Bitcoin is becoming a regular in the news headlines. And, while a lot of people remain unfamiliar with the digital currency for now, Bitcoin is gaining traction. All this has been accompanied by a meteoritic rise of its value. Was Bitcoin worth just USD 13 at the beginning of 2013, currently its value is close to USD 600. Within just one and a half-year, the value of Bitcoin has increased more than 40-fold. That alone is more than enough reason to put Bitcoin in perspective. How big is Bitcoin, really?
Bitcoin in circulation
There are probably a million ways to determine the size of Bitcoin. To explore all of them would be a little bit too much to ask. Therefore, I will focus on the most interesting approaches, and I will spend a blog on each one of these. Since Bitcoin is often addressed as a ‘digital currency’, this first blog, not surprisingly, will focus on Bitcoin as if it were indeed a currency.
First question; ‘How much of Bitcoin is actually out there?’ Coinmarketcap.com shows there are currently just over 13 million Bitcoins ‘in circulation’ with a total value of approximately USD 8 billion. Now, the obvious way to go from here might seem to compare this number with the value of other currencies that are in circulation, as is done in the table below. To keep things simple, I assumed that all Bitcoins that are mined are also in circulation, which is an overstatement as some Bitcoins are stuck in wallets or even ‘lost’.
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The table shows that the value of all euros in circulation totals USD 1.3 trillion. A close second is the US dollar, with a value of currency in circulation of USD 1.1 trillion. Clearly, Bitcoin is no match for that. That shouldn’t be much of a surprise, given the fact that the Eurozone and the US represent the two largest economic regions in the world. To make the comparison more useful, I added a number of countries with a value of currency in circulation that is close to the market value of Bitcoin. With countries like Denmark and South Africa making the list, Bitcoin’s market value compares to the value of currency in circulation of a mid-sized economies.
Total Money Supply
Unfortunately, the value of currency in circulation is not an appropriate measure to determine the size of a currency. Since, most of our money is in the bank, the (potential) amount of currency available is greatly underestimated by the value of currency in circulation. Hence, economists favor the total money supply, which, apart from currency in circulation, also includes all ‘close substitutes’ for money like checking and savings accounts.
So, let’s take another look at the size of Bitcoin, but this time based on money supply data. The most interesting findings are shown in the table below. First, the US and Euro zone money supply data reveal that money supply is in fact much bigger than the value of currency in circulation. The total money supply of the euro and the US dollar is USD 11.2 and USD 12.6 trillion, respectively. That is roughly ten times as big as the value of currency in circulation, but, more importantly, also about 1500(!) times the ‘money supply’ of Bitcoin. Predictions I read about Bitcoin taking over as the new global reserve currency seem a bit premature to me.
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Second, the list of countries with money supplies comparable to the market value of Bitcoin is very different from that in the previous table. The list now consists of countries with very small economies. In fact, Namibia, the only country with a money supply smaller than the value of Bitcoin, is the tiniest economy that is featured in the Bloomberg Global Economy Watch. Thus, if we rank currencies based on money supply, Bitcoin would end up in the bottom of that ranking.
Currency Trade Volumes
Currency is generally defined as a ‘generally accepted medium of exchange’. This implies that, besides the total stock of currency available, the total value of currency transactions also provides a good alternative to measure Bitcoin’s size. Just how much is Bitcoin traded?
To find an answer to this question, I turned to the website of the Bank for International Settlements (BIS). The BIS, often considered the central bank of central banks, keeps track of the daily turnover data of a large number of currencies in its Triennial Central Bank Survey. The last survey was conducted in April of last year and revealed that total foreign exchange trading averaged a staggering USD 5.3 trillion per day. Yes, per day. Most of this trading is related to banks and other financial institutions that use all kinds of derivatives to buy and sell currencies. But even if we only look at the value of all spot transactions, leaving derivatives-related trading out, daily FX trading amounted to USD 2.0 trillion per day.
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The BIS has yet to report trading numbers for Bitcoin, but, fortunately, there is data available. Blockchain.info shows that the transaction and trading volume of Bitcoin has been hovering around USD 50 million per day for some time. Compared with the USD 2.0 trillion of daily spot FX transactions, Bitcoin’s share is negligible, 0.003% to be exact. The smallest single currency that is distinguished in the BIS survey, the Hungarian forint, had a daily turnover of roughly USD 22 billion. If we leave out derivatives and again look at the daily volume of spot transactions (about USD 7 billion), the daily turnover of the forint is still 140 times larger than that of Bitcoin. Hence, trading volume data reveal that Bitcoin’s transaction volume is still incredibly small.
Store of Value
While currency and money are not exactly the same, they are very closely related. The BIS table above sheds some (not all) light on how Bitcoin would rank on one of the key features of money, a means of payments. I will now shortly address the other key feature of money, a store of value, since this will also give a clue on the status of Bitcoin as a currency. Wikipedia defines store of value as ‘the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved.’ That last part, predictably useful, is often directly related to the amount of risk that is involved. The more risky a currency is, the less likely that it’s perceived as a store of value.
This is where volatility comes in, the most common statistic used to measure risk. Unfortunately, a ranking based on risk does not work out well for Bitcoin, as is revealed in the table below. Bitcoin’s average volatility is already ten times larger than that of the second most risky currency in the table, the Hungarian forint. Compared to the world’s biggest USD currencies pairs, the euro and the yen, Bitcoin’s volatility stands out even less favorable. Based on the most recent volatility data, Bitcoin’s relative risk profile has improved somewhat, but it remains the sole outlier. It is exactly the volatility number that neatly explains why many consider Bitcoin’s risk profile to be its main hurdle for becoming a mainstream currency.
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One thing should be taken into consideration when looking at this table, though. Some of the smaller countries have pegged their currencies to the US dollar in one way or another. This concerns most of the Latin-American currencies and the Philippine peso, for example. Their volatility numbers would probably be significantly higher without a USD peg. Still, an outcome of 154% realized volatility, is highly unlikely. Generally, currencies that function as a store of value are characterized by a low level of risk. At this point in time low volatility is no characteristic for Bitcoin.
Bitcoin as a currency? Only a small and risky one, for now
Bitcoin’s market value is comparable with the money supply of some of the smallest economies in the world. Furthermore, its trading volume represents only a tiny fraction of the daily FX trading, as calculated by the BIS. Also, to function as a credible store of value requires a relative low level of risk, something that is currently not the case for Bitcoin. Bitcoin’s volatility has decreased in recent months, but it remains immensely risky for now. This leads me to the conclusion that if Bitcoin is a currency (which in itself is debatable), it is fair to say that it would be a very small and very risky one. Next up, Bitcoin as an investment.