Cryptocurrency Market Valuation

While an increasing cryptocurrency market valuation is indicative of greater acceptance, it does not define its legitimacy as currency.  In other words, a currency’s legitimacy is not based on its market valuation but rather on its potential for stability of value.  The greater a currency’s stability, the greater its demand as a medium of exchange and store of value.  There is no demand for unstable currencies other than forced demand by government.  While all fiat currencies are unstable, no one would willingly trade U.S. dollars for Venezuela bolivars to hold as a store of value.  The hyper-inflating Venezuelan bolivar may temporarily command an astronomical market valuation based on money illusion, but this is meaningless.  Its use as a functional circulating medium is trending toward zero.

The volatility and massive increase in cryptocurrency price and its corresponding market valuation has become a social phenomenon.  Crypto enthusiasts announce market valuation as validation of its relevance, while skeptics shake their head in dismay at evidence of a modern-day digital tulip mania.  Investors and speculators concoct market valuation theories that predict the value of cryptocurrency and justifies their investment decisions.

Cryptocurrency market valuation cannot be compared with a business entity.  A cryptocurrency does not have assets, cash flows, production costs, or traditional financial metrics.  Growth or decline of these metrics determines the valuation of a business.  The greater the market valuation the greater the increase in value of a business entity.

The growth of a business entity generally increases its value and stands in contrast to the growth of currency.  Currency stability of value is independent of its market valuation.  Nathan Lewis illustrates the difference between currency stability of value on a gold standard and market valuation.

“In 1775, the total amount of currency in circulation (primarily gold and silver coins) was an estimated $12 million. In 1900, it was $1,954 million — an increase of 163x!


During this time period, the amount of gold in the world increased by about 3.4 times, due to mining production.  Obviously, the two have nothing at all to do with one another.  If you were to take similar statistics, from Italy or Britain or France or Germany, you would find that the growth of the money supply in those countries was completely different than that of the U.S., although all of them used a gold standard system.


For example, between 1880 and 1900, the monetary base in Italy actually shrank by 4.8%.  However, the monetary base in the U.S. grew by 81% over those same years. Both used gold standard systems. So, the “money supply” not only has no relation to gold mining production, but two countries can have wildly different outcomes during the same time period.


The value of the dollar was about the same in 1775 and 1900, approximately $20 per ounce of gold (or a dollar worth 1/20th ounce of gold).”

In Lewis’ example the growth in market valuation of the gold linked dollar from $12 million to $1.954 billion in an expanding economy occurred with a stable value currency.  This expansion of dollar supply happened organically over a 125 year time period.  The issue for cryptocurrencies is that they are attempting to expand from zero to a functional currency supply in a few short years with no regard for stability.  This is not natural for any currency.  The result of this expedited fixed supply design, relative to increasing demand, is wildly volatile price swings.   

All money has production costs whether gold mining or dollar minting and seigniorage.  Cryptocurrency mining costs are derived from maintaining the blockchain. But cryptocurrency’s role as a currency is not equitable with fees generated from worldwide payment markets.  Attempts to extrapolate a market valuation and cryptocurrency value based on Visa or MasterCard income from transactions confuse money with credit.  Properly defined cryptocurrency should be a medium of exchange, store of value, and unit of account.  Its transaction fees are a function of blockchain validation and mining.  Visa and MasterCard offer a loan denominated in dollars with terms of interest to the merchant and the borrower.  Credit is not comparable to money, though monetary aggregates like M2 are often mistakenly conflated with money.  The only money is base money: cash/currency and bank reserves.  Attempts to justify a cryptocurrency’s market valuation based on extrapolation of Visa-type transaction fees are missing the definition and function of money, and thus currency.

Gold is the monetary standard of reference because its value has remained stable for millennia.  While gold’s value is stable, it is priced in dollars which have been unstable as a fiat currency.  The dollar price of gold is the inverse of value of the dollar.  Gold has increased by a factor of 36 since 1971, while the value of the dollar has decreased by its inverse, or 97 percent.  The increased market price of gold measures excess supply of dollars created by a rudderless fiat currency regime. 

There is a theory that since gold is precious, its production non manipulable, and its value stable then the total stock of gold represents the only true currency.  This is the Rothbardian view, an offshoot of Austrian economics.  Rothbardians then derive a price of gold by dividing the total monetary stock, Fed liabilities, by the total stock of gold.  This arrives at a price of gold around $15,000/oz.  Some promote the same view for calculating the price of bitcoin.  They divide the monetary stock by bitcoin’s fixed supply of 21 million units.  This is how bitcoin prices of $1,000,000, calculated on M2 instead of Fed liabilities, get tossed around.  

Another popular cryptocurrency valuation method is PANOOYA analysis—pull a number out of your ass.  This seems to be the only explanation for how traders arrive at nice round number valuations like $50,000 or $100,000.     

It is not possible to have a global currency based on the limited supply of gold and it is even less possible to create a monetary system based on a fixed supply of cryptocurrency.  If it was, the monetary system would have evolved to a 100 percent gold money system.  Instead the global monetary system evolved to a gold standard, where governments linked currencies to the stable value of gold.  Any currency linked to gold then becomes as good as gold.  There is a 300 year record of success when gold standards are properly established and maintained.  The U.S. abandoned the Bretton Woods international monetary system based on gold out of academic ignorance.  Starting at the beginning of the 20th century and expedited by confusion over the cause of the Great Depression, monetary managers lost understanding of how and why a gold standard works.  Despite this ignorance, the efficacy of a gold standard remains as valid today as at any time during its successful implementation over the past 300 years.  Gold’s stability of value inertly signals the chaos of the global fiat system.  Cryptocurrencies are a technological attempt around global fiat chaos, but they also must adhere to gold’s monetary reference…or lose relevance as money.   

The Dollar Price of Gold

The Problem with Bitcoin

Edited by Stephen Shipman

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