No, bitcoin is not bigger than New Zealand

One of my pet peeves is people (especially the media) who directly compare stocks and flows. The latest example is from this Bloomberg article about bitcoin (reproduced in the New Zealand Herald yesterday, but wrongly attributed to the Washington Post):

Bitcoin's extraordinary price surge means its market capitalisation now exceeds the annual output of whole economies, and the estimated worth of some of the world's top billionaires...

Here are five things that have been eclipsed by bitcoin in terms of market capitalisation:

• New Zealand's GDP: The nation's farm-and-tourism-led economy is valued at US$185 billion (NZ$269b), according to World Bank data as of July, putting it some US$5 billion below bitcoin. The cryptocurrency's market cap is also bigger than the likes of Qatar, Kuwait and Hungary.

Comparing the market capitalisation of bitcoin (a measure of the entire stock of bitcoin) with the GDP of a country (a measure of one year's worth of output) is pointless. It doesn't really tell you anything.

If all investors are rational [*], then the market capitalisation (of a company, or of bitcoin) is equal to the discounted cash flow (of the company, or of bitcoin) for all time. How that compares with one year's economic output isn't a meaningful comparison. You would need to compare the market capitalisation of bitcoin with the discounted value of all future years of New Zealand's GDP.

So, saying that the discounted cashflow of bitcoin for all time is greater than one year's economic output of New Zealand doesn't tell you much of anything. It definitely doesn't tell you that "Bitcoin is now bigger than... New Zealand".

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[*] Of course, it isn't at all clear that investors in bitcoin are rational. From what I can see, all of the 'bitcoin bulls' have significant investments in bitcoin, so it is hard to conclude anything other than there is a large amount of nest feathering going on. When you see a case where the market value of something is entirely based on the expectation that other investors will be willing to pay more for it in the future (because those investors, in turn, believe that other investors will be willing to pay yet more for it further in the future), then it's pretty likely that you're observing a bubble. And in that case, the people who yell "bitcoin is not a bubble" the loudest are those most likely to lose their shirts.

[Update]: Liam Damm makes a similar point.