Monday, December 16, 2013
Why Market Capitalization is a bad Metric for Bitcoin
Writen by: Romyen, https://bitcointalk.org/index.php?topic=373282.msg3993938#msg3993938 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.