Why Market Capitalization is a bad Metric for Bitcoin

[Romyen]

Prior posts have suggested that the term market capitalization as applied to bitcoin be replaced with monetary base (M0) but that is just a semantical distinction.

Market capitalization serves as a poor metric for bitcoin or any other virtual currency for a more fundamental reason, that can be seen by looking at altcoin rankings alongside bitcoin http://coinmarketcap.com There is a new coin called Next Coin or Nxt which might be a scam like some other altcoins, but that isn't my point.  1 billion coins were pre-minted (mining isn't the correct term because the developer claims that a proof-of-stake algorithm generates new coins) and are being sold of in small quantities to gullible buyers. At the time of writing 1 coin is "worth" $ 0.012 giving a market capitalization of about 12 million dollars. I chose Nxt as an example because it reduces the concept of market capitalization to an absurdity.

Bitcoin, like gold, is hoarded more than spent. However, bitcoin differs from gold because it can be cloned or modified in an altcoin, but you can't invent a better precious metal to compete with gold. Bitcoin bases its value upon a protocol rather than physical presence, and the network effect. Bitcoin differs from fiat in that the developer doesn't need to rely on an army and submissive population to enforce the value of his coin.

My point is that metrics used to describe fiat or precious metals don't work well for cryptocurrencies. I think that a new set of metrics need to be developed, probably by statistically characterizing the blockchain. I don't have the answer to this problem, and I'm wondering if anyone is working on it.

[Ibian]

Supply. Demand. One bitcoin is worth what it goes for on the exchanges. No more or less and it is always accurate.

[nate008]

Prior posts have suggested that the term market capitalization as applied to bitcoin be replaced with monetary base (M0) but that is just a semantical distinction.

Market capitalization serves as a poor metric for bitcoin or any other virtual currency for a more fundamental reason, that can be seen by looking at altcoin rankings alongside bitcoin http://coinmarketcap.com There is a new coin called Next Coin or Nxt which might be a scam like some other altcoins, but that isn't my point.  1 billion coins were pre-minted (mining isn't the correct term because the developer claims that a proof-of-stake algorithm generates new coins) and are being sold of in small quantities to gullible buyers. At the time of writing 1 coin is "worth" $ 0.012 giving a market capitalization of about 12 million dollars. I chose Nxt as an example because it reduces the concept of market capitalization to an absurdity.

Bitcoin, like gold, is hoarded more than spent. However, bitcoin differs from gold because it can be cloned or modified in an altcoin, but you can't invent a better precious metal to compete with gold. Bitcoin bases its value upon a protocol rather than physical presence, and the network effect. Bitcoin differs from fiat in that the developer doesn't need to rely on an army and submissive population to enforce the value of his coin.

My point is that metrics used to describe fiat or precious metals don't work well for cryptocurrencies. I think that a new set of metrics need to be developed, probably by statistically characterizing the blockchain. I don't have the answer to this problem, and I'm wondering if anyone is working on it.

Mother nature has taken care of that.
That's why we have silver, gold , platinum and diamonds.
And you can't really tell that gold is better than silver. You have to compare a quantity or the properties and gold isn't winning every time.

[deisik]

Mother nature has taken care of that.
That's why we have silver, gold , platinum and diamonds.
And you can't really tell that gold is better than silver. You have to compare a quantity or the properties and gold isn't winning every time.

Yes, silver is a better conductor than gold. Actually, it is the best conductor out there (at normal conditions). But this doesn't affect their prices/price ratio to a significant degree. That is what important here, so not all properties are worth considering in the first place...

[Romyen]

Mother nature has taken care of that.
That's why we have silver, gold , platinum and diamonds.
And you can't really tell that gold is better than silver. You have to compare a quantity or the properties and gold isn't winning every time.

Yes, silver is a better conductor than gold. Actually, it is the best conductor out there (at normal conditions). But this doesn't affect their prices/price ratio to a significant degree. That is what important here, so not all properties are worth considering in the first place...

This misses the point. Economic metrics are relevant here. Physical properties of precious metals are irrelevant other than the fact that you can physically hold them. They aren't virtual. Posession doesn't need to be verified by a protocol on a blockchain.

[nate008]

Mother nature has taken care of that.
That's why we have silver, gold , platinum and diamonds.
And you can't really tell that gold is better than silver. You have to compare a quantity or the properties and gold isn't winning every time.

Yes, silver is a better conductor than gold. Actually, it is the best conductor out there (at normal conditions). But this doesn't affect their prices/price ratio to a significant degree. That is what important here, so not all properties are worth considering in the first place...

Tell me how you compare the price of gold and that of diamonds please , with the price of bitcoin if you would like to expand it:)
What I was pointing out was that you can't say gold is better than silver. Also you can't say we can't invent a compound better than gold.

[deisik]

Mother nature has taken care of that.
That's why we have silver, gold , platinum and diamonds.
And you can't really tell that gold is better than silver. You have to compare a quantity or the properties and gold isn't winning every time.

Yes, silver is a better conductor than gold. Actually, it is the best conductor out there (at normal conditions). But this doesn't affect their prices/price ratio to a significant degree. That is what important here, so not all properties are worth considering in the first place...

This misses the point. Economic metrics are relevant here. Physical properties of precious metals are irrelevant other than the fact that you can physically hold them. They aren't virtual. Posession doesn't need to be verified by a protocol on a blockchain.

That was exactly my point. We should consider only those metrics that are relevant here, i.e. economic ones. Did I say anything on the contrary really?

I know I didn't. Back to the topic, though. I think one of the most robust metrics would be volume of goods and services that can be bought or rendered with bitcoin. How could we get that number? That remains to be seen, but probably we could make use of blockchain transactions by taking all volume being transacted and excluding all exchanges related from them (their wallets should be known)...

[deisik]

Mother nature has taken care of that.
That's why we have silver, gold , platinum and diamonds.
And you can't really tell that gold is better than silver. You have to compare a quantity or the properties and gold isn't winning every time.

Yes, silver is a better conductor than gold. Actually, it is the best conductor out there (at normal conditions). But this doesn't affect their prices/price ratio to a significant degree. That is what important here, so not all properties are worth considering in the first place...

Tell me how you compare the price of gold and that of diamonds please , with the price of bitcoin if you would like to expand it:)
What I was pointing out was that you can't say gold is better than silver. Also you can't say we can't invent a compound better than gold.

I didn't quite understand your question, but well, if we take some metric, then yes, we can actually say that gold is better than silver (or otherwise, depending on metric). Diamonds are not a precious metal, so their price cannot be compared directly with the price of gold, if that was your point...