The Case for Measuring Cryptocurrency Value in Bitcoin
Bitcoin has obviously had a huge year in 2021. The price surged nearly 100% (before falling) and it has finally begun to receive the institutional investment that many knew it would eventually receive. More importantly, questionable monetary printing policies by the US Federal Reserve has made for a very solid argument for storing wealth in an non-depreciating asset (ie. Bitcoin).
With all of that in mind, this article will make the case for why you should denominate the value of cryptocurrency in Bitcoin rather than United States Dollars or other fiat currency.
What Does ‘Measuring Cryptocurrency Value in Bitcoin’ Actually Mean?
This is actually a really simple point to understand. Basically, instead of measuring the value of Ether in USD, we would measure it in BTC.
In the case of Ether, the value is 1 ETH/0.07 BTC.
This does not only apply to Ether, though. Bitcoin can be used for all cryptocurrencies. The next section will explain why this makes more sense than measuring in fiat currency.
3 Reasons Why Valuing Cryptocurrency in Bitcoin Makes more Sense
These are the top three reasons why valuing cryptocurrency in Bitcoin makes more sense from an investment perspective. These are general points, but they make perfect sense from an investment perspective.
Fiat Currency Inflates
The most important reason to measure cryptocurrency value in Bitcoin instead of fiat currency is that fiat currency inflates. This has always been a feature of fiat currency.
However, it became more problematic when the US Federal Reserve decided to print approximately 20% of the total dollars in existence in 2020 to prevent a depression from the COVID-19 pandemic.
This means one thing – inflation. Inflation has obviously been a little bit of a problem, but printing 20% of the total money supply in one year will cause inflation when the economy eventually reopens and the velocity of money increases.
This brings an interesting point about measuring the value of an asset to the table. Does it really make sense to value an asset in a currency that will inflate that much?
No, it does not. The reason is simple, too.
There is no way to know whether the asset has actually increased in value or the underlying currency has inflated.
Bitcoin Is a Benchmark
Next, Bitcoin is a benchmark in cryptocurrency. It is the best performing asset when measured on a long enough timeline (ie. bull market to bull market).
This means that it makes the most sense to compare the price of other cryptocurrencies to Bitcoin. Comparing an asset to another asset simply makes more sense than comparing it to a fiat currency.
For instance, if a cryptocurrency gains 100% in value measured in fiat currency while losing value against Bitcoin, then it is not a good investment.
You would have been better off buying Bitcoin because it is safer and it made more money. But that point is slightly hidden by the 100% returns measured in fiat currency.
Of course, you could compare the returns in fiat against each other. It just makes more sense to cut out the middleman (fiat currency) and measure everything against Bitcoin, though.
Cryptocurrencies Generally Follow Bitcoin
Finally, cryptocurrencies generally follow Bitcoin. Did the price of Bitcoin increase?
The price of altcoins likely increased as well.
Bitcoin drives the rest of the cryptocurrency market. (Source: InvestoTrend)
However, this is not the case for all altcoins. There are some that do better than others when the price of Bitcoin falls. This is most noticeable with Ethereum, which has steadily increased in value against Bitcoin. Ethereum also did not lose much ground when the price of Bitcoin plummeted.
That is obviously a great sign for the future of the coin when the value is increasing in relation to Bitcoin.
The Argument Against Valuing Cryptocurrency in Bitcoin
There are some arguments against valuing cryptocurrency in Bitcoin. We will include those arguments for fairness sake even though they are rather weak arguments.
Bitcoin Is Too Volatile
The biggest argument against using Bitcoin to measure value (or for transactions for that matter) is that its price is way too volatile to be truly useful. This is obviously true – the price of Bitcoin has some impressive swings.
This is why we recommend using it to value other assets rather than your net worth. Despite that, valuing your net worth in Bitcoin still makes sense from an economic perspective.
The Price Is Too Small
Another argument against using Bitcoin for measuring value is that the price is often too small. This is a decent argument because working with small numbers is difficult. For instance, a coin that trades at less than $1 (ie. Dogecoin) will be difficult to measure in Bitcoin because the number is extremely small.
This is simply something that you adjust to overtime. It also does not matter much when looking at the value over time on a chart. All that matters, in that case, is whether the chart is going up or down.
Measuring Value of ERC-20 Tokens in Ethereum
It is also possible, and recommended, to measure the value of ERC-20 tokens in Ethereum. For one, this makes logical sense because ERC-20 tokens are on the Ethereum blockchain. It also gives a good comparison between whether you would have been better off with the ERC-20 token or Ethereum.
In this case, it makes sense to also compare the price with Ethereum as Bitcoin is slightly less relevant.
That covers it for the importance of measuring the value of cryptocurrency in Bitcoin rather than fiat currency. Is this necessary?
No, of course, it is not necessary. However, it offers a better picture of how the cryptocurrency performs when compared to the most relevant cryptocurrency asset rather than fiat currency that inflates in value every year. Simply use this as a tool to measure the success of a cryptocurrency project.
One day Bitcoin will become a more de facto currency. It is still not there at the moment, but valuing assets in Bitcoin is one way to start.
Featured Image: Unsplash.com
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