# A perspective on Bitcoin

Apr 18 · 4 min read

At the time of this writing, one bitcoin costs about \$7,000, which is one-third of its peak in December 2017 but nearly 20 times what it was selling for in November 2015.

Why has there been such fluctuation and what is the true value of bitcoin?

My goal in writing this blog post is not to advise whether you should buy bitcoin, but hopefully to introduce a new perspective on how to think about bitcoin’s value.

When determining value, there are sophisticated methods of pricing stocks, bonds, options and other financial products that ultimately derive from estimating the value of future cash flows, discounted at a required rate of return.

However, currencies don’t deliver future cash flows so the entire value is derived from the appreciation (or depreciation) of what one unit of currency can buy.

How much is bitcoin worth according to the market?

It is easy to calculate the value of the world’s bitcoins as the supply is constrained — there can never be more than 21 million in circulation (~17.1 million have been mined to date). Thus, we can calculate the value of the currency, as a whole, by multiplying the market price of one bitcoin by 21,000,000 which results in just under \$152 billion at the time of this writing.

Compared to other currencies like Euros and Yen, the vast majority of bitcoin is speculatively traded for other currencies rather than for goods and services.

Bitcoin compared to Gold

To that end, it is probably better to compare Bitcoin to a store of value like Gold, that is also speculatively traded for other currencies rather than for goods or services, like jeans and haircuts.

Like with Bitcoin, I will use the total mined and un-mined gold to derive an estimate of total supply. This gives us a total 244,040 tonnes.

At the time of this writing, the price of 1 kilogram of gold is about \$54,000 which gives us a price per ton of about \$49 million.

Thus, the total worldwide value of gold is measured at \$12 Trillion, which is about 80x the value of bitcoin.

Is all of the world’s gold worth 80 times more than the world’s bitcoin?

Before we ask this question, it is important to highlight some key differences between bitcoin and gold.

Currency value - When comparing the two as a currencies alone, bitcoin seems to beat gold. As far as I’m aware, there is nothing tangible that I can buy with a bar of gold or gold coins aside from other currencies.

However, an increasing number of merchants accept bitcoin, including overstock.com, restaurants in NYC and even a preschool in Manhattan. Moreover, the currency is very popular with criminals because of its anonymity. A recent research paper found that \$76 billion a year is spent on illegal transactions through bitcoin (46% of all bitcoin transactions). Reverse-engineering this conclusion tells us that about \$150 billion of bitcoin is used for transactions annually, suggesting that the other 99% (~\$150 trillion market cap)of bitcoin are traded or held as speculative investments.

Ancillary value - While bitcoin may seem to have more value as a pure currency, gold has value that stretches beyond currency. Most obviously, it is something that actually exists in the real world, that also happens to be quite shiny and pretty. As such, half of the world’s gold is used to produce jewelry. Still, another 7.5% is used for manufacturing medical devices, precision electronics and other products due to gold’s unique qualities.

I hope this blog post gave you a new perspective on how to think about cryptocurrencies. I am certainly not an expert on this topic, so I would be very grateful to read any additional or alternative perspectives in the comments section!

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