About the author: John Vandivier is a graduate student at George Mason with formal credentials in policy, economics and political science. He also dabbles in philosophy and apologetics. His blog discusses all of the above at www.thegenerallifeblog.blogspot.com.
In a recent article by CryptoJunky the beginning of the “litecoin explosion” was discussed. Reasons given for the historic increase in price per LTC were essentially twofold: First, a variety of merchants began accepting litecoin in exchange for real goods and services.
Second was the idea of speculation. Mt Gox indicated future support for Litecoin trading. Recently the cryptocurrency community gained further confirmation of that indication from an official statement by Mt Gox.
Since that time a noticeable rise in the value of litecoin has been observed.
The market cap of litecoin increased from just under 1M USD in the early part of February to more than 69M USD. How much of this market capitalization is based on the growth of the productive litecoin economy and how much of this money is only speculative investment in anticipation of Mt Gox support or other miraculous growth?
To answer this question I decided to compare litecoin’s market cap to an estimate of its GDP. This measurement can be thought of as an economy-wide price to earnings ratio. A high P/E is an indicator of overvaluation. As a reference point, the US’s MC/GDP is currently about 1.1 and historically about .7. Apple’s P/E is currently about 10.6 and historically about 18.
In order to calculate a rough GDP for Litecoin I did significant primary research for the month of April’s economic activity and multiplied the observed monthly GDP by 12. Two exceptional resources were the various merchants who were willing to respond with useful information and the website uselitecoin.com, which was by far the best directory I found across the web. Three notable sites of litecoin economic activity which that directory fails to mention would be the reddit litecoin market, the official litecoin forum market, and girls gone litecoin.
I assured the vendors their information would only be used in aggregate. This section including miscellaneous services and sales of real goods comprised about 800LTC/Month from all sources. Gambling was a far greater source of economic activity. Recreational gambling services comprised about 43,200 LTC/Month from all sources.
Investment in stocks and bonds is part speculation and part productive activity. I am not trying to assess investment speculation inside various securities of the litecoin economy, only the speculation of holding litecoin itself. The 62,400 LTC trade volume for the month of April at litecoinglobal.com is therefore included in calculation of the productive economy.
The last thing to measure was Atlantis. Atlantis would not simply give me the transaction volume information I asked for so I estimated it. Nicolas Christin wrote a great and well known academic paper documenting the Silk Road economy. In that paper he found that SR does slightly over 1.2M USD sales per month with about 24.4 thousand distinct items for sale. I presumed that sales were a direct function of items listed. I therefore estimate about 49.2 thousand USD/Month in transactions on Atlantis. Atlantis accepts both bitcoin and litecoin. I believe that the majority of Atlantis sales would be in litecoin because bitcoiners would almost always be better off shopping at SR. Therefore, given that the majority of sales are in litecoin, from a statistically ignorant point of view, we should presume that 75% of sales are in litecoin. If this is true than the litecoin related Atlantis sales total about 34.4 thousand USD per month.
In total we find a litecoin economy of 102.4 thousand BTC and 49.2 thousand USD per month, or the equivalent of (102.4)+34.4/(4.101) = 110.8 thousand LTC per month. Multiplying by 12 to create a GDP value, we find that the litecoin economy has a GDP of 1.3 M LTC per year at this April’s rates. The common metric of market cap to GDP for litecoin is, therefore, 69/1.3 = 53.
Please note that the transaction volume calculation is a minimum because it is comprised of only the transactions I could find. However, according to my calculations litecoin is about five times more overvalued than Apple stock. Put another way, my estimations indicate that less than 2% of litecoins are actually used for transaction while about 98% are used for speculation. All signs indicate that litecoin is hugely overvalued if my analysis is even remotely accurate.
Here’s hoping that Mt Gox follows through, or some other miracle of real productive economic growth comes quickly, because it seems that the entire economy is indeed Waiting on Godot.