Bitcoin passes the $1 trillion milestone. Coinbase is valued at $100 billion. A cartoon cat NFT sells for 300 ETH ($590,000). 

Do any of these numbers look absolutely crazy to you?

To many, almost everything seems crazy about crypto these days. Prices are out of whack from fundamentals. Memes and social media sentiment rule the day. 

With all the cheap fiat sloshing around the financial system, valuations have become divorced from reality. Investors are putting cash into anything buzzy in an undifferentiated free-for-all. 

How else do you explain the rise of Dogecoin? This project was created as a joke with no real-world utility, and yet it’s now worth $7.2 billion.

See also: Lex Sokolin - How Coinbase Is Worth $100B

But Coinbase’s number may be the wackiest of the three. Let me explain. 

Bitcoin’s price rise from less than $8000 a year ago has led economists to rethink how we value assets. 

As Jim Harper, of the American Enterprise Institute, writes in an excellent blog post this week, value is in the eye of the beholder as never before. It is subjective. 

“The subjective theory of value holds that the value of a good is not determined by any inherent property of it – nor the amount of labor necessary to produce it – but by the importance an individual places on it for the achievement of his or her ends,” he says. “There is no fundamental or inherent value to anything.”

This idea echoes the writing of CoinDesk’s Michael Casey, who argues that crypto derives value from its community of believers. 

In this way, dogecoin is valuable because DOGE fans say so. Bitcoin is worth $1 trillion-plus because its followers passionately back the project. Money becomes money because people believe in it. 

Sure, bitcoin has use cases (e.g., as a store of value against inflation) and many big time newcomers have entered the market recently. But its price is a function of its appeal as much as its innovation. In fact, one of bitcoin’s main selling points is precisely that it doesn’t change and doesn’t pivot. 

See also: Thomas Meyer - Sorry Coinbase, You’re Not Worth $100B

And Coinbase?

Well, it exists in the real world. Its S-1 listing document is public and we can see inside for the first time. Its $100 billion valuation, as Lex Sokolin argued on CoinDesk, is an extrapolation of current market volumes and the hefty fees it charges (which make up 96% of its revenue). 

To be sure, Coinbase is a legit success story, a bellwether and a vanguard startup for the industry. But it faces tremendous competition both from centralized exchanges and, most seriously, from decentralized finance (DeFi). 

As Thomas Meyer of Cove Markets wrote for CoinDesk yesterday, it’s a brave investor who bets that Coinbase will dominate the exchange business going forward. 

“Coinbase is currently the biggest name in U.S. crypto trading and has certainly earned a premium for that as the market has climbed. However, crypto is an all-out arms race with innovation occurring at breakneck pace,” he said.

More to the point, Coinbase’s valuation is arguably at odds with the notion of crypto itself, which is designed to take out intermediaries in the financial system. $100 billion, in this sense, is the product of friction in that system, not the more seamless transfer of value from one entity to another.

Coinbase may continue to tell a good story and investors may want to hear that story. But, going forward, it will have to justify its premium amid a welter of similar offerings. That’s going to be hard to do, even with billions in the bank.