It is not fair to compare the prices of Gold and Bitcoin: It’s all about market capitalization

Many are comparing the price of Bitcoin to the price of a Gold ounce and conclude that Bitcoin’s price has exceeded the Gold price. But comparing the price of Bitcoin to Gold is entirely misleading. If we would try to give Gold an estimated market capitalization, based on all the Gold that has been mined up to today, we would end up with a total value of about 6.8 trillion EUR or 7.6 trillion USD. Bitcoin’s market capitalization was recently about 38.8 billion EUR (as of June 1, 2017) showing a very clear difference. Comparing Bitcoin’s price to the Gold price underestimates the value (and importance) of Gold by a factor of around 175. So very simply spoken one could argue that, given current market prices, Gold is by factor 175 more important than Bitcoin. Autor: Sergej Stein, Philipp Sandner

The trend of comparing physical commodities to crypto currencies

Recently, the Bitcoin price has surged and doubled in value in less than four weeks overtaking the “price” of Gold, that is, the price of a Gold ounce. Media outlets started comparing the price of one Bitcoin to the price of an ounce of Gold. This comparison is driven by a fundamental misunderstanding and is in fact not just misleading but even unfair for Gold and all other commodities. Saying Litecoin is digital silver and Bitcoin is digital gold, might sound very romantic and may have some pictorial power. However, any comparison of a crypto currency to a physical commodity is mostly misleading and underestimates the current true value of physical commodities tremendously. Even though this might exchange of course in the far future. Back to the price comparison: It is about market capitalization of an asset, not the pure price.

Possible explanations for this understanding

Of course, it is very easy to simply compare two different prices — Bitcoin and Gold. If one price exceeds the other than this is a good reason for breaking news. However, it should not be forgotten that the price of Gold is “per unit”, that is, per ounce. So if the ounce would be a different ounce — say having less or more weight — then the price would accordingly be lower or higher. To the price per se is not informative. It always needs to be put in perspective of the underlying unit.

Let us further briefly try to understand, why the media and many other participants tend to compare Bitcoin to Gold. What are similarities? Both are scarce. With Bitcoin, there only exist 21 million coins that are predicted to be fully mined by the year 2140. Also, creating Bitcoin requires “miners”. We are talking about a digital process of solving mathematical problems and using computational power. With Gold, you use an excavator and literally mine a physical substance from the soil. An important similarity of Bitcoin and Gold is the scarcity; but all other comparisons are misleading and are not a good reason for simply comparing prices.

What matters is the market capitalization of a financial asset and not the price

At this point, it should become more clear that a crypto currency’s unique selling proposition is very often not solely an alternative medium for transactions, but also a collective space for ideas and visions, driven by people. Take Golem for example that allows setting a market price for computation power. By comparison, Gold is a medium for storing value — this hundreds of years.

A better comparison for Bitcoin or any other crypto currency could be related to established metrics:

market capitalization = price per share x shares outstanding

For crypto currencies, we simply multiply the circulating supply of coins with the current market price. Such metrics can also obtained by existing websites providing market overviews. With this measurement, Bitcoin’s market capitalization of 38.8 billion EUR is for example higher than the market capitalization of Deutsche Bank AG (22.7 billion EUR) or higher than Volkswagen (28.2 billion EUR). Given the German stock market index DAX, Bitcoin for a short time had a market capitalization that would allow it to be in the top 10 companies on the list of the 30 DAX companies. Ethereum has a market capitalization of 21.5 billion EUR which is higher than the market capitalization of Commerzbank (11.8 billion EUR) and also higher than Deutsche Börse AG (17.5 billion EUR). Finally, Ripple currently having a market capitalization of 11.5 billion. Therefore, it would rank on position 26 in the German stock index DAX if simply ranked by size of market capitalization.

To summarize, three crypto currencies have a market capitalization that is so significant that it would allow them to be ranked in the German stock market index DAX30 (if simply ordered by market capitalization). Clearly, this shows the significance of Bitcoin, Ethereum and Ripple — but also the hype going on. Can it really be reasonably explained that — by market capitalization — Bitcoin ranks higher than Deutsche Bank? And Ethereum ranks higher than a successful company like Merck KGaA having a solid business, valuable brands and thousands of highly skilled employees?

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Authors

Sergei Stein is blockchain engineer and consultant at the Frankfurt School Blockchain Center. You can contact him via mail (martin.valenta@gmx.net).

Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). In 2018 and in 2019, he was ranked as one of the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belonged to the “Top 40 under 40” — a ranking by the German business magazine Capital. Since 2017, he is member of the FinTech Council of the Federal Ministry of Finance in Germany. The expertise of Prof. Sandner includes blockchain technology in general, crypto assets such as Bitcoin and Ethereum, the digital programmable Euro, tokenization of assets and rights and digital identity. You can contact him via mail (email@philipp-sandner.de) via LinkedIn or follow him on Twitter (@philippsandner).

Professor | Lecturer | Author | Investor | Frankfurt School Blockchain Center