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Author Topic: Understandin the importance of Bitcoin market cap & why BTC is unique  (Read 1934 times)
contactluis
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March 24, 2013, 04:39:02 AM
 #1

I've seen many people posting that don't quite understand how/what market capitalization is and how important it is to Bitcoins.  Calculating market cap for Bitcoins is very easy. Take the Bitcoins outstanding (about $10.9 million) and multiply it by the current price (currently at $63) and the resulting $686 million is your market cap. For comparison purposes Facebook market cap is $6 billion. Market cap is important because the larger it is, the more likely that investors will invest in it because of the perception of liquidity and stability.

Below is a chart that demonstrate how market cap increases for Bitcoins.
http://anonymouse.org/cgi-bin/anon-www.cgi/http://img685.imageshack.us/img685/7928/marketcapbitcoins.png


Probably because it is Saturday, but I'm so surprised that I haven't been able to find a news about how this morning the market cap for Bitcoins dropped from $744 million ($68 price) to $572 million ($52.35 price) and then climbing back up to $738 million ($67.5 price) in less than 4.5 hours. I've never heard of that happening and I'm a retired financial analyst for a brokerage firm. THAT IS INCREDIBLE and is further proof that Bitcoins don't follow normal rules. It is unique from every financial investment product ever created. 
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fornit
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March 24, 2013, 05:15:28 AM
 #2

event description:
i sell all my btc to my little sister for 1 cent. suddenly, bitcoin market cap is around the price of a beer.
then my little sister sells me one satoshi for a beer and the market cap of bitcoin is around the price of 15 planets, including moons and inhabitants.

also, the amount of money invested in bitcoin is always zero.

but thanks for the explanation  Wink

btcbug
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March 24, 2013, 05:24:22 AM
 #3

Hi, I can see how with a each transaction in your example the price is being set between the buyer and seller. When the new price is applied to 10,000 units of Bitcoin we get the market cap. At step 4 you have the column "market cap" at $40,000, but then below you are saying "the market cap went from 0 to 40 million..." Where does 40 million come from? I thought 10,000 units x $4 was $40,000 market cap?
fornit
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March 24, 2013, 05:27:36 AM
 #4

the column is x 1000.

btcbug
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March 24, 2013, 05:29:44 AM
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the column is x 1000.

Thanks!  Cheesy
contactluis
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March 24, 2013, 06:14:00 AM
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event description:
i sell all my btc to my little sister for 1 cent. suddenly, bitcoin market cap is around the price of a beer.
then my little sister sells me one satoshi for a beer and the market cap of bitcoin is around the price of 15 planets, including moons and inhabitants.

also, the amount of money invested in bitcoin is always zero.

but thanks for the explanation  Wink

You are correct, the amount invested in Bitcoin is always zero. That column maybe should read "Total individuals cost of buying BTC". What that means is that my purchase of $10,000 is added to your sister's purchase of 1 cent and my daughters purchase of $1,000 to total $11,000.01.  What I was trying to show in the chart is that market cap has no relationship to the cost of buying Bitcoins. I've seen post where people think that because the market cap was $800 million there must be $800 million put in for the purchases of Bitcoins. Nobody knows how much money is tied up with the purchases of Bitcoins. 

I didn't think anybody would catch that, now I know do dot my i's.
theta
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March 24, 2013, 04:45:07 PM
 #7

I've seen many people posting that don't quite understand how/what market capitalization is and how important it is to Bitcoins.  Calculating market cap for Bitcoins is very easy. Take the Bitcoins outstanding (about $10.9 million) and multiply it by the current price (currently at $63) and the resulting $686 million is your market cap. For comparison purposes Facebook market cap is $6 billion. Market cap is important because the larger it is, the more likely that investors will invest in it because of the perception of liquidity and stability.

Below is a chart that demonstrate how market cap increases for Bitcoins.



Probably because it is Saturday, but I'm so surprised that I haven't been able to find a news about how this morning the market cap for Bitcoins dropped from $744 million ($68 price) to $572 million ($52.35 price) and then climbing back up to $738 million ($67.5 price) in less than 4.5 hours. I've never heard of that happening and I'm a retired financial analyst for a brokerage firm. THAT IS INCREDIBLE and is further proof that Bitcoins don't follow normal rules. It is unique from every financial investment product ever created. 


You example is wrong. The rise in price can only happen if there is more buying than selling at the previous price. So between events 5 and 6 you are missing several events of people buying BTC thus driving the price up from $9 to $12. Same between evens 7 and 8. Thus the total $ amount invested is way higher than $10534.

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auzaar
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March 24, 2013, 05:29:17 PM
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You example is wrong. The rise in price can only happen if there is more buying than selling at the previous price. So between events 5 and 6 you are missing several events of people buying BTC thus driving the price up from $9 to $12. Same between evens 7 and 8. Thus the total $ amount invested is way higher than $10534.

more buying than selling  ? WHAT?
contactluis
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March 24, 2013, 07:26:57 PM
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You example is wrong. The rise in price can only happen if there is more buying than selling at the previous price. So between events 5 and 6 you are missing several events of people buying BTC thus driving the price up from $9 to $12. Same between evens 7 and 8. Thus the total $ amount invested is way higher than $10534.
[/quote]

You are wrong, a rise in price may happen when there is more selling than buying if the sellers hold out until their perceived value target (the ask price) are realized by the buyers. Conversely, the price may decrease even though there is more buying than selling if the sellers have no confidence in their perceived value of the future of Bitcoins. An example of the first statement is if me and 7 friends are asking $90 for BTC, the last price was $80, and you and your cowardly friend are bidding $79. If me and my friends hold to our $90 asking price and your friend decides that he rather pay $90 then to be left without any BTC, then the price will rise.

You are wrong again!  There is no reason why person D pays $9 each for a Bitcoin and within seconds person A sells his Bitcoins for $12. Yesterday (3/23/13) early morning I was watching MtGox live (it's my porn now a days) and the price decreased from $65 to $55 and then increased back to $65 within seconds (and it happen at least twice).  That's a $10 or 15% spread between bid and ask price. That never happens when dealing with registered stock because the broker dealers are responsible for keeping the spread more close.  I like the Bitcoin way better because it is unregulated, it's like being in the old west.

Btw, I don't like expressing my opinion by saying that someone is wrong, partially because if I am mistaken in my retort I wouldn't like someone to point it out in a public space, it makes it look like I have no credibility and don't know what I'm talking about. But in this case I've decided to sink to your level. :-)
theta
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March 24, 2013, 07:41:07 PM
 #10


You example is wrong. The rise in price can only happen if there is more buying than selling at the previous price. So between events 5 and 6 you are missing several events of people buying BTC thus driving the price up from $9 to $12. Same between evens 7 and 8. Thus the total $ amount invested is way higher than $10534.

more buying than selling  ? WHAT?

yes, at the previous price, read it again. More buy orders at $9, no sell orders, therefore price goes up to $12. It doesn't go magically to $12.

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theta
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March 24, 2013, 07:49:08 PM
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You are wrong, a rise in price may happen when there is more selling than buying if the sellers hold out until their perceived value target (the ask price) are realized by the buyers. Conversely, the price may decrease even though there is more buying than selling if the sellers have no confidence in their perceived value of the future of Bitcoins. An example of the first statement is if me and 7 friends are asking $90 for BTC, the last price was $80, and you and your cowardly friend are bidding $79. If me and my friends hold to our $90 asking price and your friend decides that he rather pay $90 then to be left without any BTC, then the price will rise.

Btw, I don't like expressing my opinion by saying that someone is wrong, partially because if I am mistaken in my retort I wouldn't like someone to point it out in a public space, it makes it look like I have no credibility and don't know what I'm talking about. But in this case I've decided to sink to your level. :-)

While I take your point about starting my response with "wrong" (I didn't mean to be rude or anything, honestly), in this case I insist. In your example, there's no buying or selling at any price between $79.01 and $89.99, and there's marginally more buying that brings the price to $90. There's 90 additional dollars spent to buy bitcoins, and this caused the "market cap" (quotation marks, because I prefer the term monetary base instead but anyway) to rise.


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contactluis
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March 24, 2013, 08:15:04 PM
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You example is wrong. The rise in price can only happen if there is more buying than selling at the previous price. So between events 5 and 6 you are missing several events of people buying BTC thus driving the price up from $9 to $12. Same between evens 7 and 8. Thus the total $ amount invested is way higher than $10534.
[/quote]


yes, at the previous price, read it again. More buy orders at $9, no sell orders, therefore price goes up to $12. It doesn't go magically to $12.
[/quote]

I just gave you a real life example of when the price "magically" decrease by $10 and increase by $10 within a matter of seconds. I guess that I don't understand what you are trying to say.  Would it make easier and more believable to you if person A sold his BTC for a price of $9.01?  If so, it would not change what I was trying to say with the chart.

Also, I believe that the monetary base for Bitcoin is 10.9 million BTC. 
DannyHamilton
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March 24, 2013, 08:25:22 PM
 #13

Those of you who are claiming there is "more buying than selling" really need to pay attention to what you are saying.  For EVERY buy, there is a SELL.  You can't have more of one than the other.  Nothing can be bought unless someone else sold it.  Nothing can be sold unless someone else bought it.  There is not "more buying than selling".

What there is is a willingness on the part of buyers to increase the amount they are willing to pay, and an requirement on the part of sellers that the buyers pay more for what they are selling.  This increases the exchange rate.  It can jump from $9 to $12 in a single trade with no trades occuring at values between (although this is unlikely in a market with sufficient liquidity).

Decreases in exchange rate happen when the opposite occurs.  Sellers have a willingness to decrease the amount they will accept for the sale, while buyers demand lower prices.

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March 24, 2013, 08:28:35 PM
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yes, at the previous price, read it again. More buy orders at $9, no sell orders, therefore price goes up to $12. It doesn't go magically to $12.

Nope, the price doesn't go to $12 until there is both a buy order and a sell order at $12.  There can be a million buy orders at $9 and ten sell orders at $12, but if just one seller comes along and agrees to sell at $9 then the price is still $9.  Note that the number of buyers and number of sellers has no bearing on the actual current price.  The current price is the price that just one buyer and just one seller agree to.

contactluis
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March 24, 2013, 09:55:17 PM
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Those of you who are claiming there is "more buying than selling" really need to pay attention to what you are saying.  For EVERY buy, there is a SELL.  You can't have more of one than the other.  Nothing can be bought unless someone else sold it.  Nothing can be sold unless someone else bought it.  There is not "more buying than selling".


You are wrong DannyHamilton!!! j/k  Actually you are technically correct "For EVERY buy, there is a SELL" but I think that the folks in this forum are capable of knowing what we are talking about when we say "more buying than selling".

It's common financial industry lingo to say "more buying" or "more selling" to express the effect  of supply and demand. I could of said "more amount of dollars in open orders to buy than the amount of dollars in open orders to sell " but it would further signify that I'm a know it all douchebag.  Grin
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March 24, 2013, 09:57:05 PM
 #16

We are focusing on semantics here but I'll play along. Price goes up if there is no quantity available to sell at the previous price but only at higher price, and there is at least one buy order at a price greater than that previous price that meets a sell order at that higher level. Would that be satisfactory?

If we agree to define it like that, my point remains, which is that for the price to go up, you need new buyers (or more buy orders from existing buyers, let's not focus on semantics please), ultimately more US$ spent to buy bitcoins. So that figure in the OP's example cannot be $10540, it has to be greater.

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theta
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March 24, 2013, 09:58:44 PM
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Those of you who are claiming there is "more buying than selling" really need to pay attention to what you are saying.  For EVERY buy, there is a SELL.  You can't have more of one than the other.  Nothing can be bought unless someone else sold it.  Nothing can be sold unless someone else bought it.  There is not "more buying than selling".


You are wrong DannyHamilton!!! j/k  Actually you are technically correct "For EVERY buy, there is a SELL" but I think that the folks in this forum are capable of knowing what we are talking about when we say "more buying than selling".

It's common financial industry lingo to say "more buying" or "more selling" to express the effect  of supply and demand. I could of said "more amount of dollars in open orders to buy than the amount of dollars in open orders to sell " but it would further signify that I'm a know it all douchebag.  Grin

exactly my point.

You know, in trading desks the running joke when people ask why the market is up is "there are more buyers than sellers", and vice versa.

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June 06, 2013, 09:54:43 AM
 #18

Are people so dense they actually think a billion USD has been net spent aquiring BTCs because that's the market cap?

First off the circular exchange of BTC for commerce has little or no effect when all the commerce is denominated in USD, the dollars just flow through BTC with the buyer and seller each exchanging at the market price in a neutral pair of transactions.  The real price setting behavior is the purchase of newly minted coins and the demand for new BTC holdings weighed against the coins that miners choose to offer for sale.  Old hoarded coins can come out out of hibernation and crash the price too but this is secondary as the market can generally absorb such shocks and bounce back.  Currently miners are not offering many of their new coins because profitability is so high they need to liquidate a small fraction of them to pay for electricity costs (and many are likely deciding to eat the electric costs now under the belief the coins will appreciate).  Once mass uses of ASICS's squeezes out the profit margin we will see a correction as the miners are unable to hold back their coins.  The price will decline to an amount that reflects the sustainable new buy that users are willing to make in BTC.

FRC:  18mAGEto3xZzfKNJPwsDVA5c2Fk5Za3nbs  http://www.freicoin.org  IRC:  Freenode #freicoin
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June 06, 2013, 12:46:11 PM
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Once mass uses of ASICS's squeezes out the profit margin we will see a correction as the miners are unable to hold back their coins.  The price will decline to an amount that reflects the sustainable new buy that users are willing to make in BTC.

Don't agree with that. Actually they will just stop mining - as I did two months ago, because I decided not to buy an ASIC miner. Now I am just holding Bitcoins.

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