Opinion: Why we need to talk about Bitcoin's market cap

The price of a Bitcoin seems to be unconstrained right now. With each passing day there are more stories coming out of overnight millionaires, which in turn drives new punters into the market to try and make a quick buck.

With every moment in the world of cryptocurrency, we venture further into the unknown. No-one can say with confidence what a coin is actually worth, which is why, at best, we can use signposts to potentially triangulate the value of coins.

One such signpost we can look at is the overall market cap of Bitcoin, which is simply the number of coins that exist multiplied by the current price of a coin. At the time of writing this article, there were 16.7 million Bitcoins in the system with a value bouncing around US$15,000 per coin making a total market cap of a touch over US$250 billion.

In technology company terms this would make it the fifth largest on the Nasdaq behind Facebook, Microsoft, Google and Apple. This makes Bitcoin larger than the likes of IBM, Cisco and SAP. In fact, it’s more than the combined value of Adobe, Salesforce and Qualcomm, which are all companies within the top 20 on the Nasdaq. To provide an Australian comparison, the Commonwealth Bank of Australia (CBA) has a market cap of US$104 billion, employs over 45,000 people and generates an annual revenue in excess of AUD$20 billion.

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The Winklevoss twins, most famous for their role in the early days of Facebook, were early adopters of Bitcoin and have been spruiking the value of the cryptocurrency for years. In the last couple of days, they said they expect the value of a coin to eventually exceed US$300,000. Based on the current number of coins in circulation, this would make the market cap of Bitcoin US$5.01 trillion. This valuation makes it larger than the entire market cap of the London stock exchange at a measly US$3.27 trillion.

“But it’s not a company, it’s a currency” I hear you say. Well I agree, although it doesn’t quite fit into any box. It operates most like a currency with the obvious exception that it’s not underpinned by a domestic economy but rather a data storage protocol. Let’s put that aside for a moment though and have a walk through the currency relativity.

The most relevant comparison for Bitcoin is M1, also known as narrow money, which is a metric for money supply in a country and essentially represents all of the coins and notes in circulation within a particular currency. It serves the same purpose as Bitcoin, which is it’s a medium for exchange.

Taking the same Bitcoin total value at US$250 billion makes Bitcoins more valuable than all of the Australian, Danish, Russian, Swedish and UK currencies in circulation. At the Winklevoss valuation, it makes Bitcoins more valuable than the entire US currency in circulation. If we took all of the US cash out of all the bank vaults around the world and robbed every single person in the world of their US notes and coins, we would only be able to buy around 65% of the total Bitcoins available on the market.

Through first-hand conversations and in reading comments online from general consumers, it’s clear those buying Bitcoin are buying into the dream of a frictionless, global, instantaneous world of digital currencies and their potential to overtake fiat currency. I have little doubt that one day we’ll get to a global system of value exchange, but the ability for the Bitcoin blockchain to scale to that level is unlikely given the huge transaction lags and fees crippling the system right now.

[bctt tweet=”Already there are hundreds of alternatives to Bitcoin showing some potential ” username=”Canstar”]

In my opinion, it’s far too early in the evolution of cryptocurrencies for me to back the oldest of them all. Already there are hundreds of alternatives to Bitcoin showing some potential and point to the fast-moving evolution of this technology. Perhaps it’s another Beta vs VHS battle, perhaps there’s room for multiple cryptocurrencies to exist together or perhaps the technology will soon be superseded altogether.

Whatever your assessment, it’s clear the current valuation of Bitcoin and the Winklevoss prediction is based on an ‘all-or-nothing’ belief that this digital currency will conquer all other ways of transferring value in the future. A leap that is a little too far for this crypto-loving investor.