The Economist, back in 1986, created the ‘Big Mac Index’ to measure the value currencies in separate economies, showing how much currency it takes to buy a specific item (in this case a Big Mac) in different countries. This gives a better idea of the actual worth of currency than a mere exchange rate. However, it is restricted to a few major fiat currencies, and so Bitcoin loan maker BitBond has launched its own version, BitcoinPPI.com to show the worth of Bitcoin in actual purchasing power in relation to other currencies.
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Economic theory says that currency exchange rates should equalize over time, meaning that a specific item will cost around the same in any two countries, and the Purchasing Power Parity index indicates how much more currency is required than another for a given purchase. The Economist has used the ‘Big Mac Index’ for this for years, as a Big Mac is somewhat ubiquitous around the world and easily recognisable, making it a good choice of product.
It works in a simple way, by comparing how much currency is needed to buy a Big Mac, you can compare how much purchasing power each currency has in real terms, which gives a better indication of value than exchange rates, which can vary significantly, sometimes for unrelated reasons.
However, the Big Mac Index only covers the major fiat currencies, the US Dollar, British Pound Sterling, the Euro, the Japanese Yen and the Chinese Yuan. This excludes quite a few other fiat currencies, but significantly all digital currency of any kind. The bitcoin loan maker BitBond have however launched a new website, BitcoinPPI.com, to remedy this.
BitcoinPPI.com, which stands for Bitcoin Purchasing Power Index aims to offer the same comparison ability for Bitcoin, it allows you to compare the global ‘Big Mac’ value of bitcoin with local exchange rates to see if Bitcoin is under or overvalued where you are.
As we write, the global rate shows a single bitcoin will buy around 100 Big Macs, while in the US, that falls to 70 Big Macs. What does this mean? It suggests that in the United States, bitcoin is undervalued by around 30% compared to its theoretical value, although this does not mean that extra value would ever be realised.
As a tool it is useful not just for bitcoin users, but it does perhaps offer a useful tool for traders who are looking to exploit arbitrage opportunities between nations or regions. The open structure of the tool means that other digital currencies could be added too. Additionally, while currently it deals in ‘Big Macs’ for equivalence as with the existing Economist version, other commodities could be added later, including commodities such as Gold.
As another move in promoting Bitcoin as a genuine candidate for a reserve currency, this is another small step along the way that could prove more significant as time goes by.