Here's the [ formula ] I use:
Bmo = N x A
Bmo ~ total value bitcoin M0 (also called 'market cap')
N ~ total number of entities holding bitcoins
A ~ average Amount of value holding entities are willing to hold in btc
It appears likely that N is only going to keep increasing for the forseeable future (perhaps with exponential adoption rates at times).
A will stay around the same but also may increase as the confidence in holding value in btc becomes firmer.
You can let N to be any number of people, as long as it includes all people holding bitcoins in some time interval of interest and A is the average over that same set of people.
So, let N be the number of all people who have held some bitcoin at any time since January. Then N is fixed.
The Bmo of bitcoin has fallen 50% since January. Therefore A must have fallen by that much, too. So much for "A will stay around the same".
The formula is problematic also because it does not take into account the dynamics of BTC investing. It seems that most of the extant bitcoins are held by "old" inactive investors, who are confident enough to hold them for a while longer, but were not confident enough to buy more coins over the last year. (If the price keeps falling and they eventually decide to sell at 100 $/BTC, their old bitcoins would still have been a great investment, but any bitcoins acquired over the last year would have been a terrible one.)
So, the contribution to the A factor of those old investors does not depend on their confidence in bitcoin. Rather, the amount of
BTC that they are willing to hold is constant, and the amount of
value that they are wlling to hold in BTC varies according to the market price of BTC, as determined by the Chinese traders.
In that case the value of A does not determine the market price, but is passively determined by it -- making the formula useless as a predictor of price.Indeed. When viewing bitcoin as a "holder of value" and not as a "means to buy stuff", the only thing that will determine the bitcoin price is the market share of the aggregate demand for "store of value" that bitcoin will have in competition with other such stores of value (gold, stock market, fiat - including bonds and the like, real estate, works of art, land, ...). That market share will then be the market cap of bitcoin. If people want to hold the value equivalent of 20 billion dollars, then the market cap of bitcoin will be about 20 billion dollars. If that market cap is 1 trillion dollars equivalent, then the market cap of bitcoin will be 1 trillion. And if that share is 50 million dollars worth, bitcoin's market cap is 50 million.
The formula is of course correct, but as you say, teaches us little about the price in this case. N will simply be the average number of people wishing to hold B x A value on average in bitcoin (B the bitcoin price in dollar, A the number of bitcoin).
Of course it is true that passive holders of bitcoin don't SEEM to be counted here, but they do. By there passively holding bitcoin, they are in fact (passively) choosing to hold the current price B times their holdings in bitcoin. It doesn't matter whether they invested $ 1000,- or $ 1 million at the time. At the current price, he's ACTUALLY holding, say, $10 million. If he keeps it in bitcoin, he's passively deciding to hold $10 million in coins.
The formula also includes the holding time (or the inverse of holding velocity), as I said before.
If 100 people on average are holding value in bitcoin for 3 years, then this is equivalent to 300 people holding bitcoin for 1 year. THAT is what N stands for : n x T, where n is the total number of people wanting to hold value A in bitcoin for a time T.
But n x T x A is exactly the amount of value that people want to hold in bitcoin, which is a fraction (market share) of the total demand for holding value.
But, as you say, chopping this up doesn't make much sense. What counts it the market share in the aggregate demand for "holding value".
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