Topic: How I figure the Bitcoin marketcap (Read 1988 times)

A blatant keynesianization attack on bitcoin. That's futile.

basically the formula is this

Price of coins x Amount of coins = (Fees – Expenses) x Speculation

There is no such thing as a market cap for a currency. That is comparing apples to oranges.
Bitcoin and crypto are most certainly NOT money. They are digital assets, but not currencies.
Anyway, call them what you will - but the money supply anyway is not the same as market cap.

Say there are $100 trillion in existence. Is the market cap of dollars $100 trillion? No- because new money can be created via loans or credit without the need to 'print'. Is $100 trillion the size of the U.S. economy or the GDP? Also certainly not, dollars get used more than once (velocity) - you spend $1 to buy a pack of gum, the gum seller uses it to buy an apple, the apple seller uses it to buy a coffee etc.

As for commodity assets you can't actually say what is the market cap of oil, for instance. That is an absurd question to ask in the first place. One can estimate the current market value of all the oil ever produced, or yet to be produced but that is not a market capitalization.

Bitcoins are NOT shares of ownership in the Bitcoin ecosystem or anything else. Having $100 in your wallet does not give you ownership of America. Having 100 shares of Apple DOES give you ownership of Apple, Inc. however tiny.

Bitcoin has value and a market price, but it is incorrect to try to value a digital asset the same was one would value a company (shares of stock), bonds (debt), or foreign currency. FX is governed in the long-run by pricing parity principle (PPP) and via arbitrage through covered and via theory by uncovered interest rate parity.

For companies yes, for currencies not so much!
Number of coins x value of the coin.  Easy

I think you have it backwards. Market cap is the price of a share times the number of shares. All other meanings, including yours, are inferred from that. The number you are computing is something, but it isn't market cap.

You are basically doing this:

value = earnings x P/E

which is another way of computing the value of something.

Yes, your formula is correct.  That is how market cap is determined in the present. 

I am talking about how the market comes to that conclusion.  So this is the formula for the whole process.   

I think you are confused. Market capitalization is simply the market value which is $price x shares outstanding.
In bitcoins case it is $price x #bitcoins in existence currently.

How I can figure out the market cap.  (I'm not an economist but this makes sense to me)

M = (F – E) x S

When M = market cap
F = fees
E = expenses
S = speculation

This says that the market cap gets its foundation from fees.  This means that the blockchain in question must have a service that I am willing to pay for in the way of fees.  So let’s say for instance the block chain in question has a service of encrypted messaging and I am desperate to send a message to my friend in another country but it is absolutely essential that nobody can read it but my friend.  How much am I willing to pay for it?  Well….. in today’s market place competition has made encrypted messaging very cheap to the point it is almost free.  But let’s suppose that I am paranoid and I don’t trust other encryption services because I can’t understand all of their code and am suspicious they might be honey pots.  But I have found one blockchain that I can trust with certainty, so how much am I willing to pay to send this message?  For the case of this argument, let’s say the fee is $5 and I would have been willing to pay $10 but since it is only $5 that is all I pay.  And now let’s presuppose that the market cap is $0 for this entire blockchain because it is new, not well known, and not ever used.  The price of the tokens doesn’t matter.  Whether it takes me 1 token or 1,000,000 to get to $5 worth of token to pay the fee is irrelevant to me.  I find somebody who is willing to sell me $5 worth of tokens to do my transfer.  If I found one person to sell me the tokens, then fine, he gets all the $5, but let’s say that there are exactly 1000 founding shareholders in this blockchain each with an equal share.  I now am giving them $0.0005 each.  Whichever the case it doesn’t matter.  I have effectively pushed the price of the market cap up to $5 and we can then find out the value of each coin by dividing $5 by the amount of coins in the market place.  

Now lets say another person comes along with another $5, I have already cleared out all the lowest sellers of $5 worth of coin and so when the next person goes to buy the coins the price will be a miniscule higher.  Now that person goes to make the transfer but when the go to make the transfer they can’t!  Why?  Because their $5 didn’t buy the full transaction fee since they were paying higher than me.  So they now had to pay $5.01.  This now brings the market cap up to $10.01.  Each time a person wants to send a message, it will cost them a little bit more in fiat because the coins that are needed to pay for the fee will be slightly higher.  

But the coins price is not always one where the price goes up.  Sometimes the price goes down, and why? That is because of expenses.  The people maintaining the blockchain are using resources to maintain the chain.  What if I as a large holder of tokens finds out I now need to pay my electricity bill?  In doing so, I need money, so I am willing to now sell coins for cheap, much cheaper.  By now more people are needing to make transactions.  If I sell my coins into their buy walls and I lower the average price of the token, then the market cap goes down.  If I need a lot of electricity, then maybe I have to sell a lot of coins.  If there are not so many people will to pay for the blockchain’s service of encrypted messaging, then I might sell coins all the way down to 0.  

But this isn’t the final part of the equation.  A wild card now enters into the market and that card’s name is speculation.  Some might look at the blockchain and say, while it isn’t earning very much in fees now, in the future there will be a real need for these tokens to pay fees so I will buy them now and then sell them later when they are more expensive.

Speculation can also be negative.  Maybe I am a large holder of tokens but I think that someday soon the blockchain will stop earning fees, I might then sell my coins each for far less than then what current fees minus expenses divided by coins in the system dictates.  In this way I have done a transaction based on negative speculation.  

Speculation then can wildly distort a blockchain’s true market cap because the prices are being determined by project future value.  And in crypto there is A LOT of speculation.  
But we can see in this instance why a POS/POI style of block chain in the long run is far superior to a POW style of blockchain.  In a proof-of-work style of blockchain constant resources are being expanded in the way of expenses for miners.  For instance with the case of Bitcoin miners, they are charging the system hundreds of thousands of dollars a day in expenses.  They dump their coins and this lowers the market cap.  In a very energy efficient system of maintaining the blockchain like POS/POI then each dollar that goes into paying fees for services is a bigger contributor to market cap prior to speculation taking its effect.  In the case of Bitcoin the coins paid to miners for maintaining the system have already cost Bitcoin’s market cap 100’s of millions of dollars.  

So what is the real value of Bitcoin?  What services does it provide?  Does it allow me to send encrypted messaging?  Well, not really.  For me personally as a technology Bitcoin has been very useful as a means of international remittance.  I can easily save a few hundred dollars a year by using bitcoins instead of my bank to wire money abroad, and I am definitely willing to share part of that money as fees to pay expenses to maintain the blockchain.  For me to continue using Bitcoin but have to pay $100 a year in fees would still be a winning proposition for me.  

So are there enough people out there like me willing to pay $100 a year in fees to maintain the system?  Considering that miners will need to be paid more than 100 million dollars in the next year that would mean that there needs to be at least be 1,000,000 people equivalent to me.  If there are 999,999 then the price goes down.  If there are 1,000,001 then the price goes up excluding for speculation.  Of course once speculation gets into the picture, then it does of course get much more complicated.  

Bitcoin can have other services built on its platform, each one of those paying fees.  Both Omni and CounterParty are doing this and Factom probably will too.  And it is likely in the coming years more services will be built.