Many have lost sight of what Bitcoin is.

Bitcoin is money and the Bitcoin blockchain is the system for transferring that money from person to person, and ensures no double-spending without relying on trusted third parties.

People who fail to understand that:

Frances Coppola gets confused about the trust part. She confuses two trust problems: having to trust a third party to arrange the payment (which Bitcoin does solve), and having to trust your counterparty (which the Blockchain does not solve).

Take the example of AlphaBay Market, a dark market (now sadly closed) where could can buy guns and drugs. The people building dark markets have to solve two problems.

The banks will not enable payments to them. And in any case bank payments would expose their users to prosecution. There are lots of rogue sellerss who will rip off the buyers if they can.

Alphabay solved the first problem by entirely operating entirely with cryptocurrencies. There were no dollar payments at Alphabay. (Wikileaks also accepts Bitcoin payment as banks have blocked it.)

Alphabay solved the second problem of trusting your counterparty with a simple review and feedback system , like those on Amazon and EBay. This solution or mitigation of counterparty risk has nothing to do with the blockchain or cryptocurrencies.

For example, the seller of this Beretta pistol has a Trust Level 1 — too low to trust him.

People who almost certainly understand it but pretend not to in order to earn consultancy fees — the ‘permissioned blockchain’ crowd:

People who do understand it:

Bitcoin is Money so use Monetary Economics

Confusion about what Bitcoin is has led to confused analysis about the market for Bitcoin. The idea of a market capitalisation of Bitcoin has become deeply embedded in the world of cryptocurrencies, and it troubles me. It makes as much sense to talk about the market cap. of Bitcoin as it does to refer to the market. cap of dollars. Companies have a market capitalisation, money has a supply. The supply of Bitcoin is perfectly inelastic (vertical Supply curve). The demand for Bitcoin is a demand for Money.

Market Capitalisation

Look at this screengrab from Coincap.io :

Definition of market capitalisation:

“Market capitalization 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

Vinny Lingham argues that the ‘market capitalisation’ of Bitcoin is a better measure of the performance of Bitcoin than its price because of the continuously increasing supply of mined Bitcoins. He suggests a a scenario with a constant price over a period conceals an ever increasing value that is revealed by the growing market cap. measure.

Lingham suggests the mining of Bitcoins is the metaphorical equivalent of a continuous stock-split, or dilution in outstanding capital. Companies split their stocks when the price reaches an impractically high level. This is the history of Apple’s stock splits.

With that 7 for 1 split, for example, for each share of AAPL owned pre-split, the shareholder owned 7 shares post-split. At the same time, the price of AAPL is reduced by the exchanges to maintain a constant market cap. at the exact tine of the split, as is the entire historical time series of the share price.

Lingham concludes that the continuous growth in the stock of Bitcoin should be treated like a non-stop stock-split, and the price of Bitcoin should be manually adjusted down at every increase in supply, as as well as the whole price time-series.

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).

Money Supply

Bitcoin is money, not a stock, and we should think its availability in terms of a Money Supply. (And the market for Bitcoin can usefully be analysed using the Quantity Theory of Money from Classical Economics, MV = PQ.)

Bitcoin is not yet recognized by the ISO and therefore does not have an official ISO 4217 code. It does however have a provisional currency code: XBT. A currency code is generally built from the two-digit ISO 3316 country code and a third letter for the currency. Although “BTC” is often used in the Bitcoin community, BT is the country code of Bhutan. An X-code reflects currencies that are used internationally and are not specific to a single economy or economic group. Thus XE.com has chosen to use XBT to represent Bitcoin. (In the same way, Gold is XAU and not GOL or GLD. And Silver is XAG not SIL or SLV.)

How do you measure the availability of a currency? For a fiat money like the dollar, the (narrow, M1) Money Supply is the total stock of money in the economy: cash held by the public plus money in accounts in banks.

USD M1 changes over time. Usually it grows very quickly — much more quickly than the supply of Bitcoin Money — and, very rarely, it falls.

The Money Supply for Bitcoin presently is a bit over 16 million. It will rise to a maximum of 21 million. That is a total growth, spread over many years, of less than 31%. To place that in perspective, the supply of Dollars often grows 15–20% annually. The Money Supply for Bitcoin measured in USD is Bitcoin Money Supply multiplied by the BTCUSD exchange rate, or price. It is unhelpful to call this market capitalisation.

The Money Supply of Bitcoin and the Narrow Money Supply of USD both grow continuously, with the dollars growing more quickly. Therefore there is no need to revise the historical time series of the Bitcoin price downwards to account for continuous Bitcoin mining activity, as Lingham suggests. To do so is to make the implicit, and false assumption that the stock of Dollars is constant.

It follows from this that the ‘market cap.’, i.e. Money Supply is not a better measure of performance of Bitcoin than its price. They are equally valuable measures. And if the Bitcoin price remains stable for a period, while the Supply increases due to mining, this does not suggest that Bitcoin is gaining ground against the dollar as money. Actually a stable Bitcoin price means Bitcoin is losing ground as the ‘market cap’ or Supply of dollars almost always rises more quickly than that of Bitcoin. The Bitcoin price must continuously increase if Bitcoin is to maintain or increase its market share of the market for money.

The good news is, given the respective growth rates of Bitcoin Money Supply and the USD Money Supply, it’s common sense to expect a continuous increase in the BTCUSD exchange rate.

As an aside, Lingham also discusses the subject of lost Bitcoins, which he estimates at 2.5 million, and I agree that a case can be made to adjust Bitcoin Supply figures (measured in Bitcoin) down to reflect this. The Bitcoin Supply measured in USD (the ‘market capitalisation’) would also fall.

A tweet by Simon Dixon:

The only valid like-for-like comparison is between one Money and another, i.e. between Bitcoin and Silver. I investigated this and it is indeed the case that the Supply of Bitcoin matches that of Silver, measured in USD.