Deconstructing the Bitcoin Market Cap

This post was inspired by some tweets that I saw yesterday between Ryan Selkis (Coindesk) & DoctorBitcoin:

There is clearly a widely distributed misunderstanding of what a market capitalization actually is, and specifically as it refers to crypto currencies, and in particular, Bitcoin. I felt compelled to write this post as a result. This is by no means an exhaustive analysis, but it’s a good start to help clear up some market confusion. Please recommend this post on Medium and distribute this post to financial writers/journalists covering Bitcoin to help clear up the confusion.

Let’s start with definitions:

“Market capitalization is just a fancy name for a straightforward concept: it is the market value of a company’s outstanding shares. This figure is found by taking the stock price and multiplying it by the total number of shares outstanding.” — Investopedia

Now, to be absolutely clear, this definition was meant to apply to stocks — not commodities and definitely not digital commodities. Given the comparison is a semi-reasonable proxy for Bitcoin, and it’s widely understood by the financial press, let’s work with it.

All data from this post comes from Blockchain.info, unless otherwise stated.

• Total Bitcoins mined to date = 15.6m
• Total Bitcoins outstanding = 5.4m
• Current Bitcoin Price = $528
• Rate of new coins issued — 3,600/day until next month
• Bitcoins lost/destroyed/missing = 2,5m (approx — re: Coinbuzz)
• Reported All-Time Bitcoin Price= $1,151 (VWAP across all exchanges)
• Reported All-Time High Bitcoin “Market Cap” = $13,8 Billion

You may have already have guessed where I’m heading with this, based on the data above, but nevertheless, let’s explore:

1. If a company is issuing new 25 new shares every 10 minutes, clearly this would constitutes a stock split (continuously) and therefore the historical price of that stock would need to be adjusted to reflect the stock split (this is how it works today). However, in “Bitcoinland”, this is ignored. It’s just too convenient for us to use the biggest numbers possible to reinforce our dogmatic and unfettered belief in Bitcoin as the solution to all global problems and to continue pumping up the price (/end sarcasm).
2. If a shareholder loses their stock certificates and there is no other ledger or proof of ownership, the real market cap of the company would need to be adjusted as those stockholders would be unable to trade their shares, earn dividends or redeem them. The shares are gone and therefore outstanding shares would need to be adjusted. This has happened before, especially pre-electronic trading era. The general consensus is that 1.5m-4m Bitcoins are gone or lost forever. This is VERY material — I believe estimating that 2.5m is a healthy estimate for coins we will never see again, including Satoshi’s coins (risk percentage adjusted). The difference with Bitcoin is that if a hard drive is deleted, you will never recover those coins — it’s not stolen, it’s gone. Gold always remains on earth, even if the Spanish armada sinks in the middle of the Atlantic — Bitcoins don’t.
3. You absolutely cannot use an ATH for a share price if 3.5m shares have been issued (22.5% dilution has occurred) — it must be adjusted! Equally, an ATH for market cap must factor in those missing/lost shares.

I’ve done a quick analysis, based upon my understanding of how the Bitcoin world looks. The dates I’ve used have some historical and some personal arbitrary significance.

The first 2 dates are the two prior peaks (bubbles) of Bitcoin prices that many people will remember. The next 2 dates relate to my first two Bitcoin blog posts, Finding Equilibrium & Bitcoin Rising. July 10, 2015 is approximately 1 year before the Bitcoin rewards are halved this year on July 10th, and May 29th is yesterday, but 3 weeks after my post earlier this month on Bitcoin 2016, predicting the current short squeeze which started in earnest this weekend.

Based upon my analysis, the ATH price for Bitcoin is $697.19 — which most Bitcoin technical & trading analysts, like BitcoinBullBear, will tell you represents a major breakout level for Bitcoin and will likely see a lot of resistance. This is because it IS an ATH for Bitcoin, not a technical level. The technical levels essentially confirm what I’m saying — even though the technical analysis is not factoring in the points above, it’s very clear from market behavior.

The purpose of this post was merely to set the record straight. So, if you’re in the Bitcoin world, please help educate the financial community that Bitcoin’s ATH is not c. $1151, but in fact c. $700 (and this adjusts, the longer it takes to get there, given the number of new coins issued daily). The same way that the Apple share price all time high is not $800 (they did a 6–1 stock split — so it’s $133).

An alternative way of looking at it, for comparison purposes, is that Bitcoin is trading at $733 right now (as opposed to $528), relative to its previously reported ATH of $1151. I would love to see some technical analysts and chartists use my methodology, above, to replot and recalculate trendlines.

When I predicted that Bitcoin will end the year at $1,000+, it’s on an net market cap adjusted basis — so therefore imputed market cap will be over $15bn — which will most certainly be an ATH for Bitcoin…

Edit & Authors note: I’m not saying this is a akin to a stock split. I’m inferring that when a stock split happens, the market capitalization remains the same for the company BUT the stock price is adjusted accordingly. This does not happen as the number of Bitcoins in circulation increases for no value every 10 minutes.

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