paint-brush
On the Importance of Bitcoinby@obfuscat3d
2,097 reads
2,097 reads

On the Importance of Bitcoin

by Justin MitchellNovember 28th, 2017
Read on Terminal Reader
Read this story w/o Javascript
tldt arrow

Too Long; Didn't Read

Did your aunts and uncles ask about <a href="https://hackernoon.com/tagged/bitcoin" target="_blank">Bitcoin</a> over Thanksgiving? <a href="https://www.marketwatch.com/story/how-to-talk-to-your-family-about-bitcoin-at-thanksgiving-dinner-2017-11-20" target="_blank">You’re not alone.</a> As the BTC spot price approaches $10,000, many folks are considering the same question: <strong>how important is Bitcoin to the global economy?</strong>

Companies Mentioned

Mention Thumbnail
Mention Thumbnail
featured image - On the Importance of Bitcoin
Justin Mitchell HackerNoon profile picture

Did your aunts and uncles ask about Bitcoin over Thanksgiving? You’re not alone. As the BTC spot price approaches $10,000, many folks are considering the same question: how important is Bitcoin to the global economy?

The Internet has always given poor analogies for describing Bitcoin’s significance to a wider audience. Over the last two years, we’ve seen comparisons to the price of an ounce of gold. Vice News is now comparing the digital tulips to the market capitalization of companies like Disney and McDonalds. These comparisons are all useless for determining the importance of Bitcoin.

For example, people made a big deal when a single Bitcoin eclipsed the price of an ounce of gold. They failed to recognize the arbitrariness of that metric. Had Satoshi (the anonymous inventor of Bitcoin) created 210 million Bitcoins rather than 21 Million, the value of each would be 10% as much. This would, of course, change nothing fundamentally about the cryptocurrency.

Similarly, why should we compare the value of all Bitcoin in existence to a company like Disney? One is a profit producing organization whose value (theoretically) should be a time discounted function of return to shareholders. The other is either a means of transaction or a store of value. I’ve heard that we shouldn’t compare apples and oranges; but at least then we’d have something comparable!

The nonsense of comparing Bitcoin to an ounce of gold or a corporate stock doesn’t mean all comparisons lack value. Without a measuring stick we lack the ability to understand the relative importance of Bitcoin in the world economy. To that purpose, I advocate for comparing its “market capitalization” (a dreadfully misleading term) to the total value of gold in the world and the M0 money supply in the United States.

Let’s consider each.

Gold

Bitcoin and gold have much in common. They are both limited in supply and mined for profit. It’s unsurprising the moniker “digital gold” has caught on to describe Bitcoin. As of today, gold is the most important store of value in the world economy. Nations hoard gold, attempt to peg their currency to gold, and sometimes build big forts to protect their gold.

If you primarily see Bitcoin as a store of value, you should compare its “market capitalization” to that of gold. There are conflicting numbers around the internet, but the total amount of gold in the world seems to be between 150,000 tons and 200,000 tons. At a spot price of $1,250 per ounce, that makes the total value of our most important store of value around $6–8 trillion.

Bitcoin, with a value of $10k/coin and 16.5M coins mined, comes to a total value of about $160 billion. Thus, as a store of value, gold is worth around 40x all Bitcoin. That may sound low, but I’d argue it’s impressive — something under a decade old has managed to get within two orders of magnitude of a millennia old standard.

The M0 money supply in the United States

If you view Bitcoin primarily as a means of transaction then an appropriate comparison might be against an obscure economic measure, “M0”. M0 money supply isn’t complicated, it’s just a measure of all physical currency along with reserves held with a central bank like the Federal Reserve. M0 supply is best thought of as a measure of the monetary base, or “narrow money” — money immediately available for transactions.

M0 supply for the US is currently almost 4 trillion dollars. Bitcoin, with a total value of $160 billion, is still far less. Ignoring political and regulatory concerns, Bitcoin would still need to go 30x to have an impact on the world economy at a similar level to the US dollar. Geopolitics, of course, matter greatly and therefore we should assume even a 30x rise in the value of Bitcoin as a means of transaction wouldn’t unseat the dollar. It might be comparable though.

So what?

My goal is to give people a context for Bitcoin’s relative importance in the global economy. Its price compared to a company or an ounce of precious metal isn’t the right way to judge Bitcoin’s import. Instead, enthusiasts would do well to focus comparisons to products Bitcoin might challenge, if not unseat.

Another interesting implication is to set an idea of where Bitcoin might head from today. Somewhat coincidentally, both the United States M0 and the total value of gold in the world are within an order of magnitude in value. If you think those as the two best comparisons and believe Bitcoin might replace or co-exist equally with either, then it stands to reason that the value of Bitcoin might match those values. This would represent a gain of between 30x and 50x. That’s an awfully optimistic projection, but certainly fun to consider!

It’s fantastic to even be discussing Bitcoin and cryptocurrencies alongside dollars or bullion. For an eight year old technology with no obvious profit mechanism to have made such inroads is unquestionably impressive. That said, we should all take a step back and recognize the scale Bitcoin plays in the world remains tiny. Of course, this is good news if you HODL crypto, as it merely indicates how much room there is to grow.