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.
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?
Author: Sergej Stein, Philipp Sandner
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https://medium.com/@philippsandner
One form is digital & one is analog (gold bullion)..
Both have their merits..
I'm investing in both..
Just to be sure..
Me thinks that one supports the other..
"The two headed dragon", cause two heads are better than one..
Diversifying is always a good idea! True, I do not think that Bitcoin and Gold compete in anyway, although they are both used as an alternative medium for storing value (e.g. alternative to stocks). @esteemed1
Agree..
I believe that my research is stirring me true..
wrong. it's all about supression. gold would be worth far more than bitcoin this very second were it not for complete precious metal price control. That's why they are not comparable.
Thank you for your reply @lost.identity ! In fact, Gold is far more worth than Bitcoin (for now), at least in terms of market capitalization. This is also stated and described in the article.
you can't compare the markets because 1 is controlled 100% and one isn't . that's my point. ALSO there is FAR MORE GOLD than on the books.
Good point! Considering the price manipulation of Gold on the markets by central banks etc., one could argue that there is way more market distortion, whereas Bitcoin is purely driven by demand and supply.
Not purely, since the power players have a large stake in BTC and can buy and sell, but they are limited since there are no ETFs or derivitives to fuck with.
This is closer to a pure market than gold. This is valid.
Check this out
https://steemit.com/cryptocurrency/@digicrypt/applying-the-gold-silver-ratio-to-cryptocurrency
Interesting article, but I cannot see why would someone compare physical commodities to a digital currency. Specifically, if you are about to do that, than why not take market cap. instead of price. Market cap. is by far more fair than comparing pricing of two completely different subjects. Just my opinion and a detailed explanation for our reasoning you will find in my article. Thank you for your link! @digicrypt
The article was really born out of the comparison some have made about Litecoin being the silver to Bitcoins gold.(I wrote it more for fun and to make people think differently) After writing the article I realized it may also have been better to analyze based on supply, the ratio of coins mined is 1:4. 21 million BTC and 84 million LTC. Using maarket cap would be another way to do it that could produce interesting results.