Samson Mow, a prominent and influential figure in the Bitcoin community, recently kicked off an interesting discussion. He floated a hypothetical valuation for XRP that set everyone’s jaws dropping. Mow claims XRP’s price would shoot to the moon if the total supply were reduced to be in line with Bitcoin’s 21 million coins. He predicts that its value would eventually increase to around $5,800 per bitcoin. This claim flies in the face of conventional wisdom on XRP’s value and introduces the idea of “unit bias” to the discussion.
Mow's calculation is straightforward: divide XRP's current market capitalization (approximately $122 billion) by 21 million, the number of Bitcoins in circulation. This simple multiplication gives us a theoretical price of about $5,800 per XRP. Mow claims that this number is a fair reflection of what XRP is actually worth. It mitigates the psychological effects of a high circulating supply.
Understanding Unit Bias
The heart of Mow’s argument is found in the idea of “unit bias.” Unit bias is the inclination of investors to want to own a large number of units of a low-priced asset. They are usually more at ease with this scenario than holding less of a more expensive asset even when both assets are equivalent in total value. In the world of cryptocurrencies, investors will always want to hold 1000s of XRP tokens that are under $1 each. Their assumption is that this will be much more attractive than owning a portion of a Bitcoin – worth tens of thousands of dollars.
This bias can negatively distort judgment and cause investors to miss the most important details when assessing the merit of an investment. Investors change tune at this point. Investors usually flood into cryptocurrencies with huge supplies and cheap unit prices. They think these alternatives give them a better bang for their buck. This provides new investors with the tempting promise of becoming a whale, in possession of thousands or even millions of tokens. They fall victim to bait-and-switch marketing schemes that mislead them into thinking these coins are cheaper, faster or better versions of Bitcoin.
Unit bias can make investors overlook the importance of a cryptocurrency's supply and potential for inflation or deflation, as seen in the case of Ethereum's unlimited supply. Unit bias can create a tendency for investors to put undue emphasis on the number of units they will be able to acquire for their investable dollars. Instead, they are prone to misallocate their capital into low-value cryptocurrencies that hold scant promise of future appreciation.
Counter-Arguments and XRP's Fundamentals
Though Mow’s case is an interesting read, there are always two sides to every argument as well as fundamental aspects of XRP that should not be overlooked. Critics like Peter Foxley have expressed concern over XRP’s ability to actually develop international banking. They are particularly alarmed by its centralization and massive lobbying campaign.
Foxley slammed XRP for failing to move more quickly in developing a creation that would supersede current international banking models. XRP’s supporters claim that the firm is doing well, increasing its roster of clients and obtaining more contracts stateside. Development of XRP’s international banking development seems to have “seemingly zero traction,” Foxley reported. XRP supporters argue fiercely that this is completely wrong and that the company is certainly taking the lead in this area. Foxley had lambasted XRP for being too centralized. This movement across the network is seen by XRP proponents as a strength, allowing for faster and more efficient transactions. Foxley argued that XRP’s extensive lobbying to ban Bitcoin and replace it with a U.S. digital asset reserve puts it in a clear conflict of interest. Yet, XRP advocates argue that these measures are an integral part of encouraging adoption of XRP and other digital assets. Foxley warned that, while XRP just made a big leap in value, it’s not a result of the SEC dropping its case. Rather, he argues that other market forces are involved. Yet despite this, XRP supporters maintain that the SEC’s decision caused a major trigger that shot up the price.
Yet all these criticisms point to the necessity of looking beyond unit price to judge XRP’s promise. The future success of XRP ultimately depends on its adoption within the financial industry and resolution of regulatory challenges.
Market Capitalization vs. Unit Price
To appreciate what Mow is getting at, it’s important to distinguish between market cap and unit price.
Market capitalization is simply the current unit price multiplied with the number of coins currently in circulation. The unit price is the current price for one individual coin. Market cap is another term that refers to the total value of all coins currently in circulation. Unit price is simply the value of one individual coin. Market capitalization does not increase until a product or service is successful and that’s where the risks come in. In other words, a private company could release a new product line at $10 a unit and sell a million, increasing the company’s market capitalization even though the company’s units have not changed in unit value.
Their diluted market cap is Total market value of all coins that could ever exist. In the case of Bitcoin, that maximum amount is 21 million coins.
Though unit price may be a helpful measure, the full picture is more complicated. Considering market capitalization gives a much more accurate picture of a cryptocurrency’s true value and potential. Investors should focus on both metrics, in addition to other fundamental factors, when evaluating an investment opportunity.
Mow's hypothetical valuation of XRP serves as a valuable reminder to look beyond the unit price and consider the underlying factors that drive a cryptocurrency's value. By understanding concepts like unit bias and carefully evaluating market capitalization, investors can make more informed decisions in the dynamic world of digital assets.
