The Economist's Big Mac Index is a financial instrument almost thirty years old, built on the theory of the Purchasing Power Parity. PPP essentially means that, over time, currency exchange rates should equalize such that identical goods cost roughly the same in any two countries. It is used to measure the value of currencies in that if more of a currency is required in one country than another to get the same thing, the local currency is undervalued by a certain percentage.
The Big Mac Index uses a McDonald's Big Mac as its measuring stick. It currently allows for the user to select between the world's major currencies – US dollars, British pounds sterling, Euros, the Japanese Yen and the Chinese Yuan. However, Bitcoin loan market maker BitBond saw a missing currency – the other contender in the race to be the dominant reserve currency, Bitcoin. Thus,
At time of writing, a Bitcoin would buy you about 70 Big Macs in the United States, but 100 globally, making Bitcoin theoretically undervalued by up to 30% in the United States.
CEO & Founder of Bitbond Radoslav Albrecht said of the move:
The use-cases for bitcoinppi.com are manifold and showcase Bitbond’s desire to bring further value to the Bitcoin ecosystem. By launching this site, we aim to bring a lighthearted yet highly usable index signifying the products that one Bitcoin buys you.
The data is also available via a handy application programming interface, meaning that alternative cryptocurrencies such as Litecoin and Dash could, for instance, take their current exchange rate versus Bitcoin and quantify their PPI. Additionally to that end, the code of the site is available on Github.
Traders may find the data helpful in deciding which exchanges and countries to attempt to source from and sell Bitcoins to. If one country has a high Bitcoin purchasing power and another has a lower one, there may be arbitrage opportunities not previously evident.
Big Macs were perhaps a more popular food choice in 1986, and so CCN asked BitBond associate Chris Grundy if his group was considering applying the idea to other items, such as a gallon of gasoline. His response was astute:
We named it the Bitcoin Purchasing Power Index in order to keep the possibility of adding further measures of value open for the future. The Big Mac hamburger, as used by The Economist, is perfect for our purposes because it offers a universally uniform and accessible product that can therefore show the local value of bitcoin in a bank agnostic way. Thus, Bic Mac hamburgers were the obvious choice, but we may well add other measures such as a basket full of goods and commodities that fit the specifications equally well. Gold, for example, would be in such as basket.
By all rights, young Bitcoin is a true contender for the status of the world's preferred reserve currency. Its modernity, security, and immutability make it especially appealing for countries currently at the behest of world powers like China or the United States.
Images from Shutterstock and Bitbond.