assets, compared to a banking system that is increasingly surveilled, and subject to account closures and even seizures that are increasingly automated and without recourse.

It’s also key to point out that (ironically) “blockspace” is not fungible - that is, which blockchain you’re buying blockspace on matters immensely. There are differences in technology and purpose between blockchains - as a relevant example, Bitcoin has limited capabilities but time-tested security and stability, while Solana, the blockchain Sam Bankman-Fried loved, is fast, cheap, and flexible, but unstable - a fitting choice. But perhaps even more than technological differences, the price of block space varies according to what are known as “network effects.” The more users are active on a blockchain, in whatever role, the more valuable its space is.