Bitcoin Valuation - Total Value Relative to World GDP
April 27, 2021 - Bitcoin, Gold, Valuation
FAQ
1. What is valuation?
Valuation gives some benchmark to know whether an asset is undervalued, fairly valued, or overvalued.
2. Why use gold as a benchmark?
For Bitcoin to have value, it needs to be used as a currency. Gold is a commodity that has been used as a currency in the past. Central banks still hold gold as a form of reserves. The amount of gold relative to world GDP serves as one benchmark for the value bitcoin needs to have to be used as a currency for the world.
3. We used gold as a currency?
On August 15, 1971, the US stopped being willing to convert dollars to gold. Before that, the US had a Gold Standard, where the US dollar was backed by gold. If the US printed too much money, dollars could be converted to gold at a fixed price. In 1971 that price was $35. Gold in recent years has traded above $1000.
4. What if Bitcoin isn't adopted throughout the entire world?
To the extent Bitcoin becomes a niche currency, it should be expected to attain some fraction of the target gold valuation. Currently, it is priced at about 10% of gold's valuation. That could translate to 10% of the currency used worldwide.
5. What if gold is undervalued as a potential worldwide benchmark?
Gold's undervaluation would mean bitcoin's potential is even greater.
6. What about silver and other cryptocurrencies?
Silver has been used as a currency in the past. Silver has also been used with gold in various forms of bimetallism in the 1800s in the United States. So it is conceivable other cryptocurrencies could be used in conjunction with bitcoin. An expanded analysis that includes silver and other cryptocurrencies has some merit.
7. Will bitcoin become a major currency?
Seemingly unusual things have been used as currency in the past. Salt was used as a currency in China. Cowry shells are still used as currency on the Papua New Guinea island of East New Britain.
Currencies come and go throughout history. The fiat Continental Congress currency used during the American Revolutionary War fell by 99% within a few years and was replaced with the US dollar. It was one reason the US dollar was backed by gold in the first place.
So the limited amount of Bitcoin combined with people being interested in using it as a currency means it could have a role as a currency. As far as becoming a major currency, it is hard to imagine the world transacting in bitcoin overnight.
In time, it may evolve into a major currency. There could be tremendous volatility along the way, as there has been in the past. If it becomes a major currency, it has a huge upside, but if it is abandoned in the future in favor of something else, it could become essentially worthless.